In recent decades, the inequality in the distribution of wealth has become even more glaring around the world.
For example, as of 2022, the top 10% of Americans own nearly 70% of wealth in the United States. This means that 90% of the country takes home only 30% of the wealth. South Africa is another example where the top 10% take home 65% of wealth.
Many citizens also lack access to general banking services as well as world class financial services (ie services restricted to accredited investors) that are readily available to more affluent residents. Cryptocurrency can help narrow the wealth disparity by giving users access to a way to earn, store, receive, send and invest their money. This analysis explores how cryptocurrencies can help close the income inequality gap.
How Can Crypto Solve Income Equality?
Cryptocurrency offers users easier access to financial instruments and a cheaper method of transferring money.
Many people in developing countries rely on family members abroad to send money back to help them with living expenses. Remittances account for 20% to 38.5% of the gross domestic product of countries like El Salvador, Haiti and Tonga. US dollar-pegged stablecoins like USD Coin (USDC) and Tether (USDT) can ensure recipients receive more of the funds transferred without intermediaries taking a cut in the form of transfer fees.
SWIFT transfers can be costly, with some banks charging 3% to 5% while others charge a fixed fee of $25 to $45. Western Union transfers cost an average of $25 for online transfers, $2.99 to $29.99 via credit/debit card, and $7.99 in stores. On the other hand, stablecoins like USDC can cost $3 to $5 to send on Ethereum and less than $0.01 on the BNB Smart Chain, Tron, and Cardano blockchains.
While an additional $20 to $44 in transaction fee savings may not seem like a lot to many people, it makes a world of difference for people in developing countries or on lower incomes. For example, the average monthly salary in Venezuela is about $25.
These savings allow people to earn a better living through family members working abroad. In addition, family members can also send money home more frequently due to the very low fees and fast transaction times.
Ben Caselin, head of research and strategy at AAX – a cryptocurrency exchange – told Cointelegraph:
“Bitcoin, but also stablecoins, generally offer more accessibility than traditional banks, especially in emerging markets where large population groups are often unbanked, either due to lack of infrastructure or documentation, or exclusion based on social standing, gender, religion or political views. ”
“A shift towards bitcoin and stablecoin payments may also be driven by sanctions or strict capital controls that make it virtually impossible for ordinary citizens and businesses to participate in the global economy, whether through trade, commerce or otherwise,” he added added.
Caselin also noted the importance of the low cost of sending money with cryptocurrency, saying, “Users in both developed and emerging markets can benefit from Bitcoin and digital assets when making cross-border payments. This is not only because these are processed more efficiently on the blockchain, but also at a much lower cost than via correspondent banks and money transfer companies like Western Union.”
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“But it’s not just about accessibility and efficiency. The shift to digital assets and self-custody via holding funds with a bank and using their services is creating a new, more mature financial culture and creating security as societies continue to digitize and threats to privacy and freedom increase.”
Easier access to payment systems
While PayPal is one of the most popular ways for freelancers to receive payments, users need to link their account to a bank in order to cash out their payments. This is because users can only withdraw funds to their bank account and the only other option is to spend the funds using a PayPal debit card. This can make it difficult for unbanked people to make a living online.
Conversely, blockchain technology has enabled users to receive payments without the need for an intermediary like a bank. Users only need to control one crypto wallet to receive compensation directly from another user. This can prove very useful for online freelancers. For example, if a freelancer is hired to develop a website or offer another online service, all they have to do is provide their crypto wallet.
Dunstan Teo, co-founder of Philcoin — a blockchain-based philanthropy project — told Cointelegraph, “Cryptocurrencies typically only require a wallet and an internet connection for someone to sign up and transact. They offer people in developing countries the opportunity to store their wealth somewhere other than under a mattress or in a closet.” He continued:
“This helps reduce income inequality by giving everyone, anywhere in the world, access to the same financial products so they can reap the rewards of rapidly growing wealth. Quite simply, crypto levels the playing field for everyone.”
If freelancers don’t have access to a bank, they can withdraw their earnings through a Bitcoin ATM. Countries like Uruguay, Nigeria, India, and Kenya have installed Bitcoin ATMs that offer unbanked users an alternative route to buy and sell crypto, making them a viable option for withdrawal.
Crypto wallets make it easier for workers to earn income online and send and receive payments. Some wallets even allow users to receive payments via usernames instead of the usual alphanumeric crypto addresses. For example, the Solana-based Web3 payment platform PIP uses tags (e.g. user@solana) instead of wallet addresses to prevent users from making mistakes when sending or receiving payments. If users have the browser extension installed, they can send and receive crypto payments via social media by hovering over the tags to activate a payment field.
Access to protocols that simplify user experience is critical for users as an estimated 20% of Bitcoin (BTC) has been lost due to user error. Additionally, a survey conducted by Cointelegraph found that 75% of respondents said they find crypto transactions “stressful” and “unnecessarily complicated.” However, human-readable addresses can address this issue and help increase adoption in developing countries.
The use of cryptocurrency and self-custody wallets within the gig economy can help create income opportunities for people from developing countries or from low-income backgrounds.
Corbin Fraser, Head of Financial Services at Bitcoin.com — a cryptocurrency exchange and wallet — told Cointelegraph, “Crypto is a good way for users to receive payment for services. This was one of Bitcoin’s original tenets. Eliminate middlemen, lower fees and bring new possibilities to a globally connected population thanks to magical internet money.” Fraser continued:
“The silver lining to the COVID-19 pandemic has been the widespread adoption of remote work. As companies by their very nature evolve to hire with a remote perspective, we expect these companies offering payments in crypto will attract an even more engaged workforce.”
“International payments through traditional financial institutions are still a huge pain for everyone. Funds sit in limbo for days or even weeks, leaving a sticker shock of high fees thanks to outdated systems. These fees are felt most in developing countries,” Fraser added. “We are seeing a rise in cryptocurrencies focused on low fees and even Ethereum Post-Merge has sub-$0.05 fees on the horizon. So there is no doubt that everything is going in that direction.”
Easy access to financial instruments
Cryptocurrency can help bridge the wealth gap by providing access to financial instruments to a wider range of users. Centralized financial instruments like stocks, bonds, and indices typically require users to sign up with platforms and provide legal documents, including proof of income and bank details.
Decentralized finance (DeFi), on the other hand, allows users to deal with just their wallet with financial protocols like staking, yield farming, and credit/borrowing platforms. This makes it easier for low-income users and people in developing countries to earn interest on their holdings and to lend or borrow money. DeFi essentially levels the playing field in terms of financial instrument accessibility.
The DeFi sector offers users multiple ways to earn income from their crypto assets without central agency intervention, from providing liquidity on a decentralized exchange and earning a percentage of the tokens traded to earning up to 20% % by betting stablecoins.
Ethereum co-founder and Cardano founder Charles Hoskinskin believes that the DeFi revolution will take place in the developing world. In a previous interview with Cointelegraph, Hoskinson predicted that developing countries would add 100 million new users to the DeFi sector over the next few years.
A currency resistant to inflation
Inflation reduces the purchasing power of a nation’s fiat currency. As a result, people in countries like Venezuela have adopted cryptocurrencies to combat hyperinflation. Cryptocurrencies like bitcoin are inherently deflationary, meaning their supply will decrease over time, increasing their value and purchasing power. For example, 1 BTC was worth $0.40 in 2010, compared to the $21,000 for 1 BTC today.
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Teo commented on how inflation affects people in developing countries:
“Let’s face it – everything is getting more and more expensive lately for people in the developing world. Around the world we are dealing with higher gas costs, inflation, the cost of food, housing, education and more. The disposable income we all once had is now being eroded by the higher cost of living. And with inflation showing no signs of slowing, we can expect disposable income to continue shrinking.”
Users in developing countries can also hold stablecoins if they don’t want to deal with the volatility that comes with traditional cryptocurrencies. Tether and USD Coin are great alternatives for users who want to keep their funds in a dollar-pegged cryptocurrency.