Forbes: Blockchain is expected to democratize finance, and microfinance may turn it into reality

By cooperating with microfinance organizations, blockchain applications can truly realize the promise of democratizing the use of financial resources.

Before delving into how blockchain connects and improves applications such as microfinance, it is important to ensure that the terms are defined. Although these ideas already exist and are discussed and implemented by organizations around the world, there are still some ambiguities about the actual meaning of these concepts.

Microfinance can take several different forms, but it is usually designed and implemented to democratize access to financial resources. Of course, the specific amount of financing provided will vary depending on the project and geographic area under consideration, but the idea is the same.

Generally speaking, existing financial institutions usually do not provide this kind of financing because these loans (usually speaking) cannot make existing businesses profitable, or the individuals or organizations seeking this kind of credit may not be eligible for traditional loans.

This looks a lot like the idea behind blockchain and cryptocurrency, because the core idea of ​​democratizing access to financial information is the same for both ideas.

Even more encouraging is the evidence recorded by the World Bank and other institutions that microfinance (if implemented properly) can actually create economic wealth for the participants involved.

Despite the success, there are still some pain points that hinder microfinance programs and hinder the real potential of the concept. These reasons include, but are not limited to, high operating costs (compensated by charging high fees to the payee), complex transaction processes, lack of transparency and standardization, and potential corruption.

There seems to be no technical tool to solve these problems before, but blockchain-based applications can undoubtedly provide some help.

Blockchain, with its transparency and data integrity, is the core of the system and has unique advantages that can make it easier for a wider range of individuals and organizations to access such applications. Let’s look at how blockchain-based microfinance platforms can improve and increase the use of microfinance options.

Increase trust and transparency. Whenever there is external financing of related ownership, a core issue is how to record, maintain and communicate these various ownership rights, and microfinance is no exception. Especially since many recipients of these small loans are unable to obtain existing financial services for various reasons, it is very important to establish and maintain the integrity of this financial information.

Another benefit of increased trust and transparency is that as people learn about blockchain-enhanced microfinance, they can also reduce the interest rate charged to borrowers. This not only reduces the burden on borrowers and allows them to focus more on the project instead of paying interest, it will also help improve the reputation of the entire industry.

Digital priority identity. This may be surprising for individuals with a US-centric view or worldview, but the so-called emerging markets have surpassed the digital-first identity of the US and Western Europe at least to some extent. This is not to say that every non-US market is the same, but this prejudice against digital payments creates an interesting opportunity when associated with microfinance.

In short, a purely digital or digital-first financing model may actually be more suitable for emerging or developing markets than other methods.

However, in order to successfully create a digital-first identity, this identity must be as secure as possible. In particular, regulations on consumer information and privacy may vary greatly between different jurisdictions. Therefore, blockchain-based platforms can play an important role as a neutral third-party guarantor of identity security.

No bank account has been opened. This statement has been talked about many times, at the risk of becoming a cliché, but one of the most prominent potential goals of blockchain is to democratize access to financial resources and information.

Microfinance is the epitome of attempts to democratize financial resources and payment systems. For all the benefits that have been realized, there are still issues related to participation costs, low transparency and the potential of bad actors, which continue to hinder wider and more comprehensive adoption.

Blockchain is not a perfect technology. It is developed from Bitcoin, which initially attracted great interest. By cooperating with organizations and individuals in the microfinance field, blockchain applications can achieve many goals related to the technology and make the global wealth creation process more democratic.