Somalia and the question of currency

image from AFP via the BBC
image from AFP via the BBC

As the US escalates its military intervention in Somalia and drought and disease continue to decimate the country, a surprisingly resilient and resourceful currency system teeters on the verge of an overhaul. And in the process, it teaches us a lesson about cryptocurrencies.

JP Koning’s piece from last week on the Somali shilling is an excellent read, touching on the history, economics, philosophy and sociology of currency. He takes a deep look into the monetary system of a country without a government and without a central bank.

In the Somali economy, the old shilling notes have continued to circulate for the past 20 years, along with new, counterfeit notes. The interesting part is that the counterfeit notes are easily distinguishable from the old ones, but are generally accepted anyway. They became part of the currency, although they were not issued by any central bank. Counterfeiters created currency.

This shines a light on the tenuous nature of central bank-issued paper. Currency is what we say it is. In the absence of a central bank to enforce acceptance, we can designate something else as our coin if we wish.

It also underlines the resilience of money. With no central bank, why were the shilling notes accepted at all? JP presents some theories, all of them compelling: while inertia probably played a big part (might as well continue doing what we’ve always been doing, no reason not to), the one that I find most intriguing is that Somalis always assumed that a central bank would one day re-emerge and grant validity to the old (and the counterfeit) notes.

That is what is happening. A central bank formed in 2009, and, with the help of the IMF, is planning to buy the counterfeit notes from the public. It remains to be seen at what price, but the concept of validating whatever currency is currently in circulation (because hey, we weren’t here, so whatever) highlights the philosophy that money is whatever the central bank says it is.

Or maybe not. US dollars are also accepted as currency, especially in the cities. In fact, dollars are the most common medium of exchange. So, again, money is what the people say it is.

Counterfeit dollars are also in wide circulation. They, obviously, won’t be tolerated (since that’s not up to the central bank, they have no sovereignty over the US currency). According to CNBC, the US Secret Service has been brought in to help weed them out.

The case also highlights the need for some sort of monetary control. The enthusiasm of the printers of fake shilling notes led to inflation in the double digits and a currency in which over 95% of the notes in circulation are “unauthorized”.

Although, if there was no central bank, who’s to say the new notes were “fakes”? They weren’t treated as such by the users. There was no official authority to say that they weren’t real. So, why are we calling them “counterfeit” rather than “alternative”?

Perhaps because of the legacy of central bank power. Perhaps because the idea of anyone printing currency is too chaotic for us to process. Perhaps because experience has shown us that the “common good” requires a central authority.

This could go some way toward explaining the psychological resistance to bitcoin and other cryptocurrencies. We are so used to money being authorized by official institutions, and so averse to the idea that anyone can come in and complicate things, that we instinctively reject the idea of a viable alternative.

You’ll have heard the old adage that to really understand how something works, you need to break it. Thus a society ravaged by violence, famine and a lack of public infrastructure ends up revealing what money is and how it works. It can also teach us all that, while the current system is faulty, it is better than no system at all.

In addition, it shows that bitcoin is unlikely to replace national currencies. Governments, even fragile ones, like to exert some control over monetary policy. However, just as the US dollar ended up circulating along with the Somalian shilling, bitcoin can co-exist. In the end, the market will decide which currency it prefers.

Blockchain electricity

I’ve been doing some research recently into the role that blockchains could play in the management of supply chains. The fit seems obvious (one chain on top of another… geddit?), but it’s actually complex, and the potential impact is huge. In brief (and I’ll go into more detail in other posts), the blockchain could be used to track the progress of a good as it passes from one development stage to another. From design through to production through to shipping, with components’ information verified and embedded. Less bureaucracy, fewer middlemen, less chance of corruption, contamination or substitution. Greater transparency, lower costs. There’s a lot to talk about here.

But let’s step to one side for a moment and look at a supply chain that doesn’t move physical goods, or even digital goods. A supply chain that moves energy. The electricity grid. How can the blockchain help there?

From distributed generation to micro-supply, innovators both large and small are coming up with unusual ideas. Here are some examples:

RWE, a large German electricity producer, is working on a prototype (together with Ethereum Internet of Things specialist for an electric car charging station that communicates directly with your car. Your car downloads the electricity it needs, either at a plug-in station or while stationary over an induction point (such as at traffic lights), and pays exactly the right amount via its digital wallet on the blockchain. The contract is between the charging station and your car. Neither you nor the energy company need to get involved.  This system, if extended, would not only make it possible to keep your car charged in any country, since a contract with an electricity company is not needed. It also would make fleets of driverless cars more economically and logistically feasible, since responsibility for charging would fall to the car, not the owner.

Taking a huge distributed step forward, TransActive Grid (a joint venture between distributed tech company L03 Energy and Ethereum developer Consensys) can set up solar panels on your roof, and enable you to sell any excess electricity you generate to your neighbours through a “microgrid”. The aim isn’t to replace the big electricity companies, but to see if a peer-to-peer electricity network is technologically possible. At the moment the main obstacle is that these exchanges have to happen off the electricity grid, which puts physical barriers (distance) in the way of their potential spread. But if the exchange turns out to be practical, grid regulation could in the future allow adaptation of the existing electricity network. This experiment is already underway in Brooklyn, NY, and the first transaction took place successfully just a couple of weeks ago.

On the quirky end of the spectrum, SolarChange was created to reward generators of solar power, via the blockchain. For every 1Mw of green electricity produced, the producer is awarded 1 SolarCoin, which can be stored in a SolarCoin wallet and held for value appreciation, or converted into bitcoin (the current exchange rate is 0.00010001 BTC, or about 5 cents – a year ago it was a tenth of that).


Not as much for decentralized supply as for decentralized funding, South-Africa based Bankymoon – which develops bitcoin payment gateways for smart electricity meters – has set up Usizo, a crowdfunding platform for electricity supply. Schools are equipped with a smart meter, and donors are invited to contribute to the school’s electricity supply by sending bitcoin to the meter’s bitcoin address. Talk about a feel-good application.

Usizo - blockchain electricity

They are supported in this project by Vienna-based Grid Singularity, cofounded and led by some of Ethereum’s core team (and Bankymoon’s founder Lorien Gamaroff is a “Vision Partner”). Grid Singularity is developing a platform to use blockchain technology to connect power companies, and is exploring how to use the blockchain for smart grid management, energy trade verification and other applications. Their focus is use in developing countries, to help develop their solar energy deployment.

And as if to prove that things are warming up in the sector (there are so many opportunities for puns in this topic), just last week a potential new entrant emerged. Consensus 2016, a big bitcoin and blockchain conference organized by CoinDesk, was in full swing in New York. One of their features is a hackathon, in which ideas using the blockchain to improve lives compete for a $5,000 prize. Not a lot of money, true, but the PR isn’t bad. The winner this year is, drumroll, Decentralized Energy Utility, which aims to enable a network of smart meters and blockchain-based payments.

So, while the current electricity grid system is not about to be disrupted tomorrow, the talk about the blockchain disrupting the power supply seems to be passing from the theoretical to the practical. The potential is huge. Decentralized energy is more secure (less likelihood of power outages), involves less wastage (the power goes to where it’s needed), and once scale is reached, will save money (lower generation, distribution and maintenance costs). It also puts efficient electricity within reach of those without a bank account, even those without access to the power grid. Could we be witnessing the beginning of a fragmentation of the electricity market? How will this play out with the regulators? Could it be that the blockchain will reverse the centralization tendency of capitalism? With the stage set for the first act of a suspenseful disruption, the pre-show performance looks promising, and the cast of characters looks hopeful.

Bitcoin in Africa? Not yet.

I was going to write about how bitcoin could help to improve economies in Africa through its efficient and low-cost secure method of transferring money. But after doing a fair amount of research, and realising that many of the companies mentioned in the press over the past year as being the “hope” of the future have since closed down, I’ve changed my mind. Instead, I’m going to write about how hard it is for a bitcoin-based company to do business in Africa. It’s not impossible – there are some success stories. But the advantages of bitcoin at this stage are not as obvious as they might seem. The theory is excellent. But the reality is complicated.

Photograph by Robin Hammond for National Geographic
Photograph by Robin Hammond for National Geographic

First, let’s talk about the promise. According to the World Bank, 66% of adults in Africa do not have a bank account. They deal in cash and in barter, with considerable lack of efficiency and security, and scant possibility of escaping that hand-to-mouth cycle. With bitcoin, they could effectively have a decentralized bank account and manage their finances more carefully, with control over what comes in and what goes out. Families could start to save and even lend. Payments would become easier and cheaper, leading to significant savings in both time and money. Current mobile money payment systems are efficient, but have a high fee structure. Bitcoin’s decentralization and security could economically empower those that are traditionally at the margin of the economy.

The ease and low cost of sending bitcoin anywhere around the world makes it the potential saviour of remittance services. Approximately $53bn was sent to the region in 2015 by workers abroad, with fees averaging 12.4%. Remittances cost more in Africa than in other areas – the world average is 7.8%. There are five remittance “corridors” (flows between two countries) in the world with fees over 20%, all of them in Africa. Using bitcoin, the fees would come down drastically, with the savings going directly to the beneficiaries.

The potential is huge. But the reality is very different.

Bitcoin has limited end uses in Africa. Very few merchants accept it as payment, and it can’t yet be used to pay for utilities or public services. That will change, but slowly. Bankymoon, a South Africa-based blockchain financial services company, has developed smart electricity meters that can be topped up from anywhere with bitcoin.

To be able to buy bitcoins on an exchange, you need access to a computer or a smartphone. Relatively few Africans have that. It is true that the majority of the adult population has a mobile device, but only 15% have a smartphone. According to the International Telecommunication Union, only 37% of adult Kenyans had access to Internet in 2014. In Ethiopia, the figure is 2%. So, buying bitcoin is possible but not simple, and the number of exchanges that can trade local African currencies for bitcoin is limited. Most require an initial conversion to dollars or euros, which significantly increases the transaction costs.

So, buying bitcoins is not simple, and even if you receive bitcoins as a remittance from a family member or friend working abroad, changing it into local currency on an exchange is difficult. Those without a bank account would need to find an agent willing to exchange bitcoins for cash. They do exist, but their scarcity and the technology access required allow them to charge very high fees for the service.

And bitcoin as a remittance rail has competition. Innovative international payment methods are eroding the incumbents’ market share by offering much lower fees. In Kenya, for example, WorldRemit, Equity Direct, and even new e-cash services offered by incumbents Moneygram and Western Union can transfer money for less than 5%. Of course, the low fee structure depends on electronic transactions. Once cash is involved, the fees shoot up.

And regulation, or the lack of, is an important structural problem. Although Nigeria’s Central Bank has called for bitcoin regulation, no country has it in place or is even, as far as we know, working on it. Kenya’s Central Bank issued a warning in December against Bitcoin use, citing its unregulated status. Unregulated does not mean illegal, but it does create obstacles for bitcoin exchanges, wallets and payment systems.

Regional differences and market size are also a complicating factor. Kenya alone, for instance, is not a big enough market to attract the funding needed to reach profitable scale. According to IMF estimates, its GDP is roughly equivalent to Bulgaria’s, and significantly less than Luxembourg’s. Each country has its own currency and phone system, so compatibility issues are barrier to rapid continent-wide expansion.

On top of the “typical” problems that startups have to face, new businesses in Africa also have to contend with relatively poor connectivity, recruiting difficulties and electricity outages. Africa has always been a very entrepreneurial continent, but at the micro level. The cultural and logistical difficulties of setting up cross-border businesses; recruiting, training and retaining a qualified team; the general lack of political and economic stability; high interest rates; limited access to funding… These and many other factors make the launch of scalable, profitable enterprises even more challenging.

In May of last year, Disrupt Africa ran a story on “5 African Bitcoin Startups to Watch”. Of the five, one shut down, one pivoted away from bitcoin, and one has had a major payment ramp blocked. Further digging uncovers several others that have closed down, and the bitcoin sector is littered with tombstones of good ideas that came to market a bit before their time.

And yet, bitcoin’s time in Africa will come, and its effect on the continent’s economy will be significant. Some remarkable businesses are struggling hard to make this happen. The use cases are much clearer there than in Europe or the US, where credit cards are ubiquitous and mobile payments are easy. The impact it can have on people’s lives is much greater. With persistence and brave first-movers, with rationally enthusiastic public comment and constant dialogue, regulators will see the economic advantages of further encouraging financial innovation. Tech hubs are springing up all over the continent, creative entrepreneurs are attracting international interest, and a lot more than transaction fees is at stake.

Kenya vs. Bitcoin

Over breakfast on December 15th, readers of the main broadsheet newspapers in Nairobi were greeted with a full-page ad taken out by the Central Bank of Kenya, warning them about dealing in bitcoin. The public notice was also posted online.

This is in equal measures surprising, disappointing and encouraging.

The main surprise is in the timing. The day before, the Kenyan justice system decided to postpone a ruling on the lawsuit brought by bitcoin remittance company BitPesa against the mobile payments giant M-Pesa for intimidation and unfair business practices. M-Pesa had blocked access to its platform, citing as the reason BitPesa’s unregulated status. Bitpesa claims that the Central Bank told them that bitcoin fell outside their remit, and therefore they could not offer a license. The decision, which allows M-Pesa to continue to block access to the main mobile money platform in East Africa, not only denies the convenience and economy of bitcoin remittances to a significant portion of the rural population. It also highlights the absurdity of trying to get a license, being told that licenses are not available, and then being punished for not having one.

While in theory the Central Bank does not influence the justice system, and the government does not control the Central Bank, the timing of the announcement in the newspapers can be interpreted as an indication of which way the government would like the courts to rule. For a fairly modern government battling increasing concerns over deepening corruption, this level of public “intervention” is perplexing.

Another perplexing aspect of this public approach is the list of warnings about bitcoin, and the subliminal messages they contain. The first one reads:

“Transactions in virtual currencies such as bitcoin are largely untraceable and anonymous making them susceptible to abuse by criminals in money laundering and financing of terrorism.”

Putting bitcoin’s untraceability and anonymity first and foremost as a help to criminals will surely attract the attention of even more criminals (or at least those that read the newspaper), and could possibly increase rather than decrease bitcoin use. BitPesa does follow KYC/AML guidelines to prevent money laundering and terrorist financing, but other less high-profile exchanges may not be so rigorous.

The second warning claims that bitcoin exchanges “tend to be unregulated”.

“Virtual currencies are traded in exchange platforms that tend to be unregulated all over the world. Consumers may therefore lose their money without having any legal redress in the event these exchanges collapse or close business.”

While not untrue, it is misleading. Some regulated exchanges do exist (Coinbase, Gemini, itBit), many more are in the pipeline, and many others, while not officially regulated, behave as if they are. Often it’s not that they don’t want to be regulated. It’s that they can’t, as there is no regulation in place. Such as in Kenya, for instance. BitPesa complies with KYC/AML regulations, yet is being treated as if it didn’t.

And the third warning, pointing out bitcoin’s vulnerability and volatility because there is “no underlying or backing of assets”, will surely draw attention to the fact that there is no underlying or backing of assets on the Kenyan shilling, either, other than faith in the economy (doing quite well) and the government (not so much).

Political mistrust is a strong motivator in bitcoin use, and the Central Bank’s request that the public “desist from transacting in Bitcoin” could have the opposite effect. With a fragile democratic stability (the current president took power with only 50.07% of the popular vote in the 2013 elections, and is currently under investigation by the International Court of Justice for crimes against humanity), and with increasing political violence and concerns about corruption, many readers of the major newspapers could well take an official call to refrain from using bitcoin as an open invitation to try it out.

Kenya vs bitcoin

The disappointment comes from the closed-minded approach to financial innovation, from a government that has a reputation for encouraging it. In its early days M-Pesa was not required to comply with complicated and expensive regulations, which allowed it to grow rapidly and inexpensively, creating efficiency and opportunity, as well as a near-monopoly on mobile money transfers. Although it has increasing competition, its extensive network and brand mindshare still give it considerable power in the sector, which enables it to maintain the relatively high transfer fees. Lower fees from a more nimble competitor would benefit the recipients and the economy, while technology and scale bring costs down. Lower profits for M-Pesa, perhaps, but greater wealth for Kenya. Bitcoin-based services can complement the established mobile money networks by expanding their reach and broadening their client base to include remittance senders from all over the world. Trying to limit participation to competitors with less potential is short-termist and damages the incumbent’s reputation.

However, it is encouraging that the Central Bank deemed bitcoin important enough to issue a public statement. In so doing, it has called attention to the digital currency: no doubt most of those that saw the ad hadn’t heard of bitcoin. Now they have. And while it is important that those interested in buying bitcoin be aware that it is not government-backed, all who investigate further will start to realise the opportunity that it presents.

This announcement could be a first step towards regulating bitcoin, which would be positive for the sector (although why the Central Bank didn’t just issue a statement about contemplating regulation instead of advising against bitcoin use is a mystery). It would also be in line with an incipient regional trend. In August of this year the Nigerian Central Bank called for bitcoin regulation, and an increasing interest in Bitcoin conferences on the continent indicate that other nations are contemplating doing the same.

Trying to wipe out bitcoin use makes no sense, especially when the economic advantages are so strong. Harnessing the opportunity, establishing regulation to protect users and limit illicit use, and incorporating a global virtual currency into an economy already heavily dependent on mobile-based local virtual currencies would increase economic activity, encourage saving and bring even more of the population into the virtually banked sector. And it would entrench Kenya’s reputation as a regional technology hub with an innovation-friendly government. Kenya has a lot to lose if it tries to stamp out bitcoin, and a lot to gain if it cautiously supports its integration into the already strong virtual economy.



Innovators blocking innovation: bitcoin in Kenya

The bitcoin graveyard is littered with ideas that were going to revolutionize the field of remittances, spread income more evenly and lift developing economies. Structural barriers, higher-than-expected costs and limited markets are the usual culprits. But even when those obstacles have been overcome, success is no sure thing. On Monday, the best-funded business in the sector was dealt a blow by a fellow fintech, in a move that shows that even innovators can become establishment, and that unclear regulation is perhaps the biggest hurdle of all.

Remittances – money sent home by relatives working abroad – are the economic lifeblood of not only hundreds of thousands of families but also of entire countries. By not requiring a bank account, remittances are crucial for wealth distribution and financial inclusion – the sent money can be received at participating agents, which could be stores, supermarkets, pawn shops or mobile money handlers. One of the largest and fastest-growing markets is sub-Saharan Africa, which received $33 billion in 2014. In some countries, remittances account for 20% of GDP. Yet these inflows comes with a high price: the fees and commissions. The global average cost of sending money is about 8%. In sub-Saharan Africa it rises to 12%, reaching as much as 20% in some countries. In 2011, Bill Gates urged G20 leaders to commit to bringing the costs down to a more reasonable 5%, which would generate global savings of $15bn. Yes, billion. More money in the hands of low-income, unbanked families in developing countries would be a significant step towards reducing poverty.


BitPesa was founded in November 2013 to improve the UK-Kenya remittance corridor using bitcoin transfers. It soon moved into other originating markets, and now handles remittances from just about anywhere to Kenya, Tanzania, Nigeria and Uganda. Users deposit bitcoins which are converted into the destination local currency and sent via the blockchain, for a 3% fee. BitPesa doesn’t handle the cash-out side of the equation, but instead deposits the funds in a mobile money wallet, which the receiver can then cash out in his or her usual way.

Yet businesses almost never develop as originally planned. The startup soon found that their service was being used by an increasing number of businesses to pay suppliers and employees, rather than for personal transfers. Their website shows a partial pivot away from remittances, towards a business payment platform. It has also diversified into trading, and offers one of the largest bitcoin exchanges on the continent.

In February of this year, BitPesa secured a $1.1m funding round led by Pantera Capital, one of the prime VC investors in the bitcoin space. Yet, as is usually the case, securing the round does not mean that their troubles are over. In November, M-Pesa stopped payment gateway company Lipisha from processing M-Pesa transactions, freezing Lipisha funds held in M-Pesa accounts. They offered to reinstate the service if Lipisha stopped working with BitPesa, claiming that BitPesa does not have the necessary license and does not comply with anti-money laundering (AML) regulations. According to BitPesa, they do comply with all AML and know-your-client (KYC) regulations, and that the Central Bank of Kenya has told them that a license is inapplicable to its business. Both Lipisha and BitPesa have taken M-Pesa to court. A preliminary ruling on Monday declared that more time is needed to make a definitive ruling. Meanwhile, BitPesa’s access to M-Pesa’s clients remains cut off.

The Kenyan remittance market is surprisingly tough. It is competitive: the World Bank lists 12 official participants in the sector, with fees ranging from 3.4% to 11.3%. Innovation is beginning to play a bigger role. WorldRemit and Equity Direct keep rates low with their online channels. The Cooperative Bank of Kenya announced last month a partnership with mobile payments startup SimbaPay to facilitate low-cost and instantaneous remittances between account holders in the UK and Kenya. UK-Kenya payment services company Continental Money has teamed up with TransferTo, a mobile remittance hub, to allow users to send remittances in the form of mobile airtime.

by Scott Webb for Unsplash
by Scott Webb for Unsplash

Losing the Kenyan remittance market would be a blow, but not necessarily game over. M-Pesa is not the only platform that BitPesa can use: its gateway Lipisha also works with Airtel Money, Visa and Mastercard. BitPesa has managed to diversify its markets over the past few months, recently moving into Tanzanía, Uganda and Nigeria, the continent’s largest remittance market ($21bn in 2014, vs Kenya’s $1.5bn), and 5th largest in the world. It has also managed to develop a liquid bitcoin exchange in Kenya, Nigeria and Uganda, and will no doubt keep on innovating in payment mechanisms and services.

M-Pesa’s blocking manoeuvre can be seen as the recognition of the potential threat that innovative platforms pose, at a time when M-Pesa’s high fees and restrictive business practices are being increasingly called into question. Which is ironic, since M-Pesa is itself a classic example of successful financial innovation. What’s more, a large part of its success is due to relatively relaxed regulation, the same concept that it is now arguing against. It is surprising to see it attempt to block a new player such as BitPesa instead of working with them – unless their plan is to move into bitcoin remittances as well. Perhaps their intention is to provoke explicit bitcoin regulation, which in the long run will help the sector. Yet there are less destructive ways to do it. In the end, BitPesa will hopefully come out stronger, more diversified, and having benefitted from the public support of the underdog. As the saying goes: “When they start shooting at you, you know you’re doing something right.”


Bitcoin and remittances – a long-lasting relationship?

“Bitcoin will not be a significant player in the remittance industry.”

At the Money 20/20 conference last month, the Executive VP of Business Development at MoneyGram dismissed bitcoin as a possible remittance solution, alleging that “you can send money to a phone, but these people need cash”. It is somewhat perplexing that someone so involved in moving money has not realized that mobile money can be converted to cash relatively easily, using any existing extensive network of mobile money agents. And that it is precisely the spread of convenient mobile money services that is relaxing the dependence on cash, as more merchants and suppliers are happy to accept the digital equivalent. It is even more perplexing that MoneyGram does not seem to have realized that the move towards mobile is one of the main factors behind the fall in MoneyGram’s market value to almost half its value of three years ago, and the net loss of $72 million in the first quarter of this year. Someone should give them a Kodak camera.

Market statistics aside, though, the Executive VP may have a point, at least in the short-term. Bitcoin has been hailed as the revolution of cross-border payments, whose cost savings will lift entire regions out of poverty. Unfortunately, it doesn’t work like that. For now.

by Mohammad Yearuzzaman for Unsplash
by Mohammad Yearuzzaman for Unsplash

Remittances – money sent home by foreign workers – is a complicated issue. Too many middlemen eat away at the sometimes already meagre amounts sent. Currency controls delay delivery. But most difficult is the “last mile”, the physical problems of actually receiving the money. In the most common remittance destinations (India, China and the Phillipines), a significant portion of adults do not have a bank account, so they depend on exchange offices. In rural areas, exchange offices are not plentiful, competition is scarce, the fees are high and the security is low.

Enter bitcoin. Finally, money can be sent to anywhere in the world, to anyone with a computer or a mobile phone, almost instantaneously and with almost no fees. All the sender needs to do is to convert some of his or her wages into bitcoins, and with a couple of swipes and taps send it to another bitcoin address, which could be anywhere. Within a few minutes, the receiver has the bitcoins in his or her wallet. And here we come up against the problem.

Well, actually, two problems. The first is that to set up a wallet, you usually have to confirm your identity to comply with the local anti-money laundering laws, and to do this you need to upload a photograph of yourself next to your ID. Easy if you have access to a computer or a smartphone. Not everyone does.

The other, bigger, problem is that most money exchangers in typical remittance destinations do not accept bitcoin. It isn’t hard to switch your bitcoins into a more “acceptable” currency on an exchange, but relatively few exchanges operate beyond the trinity of dollars, euros and yuan. Even if the local money exchanger does accept a non-local fiat currency, there may be barriers to accepting it from an entity they are not familiar with.

Liquidity could be an issue. For an exchange to work efficiently, both sides of the trade need to be fairly liquid. There needs to be enough holders of Ghanaian cedis who want bitcoins, for example, and enough bitcoin holders who want Ghanaian cedis for the trade to go through at the recent market price. Trading bitcoins in and out of the major currencies is not a problem. Beyond that, bitcoin is just not that liquid.

But let’s say that everything has gone smoothly and the receiver has the bitcoin-converted-into-fiat mobile money in his or her digital wallet. What then? Finding an agent to convert that into cash is usually possible although with varying degrees of convenience. In Kenya, for example, M-Pesa agents are ubiquitous, as even rural areas depend on the mobile money system. Other countries don’t have that kind of opportunity or infrastructure. And the scarcity of agents allows them to charge whatever fees they wish. Often the most convenient option is to use the expensive MoneyGram or Western Union facility. Western Union and Money Gram have a combined 50% or more of the remittance market of almost 80% of sub-Saharan countries, and in some, their market share goes up to 90%.

And bitcoin-based remittances have significant competition from other innovators. Payment startups have brought remittance costs down for those willing to seek them out, to a level that in many cases competes with the bitcoin solution. In Kenya, for example, bitcoin remittance startup BitPesa charges a 3% transaction fee. Equity Direct, a payment platform that does not run on the blockchain, operated by Kenya’s Equity Bank and money changer VFX, charges 3.4%.

In some cases, the structural barriers to converting your bitcoins into a local currency are prohibitive. Bitcoin is banned in several remittance-heavy countries, such as Bangladesh, Russia, Ecuador, Bolivia and Thailand.

In others, regulation is clamping down amidst increasing concern about terrorist financing and money laundering. Money transfer businesses have to tighten their account requirements, report any suspicious movement and install a more rigorous screening process, the costs of which will obviously be borne by the users. The off-ramping gets more complicated as well: to avoid red-tape and possible fines, some banks are refusing to handle remittances of any type.

The biggest barrier of all, though, is habit. Even with all the remittance innovation and the more efficient and economic choices that senders have at their disposal, only 2% of remittances are sent via mobile. In part this is due to poor interoperability of mobile providers, and the cumbersome identity proof regulations. Innovators have their work cut out for them to overcome these barriers, and to convince long-term users that the cost saving is worth the effort of overcoming the innate resistance to change.

by Jayakumar Ananthan for Unsplash
by Jayakumar Ananthan for Unsplash

The potential for bitcoin to make a big impact in the developing world is still there. In theory bitcoin is ideal for the “unbanked” in that it gives users control over their financial transactions with minimal cost. An estimated 80% of rural people receiving remittances do not have access to traditional banking services. In sub-Saharan Africa, more than 70% of adults do not have access to a bank account. In the developing world, the average is 46%. In five sub-Saharan African countries – Cote d’Ivoire, Somalia, Tanzania, Uganda, and Zimbabwe – more adults have only a mobile money account than have an account at a financial institution.

In countries with political unrest and volatile currencies, bitcoin makes even more sense. While the value of local currencies depends on relative growth prospects, the financial health of the government and faith in ruling stability, the value of bitcoin is above all those things. The value of bitcoin fluctuates, true, but its worth is determined almost exclusively by market forces. No-one can unilaterally devalue bitcoin, no-one can ban it outright, no-one can dictate what it’s used for. Bitcoin is a self-determined alternative store of value, whose worth is protected by cryptography.

As with all innovation, the idea is “essential but not sufficient”. The secret to success is in the implementation. Bitcoin’s use is growing and spreading, and its benefits are still being explored. The potential it holds to put economic power in the hands of the hitherto disenfranchised is real, and exciting. But making that happen is something else altogether. The shift required in regulation, infrastructure and habit is profound, but it is starting. And as bitcoin use spreads, the change will gather speed and the economic benefits will become apparent. That should be enough motivation for the current startups to keep on trying, and for others to fill the service and technology gaps that impede the progress. Bitcoin may not be ideal for remittances now. But in one form or another, it will be.