Wealth Inequality & Crypto
đ°âď¸ Can crypto be the solution to global wealth inequality? Smesher #016
TL;DR
One of the cool things about crypto is its potential to tackle wealth inequality. And some claim it already does. Others say there is a strong correlation between wealth inequality at large and wealth inequality in crypto. Can this situation be disrupted? And if so â how?
Wealth inequality is real and global
In 2022, the top 10% of Americans held nearly 70% of the wealth in the United States, leaving 90% of Americans with only 30% of the wealth. In South Africa, for example, the numbers are quite similar, with the top 10% taking home 65% of the wealth. A report by the world bank shows that wealth inequality is extreme everywhere.
There is no region in the world where the bottom 50% of the population owns more than 5% of the wealth.
And these numbers only reflect how income is distributed within the population. But wealth is much more than your current income; itâs comprised of homes, cars, savings, and stock, to name a few. Not to mention social status, health, and freedom, which influence a personâs ability to gain wealth.
Can wealth inequality change within the current system?
While there are non-profits everywhere trying to âfixâ the damages of wealth inequality or to improve peopleâs chances of escaping poverty, real change requires big, long-term, and global policy changes.
Policy changes are difficult to execute. One reason is, that the people holding the top 1% of the wealth, are powerful and influential. And for the most part, use their influence to maintain the status quo.
It doesnât come as a surprise that the country of Mark Zuckerberg, Jeff Bezos, and Elon Musk is lagging behind on closing the wealth gap, an effort which requires increasing wealth-taxes.
The UN has put wealth inequality on its agenda; number 10 on its Sustainable Development Goals (SDG) is reducing inequalities.
In its reports, the UN details how COVID-19 contributed to deepening inequality, by hitting the poorest and most vulnerable the hardest. The UN also mentions, that even before COVID-19, children in the poorest 20% of the population are up to three times more likely to die before the age of five than children in the richest 20%. This is only one of the reasons they give for making this their 10th goal.
But the UN is all but naive, and states clearly, that fighting against inequality âmust be rooted in country-contexts, economic imperatives, and political realities. There is no scope for a one-size fits all approach, and national policies and institutions matter.â
In other words, it is every countryâs responsibility, to put forth the measures that will bridge the gap.
Can crypto help reduce wealth inequality?
People within the current system depend on the system to help them escape poverty and improve their chances of long-term financial sustainability. But some people are not even in the system or fall between the cracks.
Think of the bankless, who canât save money. Think of people in unstable regimes, and in war or conflict zones, where money has suddenly lost all its value, or canât be accessed. Think of people in gig economies. Think of work immigrants, sending money back home, and paying terrific percentages for money transfers. All these people can not hope to gain help from the system.
âRecent events in Turkey, Ukraine, and Canada have highlighted the need for a currency that cannot be manipulated or confiscated by the government on a transactional level,â says Rufas Kamau in his Forbs article. âPeople in emerging economies have been compelled to explore a harder currency that cannot be rationed or devalued as a result of the massive movement in exchange rates between the US dollar and foreign currencies.â
In one of SMESHER past issues Hunger and Crypto, we told the story of BanQu â a startup that utilizes blockchain to give refugees, displaced people, and last-mile-farmers the means to establish a verifiable digital identity. Thus turning the unbanked population into people who can participate in the global economy.
This is how crypto is a game changer. It has the power to give people in such situations the means to earn, receive, store, transfer and invest their money. And doing so, can prevent them from slipping into poverty, and instead generate financial stability and sustainability. Which in turn, narrows the wealth gap a bit.
Can Bitcoin be the solution?
âBitcoin is gaining traction as a currency that can help individuals deal with the problems that fiat currencies and traditional financial systems have,â writes Kamau. âIt's important to remember that Bitcoin remains highly correlated with equities and if that correlation breaks in the next two quarters, it'll be a sign that Bitcoin is evolving into a store of value rather than merely a transactional currency.â
But Kamau also notes, that just like the economy, âBitcoin may become polarized as well.â This means it might reflect the wealth gap, rather than counter it.
An analysis of the wealth distribution of eight major cryptocurrencies, including Bitcoin, found that they show a wealth distribution that is in-line with real-world economies. For example
The current Gini value for Bitcoin, of 0.65 is similar to that of Australia
Which doesnât mean cryptocurrency can not help in the ways described above. But it does mean, that while it can help lift individuals out of poverty, itâs not necessarily a game-changer from a big-picture perspective. At least not yet.
What will it take then?
What will it take for crypto to be a game-changer for wealth inequality? We donât have all the answers. The more NGOs, startups and institutions will enable utilizing crypto as both means for commerce and for storing value, the bigger the chances of a disruption to the current system.
Another path, like that of Spacemesh, is lowering the barrier to participation in crypto, so that it becomes more inclusive â helping the unbanked and other vulnerable populations mentioned above, as well as more decentralized. This last point is important because decentralization maximalism strives to be synonymous with wealth distribution.
We will discuss this point and delve deeper into wealth inequality and crypto in our coming newsletters and podcasts. Stay tuned, and feel free to ask us anything in the meantime, here or on our Twitter.