Cryptocurrencies continue to attract investors against the odds. How can businesses approach these opportunities in a way that maximizes their potential for empowerment and inclusivity, while guarding against significant environmental and social concerns?
We’re still witnessing the fallout of cryptocurrency exchange FTX’s collapse last November. Two crypto-focused banks in the US, Silvergate and Signature, have since buckled under heavy losses, sending crypto firms looking to banks in Switzerland for loans. While regulators rush to strip crypto of smoke and mirrors, a report from economic advisors at the White House offers the damning judgment that “crypto assets currently do not offer widespread economic benefits…[and] are too risky at present to function as payment instruments or to expand financial inclusion.”
The risks were evident before FTX filed for bankruptcy. In 2022, hackers stole over US$3 billion from crypto investors—but neither the thefts nor the exchange’s failure has proved a strong deterrent. The top cryptocurrencies also held up well in the wake of Silicon Valley Bank’s more recent collapse, while Bitcoin and Ethereum surged.
Advocates pin crypto’s resilience on the decentralized, transparent, and (in theory) auditable nature of its blockchain foundations. And while it isn’t insulated from the flaws of mainstream banking (SVB’s collapse heavily impacted Stablecoin issuer Circle, for one), it continues to attract both traders and those up against the limitations of centralized finance.
Advocates point to these theoretical advantages:
- Cheap and instant peer-to-peer transactions across borders, cutting out middlemen and supporting people in emerging markets and those dependent on remittances
- Financial opportunities for the unbanked, with potential gains for women in particular, who are less likely to have a bank account than men
- Alternative access to finance for those subject to government corruption or restrictions
- Ownership of financial assets (akin to keeping gold under your mattress) affording some protection against hyperinflation
- New fundraising sources for start-ups, again with particular gains for women-owned businesses, which receive less than 3 percent of venture capital funding.
Beyond the World’s Paywalls
While cryptocurrencies can prove as volatile as fiat, they have offered a lifeline where geopolitical challenges have cut people off from salaries and savings. Ukraine has seen an increase in crypto use with restrictions on currency cash transactions and to enable foreign donations. In Afghanistan, crypto has offered a way to pay gig workers cut off by economic sanctions, including women. In Lebanon, young people are turning to cryptocurrencies to counter dire currency depreciation and bring in money from abroad. In these extreme cases, liquidity trumps stability, while the anti-establishment roots of crypto attract those who have never known a trustworthy government.
However, the potential of crypto to drive financial inclusion where it is needed most is limited by smartphone access—particularly impacting women, who are 18 percent less likely than men to own one. Innovations might help: Sorted.Finance supports crypto wallets on basic feature phones. Its app has 4000 users, finding its largest markets in Pakistan (which has one of the highest gender gaps in phone ownership), Nigeria, and Tanzania, with usage focused on daily transactions and remittances.
Sorted's wallet supports Bitcoin and the dollar-paired stablecoins Tether (USDT) and USD Coin (USDC)—limiting the options for good reason: underprivileged people have been targeted for the rollout of crypto, only to be exposed to scams. As COO Stephen Browne explains:
“It’s against the free nature of crypto to limit a wallet, but we felt it was important to protect people from scams. Yes, Bitcoin could be hacked—but it hasn’t been since 2009. As for the stablecoins, we can’t guarantee their deposits, just as any bank account is vulnerable to theft and loss of value—but we make it clear that you transact at your own risk.”
Risks and Recommendations
Greater protections are needed to insulate all consumers from a range of risks:
- Debt and bankruptcy: One study found that trading cryptocurrencies overlaps strongly with trading high-risk stocks, while soaring loan interest rates and flash loans can expose users to exploitation and addiction.
- Access to risk-taking activities, such as drugs and gambling: Cryptocurrencies offer anonymity that can be used to fund illicit activities—although legitimate activity is growing more rapidly than criminal usage.
- Risks to minors due to weak age verification systems
- Lack of insurance provision from the likes of the UK’s Financial Services Compensation Scheme or the US Federal Deposit Insurance Corporation
- Value collapse spurred by hacks, "bank" runs, or regulation, such as China’s crypto ban
These add to well-acknowledged environmental risks: The energy demands of coin mining and minting have been a factor in bans in Iceland and China, while the US just proposed a 30 percent excise tax on the power demands of crypto mining companies.
Regulators are playing catch-up, but there is a clear opportunity for environmental, social and governance leadership from private sector players. Recommendations include:
Prioritize applications that use the coin mining method Proof-of-Stake to cut energy consumption by 99 percent compared to Proof-of-Work. Beyond this, support renewable sources to scale, look for opportunities to conserve energy and use low-carbon products, and consider partnerships such as the Crypto Sustainability Coalition, exploring how web3 technologies can drive climate action.
Engage in partnerships, including with governments, to support inclusivity at every stage of design and implementation. Design for interoperability and inclusivity to maximize access and empowerment, and take a gender-sensitive approach to address crypto’s gender gap and protect women users.
Advocate for legal and regulatory frameworks to safeguard minors, marginalized communities, and other at-risk groups. Pursue standards, transparency, and accountability. In strategy setting, unite around the specific challenges you aim to solve with crypto, and seek to deliver gains across the board.
Questions to Business
- What specific challenges can you identify to which crypto can offer a solution?
- How can you support the potential of cryptocurrency to empower individuals and communities in your supply chain?
- Where can you play a role to protect the financial, social, and mental well-being of those engaged in cryptocurrency activities?