Over the past few decades, the inequality of wealth distribution globally has become all the starker.
For example, as of 2022, the top 10% of Americans hold nearly 70% of the wealth in the United States. This means that 90% of the country only takes home 30% of the wealth. South Africa is another example, with the top 10% taking home 65% of the wealth.
Many citizens also lack access to general banking as well as high-class financial services (i.e., services limited to accredited investors) that are readily available to residents who are more well-off. Cryptocurrency can help to reduce wealth disparity by providing users with access to a means to earn, store, receive, send and invest their money. This analysis looks at how cryptocurrency can help close the income inequality gap.
How can crypto solve income equality?
Cryptocurrency gives users easier access to financial tools and a more affordable method of money remittance.
Many people in developing nations rely on their family members abroad to send money back to help with living expenses. Money remittances account for 20% to 38.5% of the gross domestic product of countries like El Salvador, Haiti and Tonga. U.S. dollar-pegged stablecoins like USD Coin (USDC) and Tether (USDT) can ensure that the recipients receive more of the transferred funds 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. Transfers via Western Union cost $25 on average for online transfers, $2.99 to $29.99 via credit/debit card and $7.99 when done in-store. 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 saving an extra $20 to $44 on transaction fees might not seem like much to many people, this makes a big difference for people in developing countries or with lower incomes. For example, the average monthly salary in Venezuela is roughly $25.
These savings make it possible for people to make a better living from family members working overseas. In addition, family members will also be able to send money back 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 provides more accessibility than traditional banks, especially in emerging markets where large populations often find themselves unbanked either due to lack of infrastructure or documentation or exclusion on the basis of social standing, gender, religion or political viewpoints.”
“A shift toward Bitcoin and stablecoin payments can also be driven by sanctions or tight capital controls that make it virtually impossible for ordinary citizens and businesses to participate in the global economy either through trade, commerce or otherwise,” he added.
Caselin also noted the importance of the low costs when it comes to money remittance using cryptocurrency, saying, “Users in both developed and emerging markets can benefit from Bitcoin and digital assets when engaged in cross-border payments. This is not only because these are processed more efficiently on the blockchain but also at a much lower cost than through correspondent banks and money transfer operators such as Western Union.”
“But it’s not just about accessibility and efficiency. Switching to digital assets and self-custody over holding funds with a bank and using their services is building toward a new, more mature financial culture and builds safety as societies continue to digitalize and threats to privacy and freedom proliferate.”
Easier access to payment systems
While PayPal is one the most popular ways of receiving payments for freelancers, users need to have their account linked to a bank to cash out their payments. This is because users can only withdraw money to their bank accounts, with the only other option being to spend the money with 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 needing an intermediary such as a bank. Users only need to control a crypto wallet to receive compensation directly from another user. This can prove very useful for online freelancers. For example, if a freelancer is commissioned to develop a website or provide any other online service, they only need to provide their crypto wallet.
Dunstan Teo, co-founder of Philcoin — a blockchain-based philanthropy project — told Cointelegraph, “Cryptocurrencies typically need only a wallet and internet connection for someone to sign up and transact. They offer an opportunity for those in developing nations to store their assets somewhere else other than under a mattress or in a cupboard.” He continued:
“This helps to reduce income inequality by giving anyone, anywhere in the world, access to the same financial products so that they can reap the rewards of a rapidly growing asset. Quite simply, crypto levels the playing field for all.”
If freelancers cannot access a bank, they can withdraw their earnings through a Bitcoin ATM. Countries like Uruguay, Nigeria, India and Kenya have installed Bitcoin ATMs, providing an alternate route for unbanked users to buy and sell crypto, making it a viable option for cashing out.
Crypto wallets make it easier for workers to earn an income online as well as send and receive payments. Some wallets even let users receive payments via usernames instead of the usual alphanumeric crypto addresses. Solana-based Web3 payment platform PIP, for example, 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 through social media by hovering over the tags to activate a payment box.
Access to protocols that simplify the user experience is crucial for users, given that an estimated 20% of Bitcoin (BTC) has been lost due to user error. In addition, a survey covered by Cointelegraph found that 75% of respondents said they found crypto transactions “stressful” and “unnecessarily complicated.” However, human-readable addresses can tackle this issue and help to increase adoption in developing nations.
The use of cryptocurrency and self-custody wallets within the gig economy can be instrumental in creating income opportunities for people from developing countries or 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 payments for services. This was one of Bitcoin’s original tenets. Removing middlemen, reducing fees and unlocking a globally connected population with new opportunities thanks to magic internet money.” Fraser continued:
“The silver lining on the COVID-19 pandemic was the widespread adoption of remote work. As companies naturally evolve to hiring with remote in mind, we expect those companies offering payment in crypto will attract an even more dedicated workforce.”
“International payments through traditional financial institutions are still a huge pain for everyone. Funds get caught in limbo for days or even weeks and leave people with sticker shock from high fees thanks to legacy systems. Those fees are felt most in developing nations,” Fraser added. “We’re seeing a rise in cryptocurrencies focusing on low fees, and even Ethereum post-merge has sub-$0.05 fees on the horizon. So, it’s no doubt that this is where it’s all heading.”
Easy access to financial tools
Cryptocurrency can help to reduce the wealth gap by providing access to financial tools to a broader range of users. Centralized financial tools like stocks, bonds and indexes usually require users to sign up to platforms and provide legal documents, including proof of income and bank details.
Decentralized finance (DeFi), on the other hand, lets users engage with financial protocols such as staking, yield farming and lending/borrowing platforms using only their wallet. This makes it easier for low-income users and people in developing countries to earn interest on their holdings and lend out money or borrow money. DeFi essentially levels the playing field regarding accessibility for financial tools.
The DeFi sector offers multiple ways for users to earn an income with their crypto assets without the interference of any centralized entity, from providing liquidity on a decentralized exchange and earning a percentage of the tokens traded to earning up to 20% by staking stablecoins.
Ethereum co-founder and Cardano founder Charles Hoskinskin believes the DeFi revolution will take place in the developing world. When previously interviewed by Cointelegraph, Hoskinson predicted that developing nations would add 100 million new users to the DeFi sector in the next few years.
A currency that is resistant to inflation
Inflation reduces the spending power of a nation’s fiat currency. As a result, people in countries like Venezuela have adopted cryptocurrency to combat hyperinflation. Cryptocurrencies like Bitcoin are deflationary by nature, meaning their supply reduces over time, increasing their value and spending power. For example, 1 BTC was worth $0.40 in 2010, compared with the $21,000 for 1 BTC today.
Teo weighed in on how inflation is affecting people in developing nations:
“Let’s face it — everything is becoming more expensive lately and even more so for those in developing countries. Across the world, we’re dealing with higher petrol costs, inflation, food costs, housing, education and more. The disposable income we all once had is now being eroded by a higher cost of living. And since inflation is not showing any sign of slowing down, we can expect that disposable income to keep withering away.”
Users in developing nations 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 cryptocurrency pegged to the dollar.