ISSUE BRIEF
DESIGNING DECENTRALIZED FINANCE FOR FINANCIAL INCLUSION OCTOBER 2021
NIKHIL RAGHUVEERA
Cryptocurrency began as a peer-to-peer payments system “without going through a traditional financial institution.” 1 Today, cryptocurrency has evolved into decentralized finance (DeFi) to offer more comprehensive financial tools that further bypass the cumbersome aspects of the existing financial system. There are some, however, who do not recognize the potential for crypto to streamline the financial system, and are calling for a blanket ban2. As of September 30, 2021, approximately $80B of cryptocurrencies are tied to DeFi contracts (a 4x increase from one year ago). 3 Proponents of DeFi envision a powerful tool for the unbanked and underbanked, as well as people living in countries with authoritarian regimes, hyperinflation, and weak financial institutions. Communities of color in the United States, for example, could access alternative forms of lending in the face of predatory loans or high fees.4 Version 1.0 of DeFi, however, has thus far been primarily aimed at crypto whales, people who already have access to the financial system, and users in markets with robust financial institutions. 5 This makes sense given the 1 The GeoEconomics Center works at the nexus of economics, finance, and foreign policy with the goal of helping shape a better global economic future. The Center is organized around three pillars - Future of Capitalism, Future of Money, and the Economic Statecraft Initiative.
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Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System,” Bitcoin, May 24, 2009, https://bitcoin.org/bitcoin.pdf. Robert Manning, “Bye-bye, bitcoin: It’s time to ban cryptocurrencies,” Hill, July 25, 2021, https://thehill.com/opinion/cybersecurity/564696-bye-bye-bitcoin-time-to-ban-crypto-currencies DeFi Pulse, https://defipulse.com/. Robert Farrington, “Explaining DeFi And How It Will Revolutionize Financial Services,” Forbes, March 23, 2021, https://www.forbes.com/sites/robertfarrington/2021/03/23/ explaining-defi-and-how-it-will-revolutionize-financial-services/?sh=76064ee31d08. Stefan Grasmmann, “DeFi — an ecosystem made for “whales”?!,” Coinmonks, August 9, 2020, https://medium.com/coinmonks/defi-an-ecosystem-made-for-whales-93fbeaba38ad; Seth Goldfarb, “Stop Saying DeFi is About Banking the Unbanked,” ADD. xyz, November 25, 2019, https://medium.com/addxyz/stop-saying-defi-is-about-banking-the-unbanked-4aa21c6884ed; Owen Fernau, “ DeFi Has a First World Problem: Too Few Developing Nations’ Users,” Defiant, March 24, 2021, https://thedefiant.io/ defi-has-a-first-world-problem-too-few-developing-nations-users/.