Are we financially inclusive yet?

“And how do you get Euros out of this thing?”

That was my wife. I had been explaining Aave to her. If you’re unfamiliar with it, Aave is one of several platforms where you can deposit an amount of cryptocurrency and gain interest on it as it is lent to other people. Most if it is in the form of stablecoins - tokens whose value is pegged to a particular fiat currency (normally the USD).

It’s easy enough to understand: you add an amount of USD-valued tokens, get a variable interest rate, and can withdraw into the same wallet you deposited from whenever you want.

So far so good. But she wanted to know about the next step: the moving parts involved on how to get from there to a bank account, or to pay rent, or the supermarket. Once I started answering her question, talking about keeping an eye on gas costs, wallet backups, and other things to keep in mind, I saw her eyes roll.

She’s smack down on what I’d expect to be our target when talking about financial inclusion, having grown up with a depreciating currency no other country would accept. She has mental bandwidth to figure out this stuff. She’s demonstrated the required patience to put up with my shit. And still she saw it as annoying busywork.

Do we expect that interest rates and speculation are going to bring regular people in?

We need to talk about this. I don’t think we have built a tool of financial freedom yet that’s simple enough to be wielded by the people who’d need it the most.

Are we giving them something whose value is immediately obvious and the conceptual overhead low enough for them to adopt it before they are forced to?

What would that look like?

What do I mean when I talk about inclusion

There are two kinds of people that we refer to when we talk about those who need access to financial services:

  1. The unbanked;
  2. People in crumbling economies with currency controls.

I’m not going to talk much about the unbanked - I can’t say I know that many of them. More importantly, the unbanked see that they have a problem and likely want a solution. People who know they have a problem are more willing to jump over hurdles to solve it.

I’m more concerned about people who have bank accounts in some country they don’t realize is headed to a collapse - they will end up being held hostage to their local currency. These people may not know they have a problem yet, and if they do, they may not have the mental bandwidth or risk tolerance to try our alternatives.

I also feel more qualified to talk about the second group. I’m Costa Rican. We didn’t invent currency devaluation in Latin America, but we have worked hard at perfecting it. My parents got the full monty:

  • 90% value loss in a couple of years;
  • restrictions in acquiring foreign currency;
  • individual debt often pegged to dollars, to rub salt on the wound.

There’s a reason why I’m worried about the second group, the one that doesn’t realize their banking system might turn into a Sideshow Bob garden rake routine: Central Bank-issued Digital Currencies are coming. China airdropped $1.5M of their digital currency a few days ago. Christine Lagarde, the European Central Bank president, said the ECB is looking at creating a digital Euro. Other countries will follow suit and issue their own CBDC.

This new system will look very much like the old one, only digital. If you are in the US, you get to use dollars. If you are in Spain, it’s Euros. Costa Rica? Colones, and god help you.

Even Facebook’s Libra, the bugbear to open alternatives, might be too late to compete. Unless the CBDCs disregard usability as much as we are doing, of course. But even then, countries have a captive audience. That goes a long way.

It’s not about us

For all our talk about banking the unbanked and empowering people to route around central banks, we don’t seem to keep one key thing in mind: the people who most need to route around central banks don’t yet know they do, and by the time they realize it, it’s usually too late.

I’ve spoken before about my own story, growing up in Costa Rica during a massive economic crisis.

The critical part of the story is that, during that monstrous devaluation, both my parents worked full-time and raised two kids. They would not have had the mental bandwidth to explore new currencies or systems or figure out what a passphrase is.

However, they would have benefitted from having access to an uncensorable system where they got control of their funds. They would have loved to easily transfer their salary into something more stable than Colones (and back when needed).

But it would have had to be something where the government can’t kick their door down and demand they convert their holdings into the rapidly devaluating local currency. Holding your keys is irrelevant when they come at you with a rubberhose.

It’s not about us who know about crypto. It’s about my parents then, and Argentina now (again), and Venezuela, and - the way things are going - so many other places.

It’s a matter of perspective

Sure, decentralized, crypto-based, non-custodial alternatives have advantages.

These systems are unlikely to be private, considering how privacy-adverse most governments continue to be. They will not be uncensorable. They will not, by definition, help you circumvent central banks and market authorities.

People don’t want these things (until they do). An average busy worker doesn’t want to “be their own bank”; they want control over their money. They don’t want to route around central banks; they want their money not to lose value.

Yeah, don’t get me started. I know those are different because of the spelling. I don’t think you can truly have one without the other. That’s not the point.

The point is that being your own bank and having to figure out how to get Euros out of a stablecoin yield farm while keeping an eye on gas costs feels like complicated busywork. Being able to hold your money on your phone and instantaneously transfer it to your buddy feels like being your own bank - even if it’s on a centralized app controlled by a monster.

For most people, being crypto-based seems like an irrelevant advantage.

It’s not about crypto adoption

I’m not arguing we need “retail” to stream in so that they make everyone’s bags more valuable. That would be, at best, a positive externality.

I’m saying that routing around central banks is not an academic concern for me or something that sounds nice as we pitch a token.

This stability, being able to choose between mediums of exchange, that’s not a design ideal. It’s something I wish my parents had when I was growing up. It would have made their life easier.

I’m not hoping we bring in more users to get another 10-bagger - I want us to help people who don’t know they are heading to a 90% currency crash. I have been there, and it’s not fun.

It’s about what would have helped

Now, I’ve been thinking about what would have helped my folks back then, before it all went to shit. What would they need if that happened now?

They would need:

  1. A non-custodial stablecoin, not only because the point is to help people flee currency instability, but stablecoins are easier to comprehend;
  2. A keyless, non-custodial wallet, such as ZenGo;
  3. Which does allow them to convert to crypto, for when they’re ready to invest in something that can appreciate; and
  4. With the privacy guarantees of Zcash’s shielded addresses, so the government can’t know which doors to kick down first.

The first might be polemical, and I have gotten some pushback about it. It shouldn’t be. The whole reason people want to escape their own currency in these situations is the lack of volatility and predictability. Selling them on Bitcoin or Zcash as their first step into this brave new world, where they might see it drop 5% in a matter of hours, would not help. We are talking, first and foremost, about wealth preservation.

Here’s the thing: most people don’t want to route around central banks - they want to route around their own country’s. A stablecoin pegged to a value that happens to not be on free-fall that month would serve their purpose just fine.

We do want to have them easily convert to the cryptocurrency of their choice, which is why we have that third item. But the volatile, hopefully-appreciating-in-the-long-run cryptocurrency needs to be optional, not a forced entry point.

I believe that a keyless wallet is fundamental. People need a tool where they can’t accidentally lose their funds because they forget a passphrase, or their phone dies, or their three-year-old decides to use the paper wallet as a canvas. And it needs to be non-custodial, or they might as well be using their CBDC wallet.

Now, here’s something I don’t think is fundamental: anonymous fiat onboarding. I am OK with fully KYC’d exchanges being part of this. Exchanges are easy to understand on-ramps - they mostly look like a bank - and people will need something familiar as a door into an unfamiliar system.

The people I have in mind are on a salary. The government tracks their income, and they already paid taxes on it. A KYC’d exchange doesn’t reveal anything new about them. But they deserve to have financial privacy for their holdings and transactions after they convert their income (even if the Bank of International Settlements might disagree right now).

Therefore we need to give them actual privacy. Being your own bank is useless if anyone can raid you, and when push comes to shove, they will prioritize targets based on publicly available information.

Twitter for your bank account will not cut it.

This is their machete

My dad used to call a college degree “the machete.” It was the all-purpose tool you used to get along in life. If all else failed, you could go back to your trusty machete and use it to get ahead, cut your way through the weeds.

That is what we need to give consumers. We need to provide them with something they can swing around, which allows them to cut through the governmental bullshit and their devaluation tactics. Something that is trivially easy to understand, that they don’t need months of research to “get” and that, as long as they are pointing it away from their knees, will get the job done.

If we don’t have a simple answer for “how do you get Euros out of this thing?” it’s not the right tool for them.

Many thanks to Moritz Müller-Freitag for his extensive comments on a rough early draft; and to Mario Branciforti, Ouriel Ohayon, Aleksandr Bulkin, Teemu Paivinen, and Jerome de Tychey for their review and thoughts.

Published: 2020-10-19


Ricardo J. Méndez