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How crypto regulations can help to reduce wealth inequality

Income inequality has become a common phenomenon characterizing current economic conditions in many countries around the world. Exacerbated by the impact of COVID-19 and the Russian invasion of Ukraine, the wealth inequality crisis has reached unprecedented heights. Since the global health emergency began, the world’s 10 richest people have doubled their fortunes while the incomes of 99% of humanity are worse off as a result.

Therefore, governments are increasingly focusing on finding ways to reduce inequality and create a more just and equal society for all. And that is where blockchain technology comes into play. Many cryptocurrency researchers have suggested that blockchain might provide a solution to the issue of wealth disparity. It can indeed help to reduce income inequality by providing users with an easier way to earn, store, receive, send, and invest their money.

First, cryptocurrency is resistant to inflation which has now reached levels unseen in 40 years. According to the Mayor of Miami Francis X. Suarez, “Most people who are poor have their money in a bank account that earns negligible interest. With the rapid inflation that we have, the people are losing purchasing power – they’re actually becoming poorer”. By contrast, if you had a crypto account, you could get a U.S. stablecoin – a form of digital currency pegged to assets like U.S. dollars or gold – with a yield of 5% to 6%.

Secondly, cryptocurrency is much more accessible than traditional banks, especially in emerging markets where large populations often find themselves unbanked either due to lack of infrastructure, or documentation, or exclusion based on social standing, gender, religion or political viewpoints. Cryptocurrency is the first asset class that is accessible to anyone. It allows people with low income to invest, buy products and earn money without any bureaucracy or the need to take out a bank loan, which is usually problematic in most countries. Moreover, cryptocurrency can help to reduce the wealth gap by providing users with access to different financial instruments. For example, decentralized finance (DeFi) allows users to engage with such financial protocols as staking, yield farming and lending/borrowing platforms using only their wallet. In this way low-income users can easily earn interest on their holdings, lend out or borrow money.

Finally, cryptocurrencies combine important properties to foster trust, such as accountability and transparency which means that it is safe to use and difficult to steal. A new study has shown that as much as a sixth of foreign aid intended for the world’s poorest countries has flowed into bank accounts in tax havens owned by elites. Blockchain technology, on the other hand, can help to transfer money directly as well as provide a way for donors to track how their contributions have materialized. For example, the last report of the Ministry of Digital Transformation of Ukraine shows how the government spent the last $45 million donated in cryptocurrencies.

Fom a macro and micro economic perspective, blockchain-powered cryptocurrency would be an effective tool in reducing wealth inequality. However, using cryptocurrency as a tool for shortening the gap between the wealthy and the poor is possible only under the implementation of smart blockchain technology regulations. Although governments are making efforts to bring regulatory clarity to the crypto industry, the blockchain technology sector is still overlooked. There is still suspicion and hesitation, which has caused some of policymakers to push back against blockchain technologies, including regulatory and legislative actions.

The adoption of adequate and customized legislation, alongside the consumer protection and transparency it delivers, is the best way forward for crypto and its billions of users. Regulators need to “get on with the job” of bringing the use of crypto technologies within the “regulatory perimeter,” says Jon Cunliffe, Bank of England’s deputy governor for financial stability.

Considering the current economic crisis, governments should urgently tackle extreme poverty and narrow the gap between rich and poor, laying the foundations for a more equal and sustainable future. Using blockchain technology can mitigate these problems and level the playing field for the world’s poor as governments work toward economic justice. Adequate and appropriate government regulation would create an incentive for investments in blockchain technology and it would also build trust around it, making its widespread adoption easier.