Editor’s note: Tonantzin Carmona is a David M. Rubenstein Fellow at the Brookings Institution. Her most recent work has focused on the risks and downsides of cryptocurrencies, particularly their impact on the Black and Latino communities. The views expressed here are her own. Read more opinions at CNN.
Just a few short months ago, venture capital firms, celebrities and even some elected officials were hailing cryptocurrencies as the future of personal finance, an investment vehicle that can turn small savings into huge fortunes.
One of the advantages touted by its proponents is the claim that cryptocurrencies have the potential to close the vicious, generational racial wealth gap for potential black and Latino investors. It is said that cryptocurrencies are prepared for the “democratization of finance”.
But in fact, it’s not.
If cryptocurrencies have democratized anything, it’s the huge — if not staggering — financial losses suffered by the thousands of investors who have plowed their savings into cryptocurrencies. The downfall of Sam Bankman-Fried and his cryptocurrency exchange FTX has become the most famous symbol of cryptocurrency volatility, with personal financial assets large and small wiped out as it crashed and burned.
The effects are especially strong in communities of color. A Charles Schwab study earlier this year found that black Americans are more likely than white Americans to invest in cryptocurrencies. A Pew Research Center study also found that black, Asian and Latino Americans are more likely than white Americans to say they own or trade cryptocurrencies.
Black Americans have been one of the groups hardest hit by the cryptocurrency implosion because they are more financially at risk and because they are late to the crypto market. In the early days of bitcoin and other digital currencies, black investors were hesitant to buy.
Research has shown that black Americans are significantly less likely to invest in stocks than white people — and cryptocurrencies appear to offer an attractive alternative. But a dearth of assets in traditional financial instruments, and in many cases, generational wealth, makes this group of investors particularly vulnerable to sharp swings in the value of cryptocurrencies.
Its proponents argue that cryptocurrencies allow members of historically marginalized groups to bypass institutional and structural barriers to traditional investing, such as racism, discrimination and prejudice. No more intrusive credit checks or unattainable income requirements; no more would-be investors being turned away because of their race or ethnicity.
Over time, many crypto-focused clubs and Facebook groups catered to an emerging black and Latino audience, as did events like the Black Blockchain Summit, an annual event that encourages African-Americans to invest in cryptocurrencies Meeting.
Celebrity endorsements and generally favorable media coverage also make cryptocurrencies look safe and credible. Its proponents rarely mention how volatile cryptocurrencies are compared to traditional financial products and services, or how cryptocurrencies can be the target of scams, frauds or hacks.
Ultimately, many black Americans are pinning their hopes on cryptocurrencies as a relatively accessible means of wealth accumulation. In a short period of time, communities of color have seen a noticeable increase in cryptocurrency adoption, overcoming their initial reluctance. Nearly 44 percent of Americans who own and trade cryptocurrencies are people of color, according to a 2021 NORC survey by the University of Chicago.
But for many, cryptocurrencies have yet to deliver on their promise of access and opportunity. Far from being a financial haven, it turned out to be an unmitigated disaster for many investors of color.
The backdrop for communities of color’s eventual rush to adopt cryptocurrencies is a racial and ethnic wealth gap that reflects decades of discriminatory practices that have hindered the ability of people of color to accumulate wealth.
Before the civil rights movement of the 1960s, white families benefited largely from federal policies aimed at building and sustaining the American middle class. However, Black and many Latino families are excluded.
While policies like the GI Bill primarily help white soldiers attend college, start businesses or buy homes, black veterans, and to some extent Latino veterans, are often barred from receiving these benefits. While white Americans receive federally backed loans designed to facilitate home ownership, redlining excludes black and many Latino communities from these government-backed mortgages.
Civil rights legislation passed in the 1960s outlawed racial segregation and prohibited employment discrimination and redlining. But just when it seemed that communities of color might finally be included in society’s wealth-building efforts, there was a backlash against the expanding government, with deregulation, union dissolution and tax cuts for high earners in full swing.
This history of explicit exclusion was followed by an era of “predatory inclusion”: Black, Latino, and other marginalized communities could theoretically gain access to opportunities — such as mortgages and credit — from which they had historically been excluded. But without substantial federal investment, the conditionality of this “entry” tends to undercut its benefits — and in many cases, these communities resurface with insecurity.
For example, higher education opportunities at for-profit colleges are more expensive and riskier for loans. The subprime mortgage, hailed as an “innovation” that made owning a home easier, decimated black and Latino wealth during the 2008 financial crisis and its aftermath. In short, it turns out that the experience of many people of color with cryptocurrency is a continuation of a pattern of predatory inclusion and exploitation.
Today, Bitcoin ATMs notorious for charging exorbitant fees are congregating in Latino and low-income neighborhoods, targeting vulnerable groups in the same way that payday lenders and check-cashing services do. At the same time, many people of color remain excluded from the financial system, even though they still need opportunities to build wealth.
Cryptocurrencies have yet to come close to delivering on their promise of access and opportunity.