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FinTech in Focus—October 24, 2023

Newsletter
FinTech in Focus—October 24, 2023
Digital Identity, Local Currency, and Lifetime Financial Security

In This Newsletter

Digital Identity
Digital Public Infrastructure
Local Currencies and Community Development
FinTech and Lifetime Financial Security

Digital Identity

Digital identity plays a pivotal role in enhancing financial inclusion by providing individuals with a means to prove their identity online. Digital identity enables institutions to bring the "identity invisible" into the formal economy. In emerging economies, a significant portion of the population often lacks traditional identification documents, such as birth certificates or government-issued IDs. This can be a major barrier to accessing financial services, as banks and other financial institutions often require such documents to open accounts. Digital identity solutions, like biometric authentication or secure digital tokens, offer an alternative way for these individuals to prove their identity, enabling them to participate in the financial system. Digital identity can allow individuals to participate in digital payment systems and access financial services remotely while enhancing security and reducing fraud, further boosting confidence in digital financial transactions.

In 2009, India established its centralized biometric digital identity infrastructure, Aadhaar. According to a Yale Insights article, Aadhaar is the world's largest digital ID program, serving over 1.2 billion residents in India. Users can access public and private services with fingerprints, iris scans, or one-time passcodes. The program aims to integrate marginalized groups and expand welfare benefits access across India. The Singapore Monetary Authority's chief FinTech officer, Sopnendu Mohanty, discussed the vital role programs like Aadhaar have played in bringing people into the financial system across South and Southeast Asia at the 2023 Asia Summit session Driving FinTech Forward: Innovation and Impact.

Over the summer, Brazil and Argentina rolled out new digital identity platforms for their citizens. Cointelegraph reports that Brazil is launching a new national identity program on a private blockchain developed by Serpro, Brazil's national data processing service. The Brazilian states of Rio de Janeiro, Goiás, and Paraná will be the first to issue on-chain identification documents. The government hopes that the ID infrastructure will offer better personal data protection, prevent fraud, and create a more secure digital experience for Brazilian citizens. The move culminates a decades-long effort in Brazil to coordinate identity documentation across the country.

In neighboring Argentina, CoinDesk reports that in the city of Buenos Aires, citizens can now access official documents like birth and marriage certificates through the QuarkID wallet, which uses zero-knowledge proofs to document authenticity. The city plans to roll out proof of academic credentials and income on the platform this fall to help citizens claim government benefits.

Digital Public Infrastructure

At the 2023 Milken Institute Asia Summit, Nicole Valentine, director, FinTech, participated in the session Digital Public Infrastructure 2.0: The Blueprint for Building a Digital Economy. The private session considered how the rapid growth of digital solutions has helped to enhance the economic and social well-being of millions of people around the world. Speakers discussed the rise of digital public infrastructure in countries such as India and Singapore that have created a foundation for their digital economies, enabling interoperable solutions and seamless digital services to reach more people and businesses at a lower cost and greater convenience and security. Elevandi published a breakdown of key insights from the conversation.

Local Currencies and Community Development

Maxwell DeGregorio, associate, FinTech, moderated a session this September on Blockchain and Community Economic Development at Boston Blockchain Week. Pietro Poretti, director of economic development for the city of Lugano, Switzerland, spoke about the LVGA token the city launched in 2020.

The token is an all-digital local currency operated on a private blockchain to encourage retail spending at local businesses after consumers shifted to online retail during the pandemic. Using a private, permissioned blockchain, Lugano developed a Swiss franc-pegged stablecoin that could be accessed in a digital wallet built on top of the city's COVID-19 track and trace app. Citizens can collect 10 percent cash back in the form of LVGA tokens when they make a purchase at a participating merchant. The tokens, in turn, can only be spent at one of the city's over 400 participating merchants. Only these merchants can redeem the tokens for Swiss francs who buy and sell them to the city. The initiative boasts 25,000 LVGA wallet holders, which represents over a third of the city's population.

The LVGA token is an example of how local currencies can promote local economic resilience by encouraging spending within a region or community. Individuals using local currencies are more likely to support local businesses. Money spent at a small business in a local currency can help address economic imbalances by circulating wealth within a community and reducing the leakage of funds to non-local, larger corporations. Local currencies also help build a sense of community and social cohesion, as they often require local engagement, participation, and community buy-in to be effective.

The Milken Institute Review published an article titled "Do community currencies really work?" by Hazel Sheffield in 2019 that examines the relative value of local currencies beyond just collectibles or glorified gift cards. Sheffield asks why so many local currencies fail. She identified cases where there were too few participating merchants or a limited incentive to switch to the local currency. Sheffield also highlighted cases where projects experienced sustained success; in these cases, the local currencies offered something that traditional banking services could not.

For example, Sardinia's Sardex, a B2B cashless local currency and mutual credit program, was founded after the 2008 financial crisis limited the region's credit access. The platform allows merchants to extend credit to each other in exchange for future in-kind services. All the transactions are recorded digitally and taxed according to local rates.

FinTech and Lifetime Financial Security

This October, an article by Cheryl Evans, director of the Milken Institute's Lifetime Financial Security Program, titled "The Potential of AI In Advancing Workplace Changes That Support Longer Working Lives," was published by AARP International. The article considers how AI might facilitate longer working lives and enhance long-term financial security by reducing bias in the hiring process, improving the training process, and enhancing the productivity of older workers.

Evans also recently released Shifting the Retirement Paradigm: Moving toward Lifetime Financial Security. The report highlights and analyzes developments, such as state-facilitated retirement plans, the SECURE 2.0 Act, and FinTech solutions that make long-term saving easier and more accessible. It also highlights the power of compounding, the need for financial education, and the value of saving and investing at an early age. The report discusses other important topics, such as addressing financial inequality, saving for medical and long-term care costs, and individual behavioral biases that impact long-term saving and investment decision-making.