The decentralized finance or “DeFi” revolution has evolved once again thanks to the UNICEF Venture Fund’s recent series of investments in seven distinct blockchain startups across six countries: Kenya, Mexico, India, Argentina, Nepal, and Rwanda. According to the initiative’s press statement, UNICEF will give up to $100,000 in seed funding. Of the seven companies, five of them have elected to receive at least some portion of their investment cash in Ether.
What’s the aim? UNICEF is looking to push for global banking inclusion and to help unbanked populations around the world join a new, decentralized, community-focused financial system. The organization is providing resources for startups to help them innovate and grow to serve these vulnerable populations. Although this is a bold initiative, let's explore how this investment could work in practice over the next few years
A global need for fintech solutions
Fintech solutions are growing across the developed world, with many users valuing convenience even over data privacy in their preference of digital financial services over traditional banking institutions. But in many countries, the situation is more complicated.
There are approximately 1.7 billion people classified as “unbanked,” meaning they don’t have access to basic financial services like bank accounts or places to withdraw cash. For the unbanked, financial technology is difficult to understand at best and impossible to access at worst. More importantly, unbanked individuals are often less financially secure than those who have access to basic tools like bank accounts. Carrying cash on hand, after all, means that said cash is more easily stolen or lost.
In response to this problem, UNICEF is looking to make investments in various early-stage products or startups to help support innovative fintech solutions. The venture capital fund has actually been doing this since 2016, although this latest initiative is among the most unique and forward-thinking it has ever proposed.
It may also be more important than ever before. Thanks to the COVID-19 pandemic, millions of families and communities around the world face new financial challenges. According to UNICEF Ventures Lead Sunita Grote, “we need to tap into and support innovators and problem solvers to ensure systems are transparent, efficient, and decentralized – and that they include the traditionally underserved.”
How UNICEF’s program aims to help
In a nutshell, the fintech startups supported by UNICEF’s latest round of investments promote user-focused financial solutions that aim to alleviate the financial problems of the underserved in a few key ways:
- By providing access to financial tools that enable basic financial activities such as storing funds, investing in retirement accounts, and more
- By leveraging emerging blockchain and similar solutions to ensure decentralized finance takes a role previously occupied by classic financial institutions like big banks
- By giving unbanked and underserved communities the tools they need to govern themselves and avoid some of the pitfalls commonly encountered by traditionally developing countries/communities
What realistic goals could these startups achieve?
The discussion around DeFi fintech solutions is sometimes plagued by overly optimistic ambitions, oftentimes by startup entrepreneurs or CEOs who claim their platforms are the things needed for fully secure yet unregulated finance around the world. In reality, policy and culture progress at a slower pace than technology.
That being said, each of the seven startups could achieve realistic goals in their home countries and beyond. For example, GovBlocks – the new startup from India – demonstrates some of the most achievable goals shared by this collective.
GovBlocks is looking to build protocols to allow for decentralized governance and blockchain-based voting. If successful, GovBlock will allow underserved communities to vote for decentralized autonomous organizations (DAOs) using decentralized applications, or DApps.
To accomplish this, GovBlocks leverages Ethereum-based DAOs called Nexus Mutual and PlotX. The former is a decentralized insurance alternative and the latter is a prediction market protocol that crypto traders can use across blockchains.
Combined, these tools may allow individuals and communities to securely vote for government officials or vote for specific initiatives, laws, and so on. Thanks to the security inherent in many blockchain systems, GovBlocks could help lead the charge for fraud-proof voting and ensure that governing power remains in the hands of local communities.
This initiative has already seen some success. As an example, GovBlocks’ smart contracts and Nexus community have already enabled 149 separate governance protocols to date. This proves that the basic idea works, although it remains to be seen whether it will gain enough traction to become a staple of government in India and beyond.
Another important outcome is the development of decentralized financial systems, especially through the use of smart contracts. Smart contracts are used for transferring assets or currency between two parties as soon as certain conditions are met, minimizing the possibility of fraud or cheating.
For example, the above-mentioned GovBlocks plans to expand to Polygon, a layer 2 scaling solution from Ethereum, with the money from UNICEF. This may help individuals to manage their digital wallets and other banking functions from a decentralized yet secure financial platform.
This push will also heavily leverage DAOs, which are more often being used to purchase and own non-fungible tokens (NFTs). Already, DAOs are being used in India in conjunction with smart contracts to help communities purchase NFTs for investment purposes.
Barriers to DeFi
Although these developments are exciting, there are still several big barriers that may stall progress, even with the new seed capital from UNICEF.
For example, many DAOs have high transaction costs (though the above-mentioned layer 2 solutions may help to eventually solve this). Furthermore, many of the industries in which these startups operate do not provide regulatory support to decentralized fintech platforms and solutions. This can make it difficult to navigate industry regulations and remain in compliance.
Lastly, unbanked individuals or communities are often undereducated in regard to technologies like cryptocurrencies, DeFi solutions, and so on. While there is a lot of untapped potential in blockchain technology, it’s also undeniable that many people don’t fully understand what exactly blockchain tech is, how it works, or how it benefits them and their financial goals.
Will UNICEF’s investment change global financial inclusion?
It’s difficult to say whether such programs will change global financial inclusion for the underserved in the long term. Even if given the opportunity to transfer their assets to electronic wallets or participate in decentralized financial systems, many may refuse purely due to unfamiliarity with the uses and concepts.
That said, simply introducing these technologies and taking steps to integrate them into local economies is an important step. Financial literacy tends to improve on a generational basis. For example, more than half of Gen Z adults begin investing before the age of 25 - earlier than their parents and grandparents.
The same principle holds true when it comes to new technologies. Therefore, even if the first generation exposed to DeFi platforms like blockchain crypto exchanges don’t adopt them fully, the next generation may adopt them more regularly.
GovBlocks and the other beneficiaries of UNICEF’s investment certainly have their work cut out for them. Fintech startups face an uphill battle financially and professionally, and only time will tell whether their ambitions are ultimately realized. But even if these startups don’t fully accomplish all of their goals, they will have pushed us collectively closer toward a fully decentralized financial future.
Lee Li is a project manager and B2B copywriter with a decade of experience in the Chinese fintech startup space as a PM for TaoBao, MeitTuan, and DouYin (now TikTok).