Something strange is happening to Bitcoin. Once viewed as a way to do business in the darkest corners of the Web, the digital currency has rather suddenly become a favorite talking point among humanitarians and international development enthusiasts.
Bitcoin isn’t just for illicit transactions or Internet hobbyists anymore, but for helping the poor, the downtrodden, and the unbanked.
Perhaps Bitcoin can save them! Perhaps Bitcoin can save the world!
Regardless of whether this attitude is realistic—and more on that in a minute—the people focused on demonstrating the social benefits of Bitcoin are challenging existing narratives about the cryptocurrency.
While early commentary focused on how Bitcoin might be used to buy drugs online, or for sending money without a paper trail; the social-good argument suggests that these uses were simply the first use-cases in which Bitcoin’s utility became apparent. But there are billions of other potential use.
There are, for example, people who face significant obstacles in operating within the formal banking system—and these folks look very different from the shadowy hackers that tend to be seen as the prototypical Bitcoin user. They could be low-wage migrant workers sending money back home to their families, for example, or activists receiving money from abroad during tumultuous times.
Bitcoin do-gooders also propose the idea of using a blockchain to register and record property titles in countries with tenuous land-rights protections. Instead of using paper-based processes, the blockchain would enable the government to register digital titles that cannot be duplicated or easily changed. Which would mean greater accountability for official records.
Think about it this way: Most of the value in developing world communities is locked “dead capital,” or property that cannot be leveraged as collateral for loans or long-term contracts, because ownership of the property is not easily verifiable with a title or deed. In other words, even if someone owns property, that person may not be able to prove ownership sufficiently enough to gain access to money for future long-term investments.
That’s according to the development economist Hernando de Soto, who proposes fixing this problem by registering digital versions of property titles into a distributed blockchain like Bitcoin. By being entered into the blockchain, there would be an immutable record of title that could not be easily tampered with or destroyed.
Blockchain enthusiasts like to give the example of a poor farmer or a low-wage migrant worker receiving a low-cost money transfer from a loved one far away. And the cost of money transfer is a real issue. Sub-Saharan Africa remains the most expensive region in the world to send money to, with average fees in the range of 9 percent to 10 percent, according to the World Bank.
But Bitcoin wouldn’t necessarily make transactions cheaper. The price of transacting over Bitcoin depends on how much demand there is to use the network at a given time. While the number of transactions over Bitcoin has been steadily rising over the last few years, the processing capacity of the network (that is, the volume of transactions that can be processed per second) has remained static. What that means: If transaction volumes continue to grow without a commensurate increase in processing capacity, then transaction fees are likely to climb well above the cost of credit cards or bank transfers.
On top of that, wait times for those transactions to be fully processed have become increasingly erratic, causing a record number of complaints from customers trying to pay with Bitcoin.
Part of this bottleneck comes from built-in limits on the number of transactions that can be processed at a given time. The issue of how to increase the processing capacity of the network, while also maintaining critical aspects of its decentralized character, has been a heated topic of debate for well over a year now. And, so far, there hasn’t been a clear way forward. These early growing-pains underscore some of the tough engineering decisions that need to be resolved before Bitcoin can be considered a reliable product for the world’s poor.
At the same time, companies like Sendwave are also competing with Bitcoin by significantly lowering the price of international money transfers. And while emerging, low-cost remittance services like Sendwave lack Bitcoin’s infrastructure, they’re catching on with developing-world users, who care more about predictability and utility than about Bitcoin’s decentralized structure.
Even in the developing world, Bitcoin transfers often aren’t used the way many enthusiasts might suggest. Rather than migrant workers sending money back home, for example, people often send money to themselves. That’s according to Elizabeth Rossiello, the founder of a bitcoin exchange based in Nairobi called BitPesa. Rossiello says much of the international money transfers conducted on the company’s platform were “self transfers” from an individual’s foreign bank account to a Kenyan one, or vice versa.
These types of international money transfers are conducted by folks like John Kidenda, a recent graduate from Harvard University who returned home to Nairobi last year for work.
“Every month, I move a portion of my paycheck from my Kenyan bank to a U.S. account in order to pay back my school loans,” Kidenda said. “Using a service like BitPesa helps me save money on bank transfer-fees and high foreign-exchange rates.”
Other young, tech-savvy Kenyans use the site to gain entry to global trading markets that they otherwise wouldn’t be able to access as lone-wolf traders in a place like Kenya—where sites like E-Trade are not accessible. Clearly, Kidenda and his peers are a far cry from the poor, rural farmer so often celebrated in the story of Bitcoin and low-value remittances.
The bottom line is this: When people understand Bitcoin in terms of one hypothetical story—a poor farmer they neither know nor understand—they cannot grasp the real potential for this technology in places like Kenya.
Incidentally, most of BitPesa’s traffic doesn’t come from individual accounts at all, but from small- and medium-size businesses that have identified the platform as a more cost-effective means of carrying out e-commerce and trade abroad.
“In essence, BitPesa is a company solving the problem of FX [foreign exchange] in Africa,” Rossiello told me. “It is not a glamorous topic, but FX availability and pricing is at the core of every company doing payments, lending, or financial transactions in more than one country.”
For example, it’s very expensive for a Kenyan furniture dealer to purchase a bulk order of silk lamp shades from Dubai, given the high bank transfer fees and currency exchanges at both ends of the deal. BitPesa offers a way to engage in same-day international purchases of this kind for a predictable, flat percentage fee.
Rossiello says BitPesa could help foster business models like Andela, which sources high-quality software development in Nigeria for Fortune 500 companies like Microsoft. These use cases don’t warm the heart the way the story of our theoretical farmer does, but they point to a more realistic near-future for Bitcoin in the developing world—as a powerful tool for early adopters, who are likely to be upper-middle-class entrepreneurs, building international businesses through trade and online commerce.
“Saying that remittances are the only financial product for the entire continent of Africa that is interesting is a major underestimation of the size of these markets and the huge amounts of international trade in the region and beyond,” Rossiello said.
This doesn’t mean Bitcoin can’t serve individuals in need. Bitcoin has the potential to push forward the conversation about financial inclusion in really interesting ways, just not in the way it’s currently being discussed.
Instead, Bitcoin is first pushing people to rethink the way financial transactions should and can work. For example, BitPesa recently sued the mobile network operator Safaricom after Safaricom shut off access to its mPesa, Kenya’s largest mobile money platform, without the notice required by its service agreement. While Safaricom was instrumental in the launching of mPesa, it’s also the main reason for its limited impact as a platform for broader financial inclusion.
In the Kenyan startup scene, Safaricom is known for its cutthroat business practices, which make it difficult for smaller companies to offer a diverse set of services and products on top of the mobile money platform. In the case of BitPesa, Safaricom shut off access to its mPesa gateway without notice. This was significant because most Kenyan businesses offer mPesa acceptance as a mode of payment. Blocking access to mPesa was a public statement by Safaricom that they would not support Bitcoin companies. (Bitcoin is not illegal in Kenya, and recent Central Bank notices for consumers alerting them of investment risk in the digital good stop short of banning the use of it.)
Struggles like this point to major shifts in the ways money works today. Researchers like Rachel O’Dwyer urge us to dig into the ways mobile money is embedded in new, networked systems of control and value enclosure, as opposed to being a purely grassroots phenomenon for social inclusion. When framed this way, it’s interesting to think of Bitcoin (and other cryptocurrencies) as playing a role in constructing new infrastructure for payments—on top of which services like BitPesa can be built.
But is Bitcoin really the best way to think about establishing a digital commons for financial transactions? Maybe not. The Bitcoin network requires large amounts of bandwidth to run and uses enormous amounts of power, which makes it challenging for people in the developing world to participate in mining or use the network reliably.
The challenges of financial inclusion in a place like Kenya are diverse, from the cost of sending and receiving money, to the difficulty in doing business across borders, and the concentrated power of Safaricom. Perhaps Bitcoin could spur financial innovation there. But there are no guarantees. Understanding what Bitcoin can do for people in the developing world will first require a better understanding of the people who live there.