Ant Financial’s bid to purchase Moneygram is on the verge of failing, apparently because it’s Chinese.
So much for free markets.
Euronet (electronic payments software, pre-paid processing, money transfers) has stepped into the ring, with a $2bn offer for the remittance company. According to the FT, Euronet believes that it has a much better chance of succeeding – largely because it’s based in Kansas. (It’s interesting to note that Euronet made a bid for Moneygram 10 years ago, which was withdrawn when Moneygram made it clear it didn’t like the idea.)
Two Republican senators recently published an open letter in the Wall Street Journal warning about the consequences of allowing Chinese firms to take stakes in American enterprises.
“Unfortunately, America’s economic strength is at risk from strategic, well-coordinated and state-sponsored Chinese investments in American financial institutions. Chinese spending in the financial sector has risen dramatically and is often driven by the priorities and objectives of the Chinese government.”
The main concern seems to be the access to information that ownership of Moneygram would confer. What could the Chinese government (via its stake in Ant Financial’s possible stake in Moneygram) do with that information? Target certain individuals.
Quite why the Chinese government, for all its human rights infringements, would choose that channel to glean sensitive information is not explained. Given the increasing level of competition in remittance services and the ease with which the contributors of that sensitive information can use another service (such as bitcoin?), it’s hard to believe that they don’t have better ways to spend their intelligence resources.
An anonymous expert is cited as claiming that Chinese corporate acquisitions are “part of a broader state-led strategic effort” to gain influence in American markets. As if the massive Chinese holdings of American debt weren’t enough.
While it may be the case that the Chinese government really wants to “gain control of western investment syndicates” and use investments in remittance companies to target dissidents and their families, we should all be raising an eyebrow at the level of US interest in state intervention in market operations. After all, Moneygram’s board approved Ant Financial’s offer. But it looks like they may not have the final say.
I’m not saying that state intervention is wrong. There are cases where anti-trust legislation does help keep prices affordable and innovation humming. And certain strategic industries understandably need to stay in local hands. However, it does seem insincere to espouse capitalist free-market principles in non-strategic sectors, but only when it suits.
Going back to the deal in question, Euronet’s offer per share is higher than Ant Financial’s – $15 vs $13.25. That in itself should be enough to win, without the need to resort to nationalist instincts.
Moneygram shareholders should do well out of the fuss, as should traders. You can almost hear them rubbing their hands in glee at the thought of a bidding war. Looking further ahead, deeper coffers could help to fund innovation that helps to lower the cost of remittances – good news for businesses, individuals and globalization.
The merger may have an impact on blockchain innovation in payments. While Euronet has not been involved in any proof-of-concepts that I’m aware of, it did issue a white paper back in December 2015. Ant Financial, on the other hand, is – through various subsidiaries – relatively advanced in blockchain work, and could have embarked on interesting projects with blockchain-reluctant Moneygram.
Yesterday, CoinDesk published an article I wrote on the blockchain policy of the United Arab Emirates (UAE). The main point was that the new technology can not only bring additional efficiencies and cost savings to bank operations, but also future-proof sectors against shifting geo-economic conditions. The blockchain can help entire regions maintain their global relevance.
What triggered that thought process was the news that the National Bank of Abu Dhabi (NBAD) had implemented a blockchain-based cross-border payments service. Note that the report did not say “was testing”. The project is now live.
What I couldn’t cover in the article (it wasn’t central to my point) was the following tangent: The NBAD – the second largest lender in the region – is merging with First Gulf Bank, the third largest bank by assets in the UAE.
The regulators have yet to weigh in, although the market does not expect them to block the deal. Assuming the proposal goes ahead, it will create the largest bank in the region in terms of lending, and for comparison, it will have a larger market cap than Deutsche Bank (which admittedly is a lot lower than it was, but that’s a different topic).
This puts even more power behind the blockchain project.
Considering that 90% of the UAE’s population are expats, this gives the bank’s geographical expansion a new twist. The vast majority of the region’s residents are from somewhere else… which probably has a NBAD branch or subsidiary. That’s a lot of captive business, and a lot of cross-border payments.
Where do they go to?
A report in Gulf News today reveals that the largest receiver of remittances from the UAE in 2016 was India (again), and that, in spite of an economic slowdown, the amount went up by 10%.
This jump apparently is in part attributed to the Indian government’s recall of 80% of the notes in circulation – the ensuing economic disruption and loss due to inability to exchange notes increased the need for money from family members working abroad. In addition, the rupee declined significantly against the US$ – since the UAE dirham is pegged to the US$, the value of remittances went up.
Even if the bump is temporary, it does highlight the impact that blockchain technology can have on an important part of the region’s financial landscape. (It is important to note, as I pointed out in the CoinDesk article, that not all of the bank’s remittance services will be on the blockchain. The bank is incorporating this new process into its current offerings. But it’s a start, and it has potential.)
The increase also points to the growing prominence of financial services in the UAE economy, potentially replacing oil revenues as the motor for growth. With blockchain services adding momentum, the region could be well on the way to consolidating is position as a financial and technology hub. Throw in the fortuitous time zone in between Europe and Asia, and easy access to and from just about anywhere in the world, and we could soon witness a fundamental shift in centres of economic power.
The idea of bitcoin and central banks joining forces is not quite as farfetched as it seems. True, bitcoin is a decentralized global currency system, and regional central banks are, well, centralized and regional. So, on the surface they have nothing in common, except for the objective of a fast, efficient, low-cost method of payment and settlement. The main difference between bitcoin and the central banks is in how they think that should be governed and executed.
What do central banks want? They want an efficient way of settling interbank trades. They want a healthy banking system. And they want to influence the economy by controlling both the money supply and the interest rates.
What does bitcoin want? It wants to empower individual users to control the use of their own money, free from intervention, manipulation and censure, and totally open to market forces.
Could central banks use bitcoin’s technology to achieve their goals? In theory, yes. Would this end up being the irony of ironies? No, not really.
Central banks would not so much be interested in bitcoin as in its underlying technology of the blockchain. More efficient settlement, increased transparency, less economic vulnerability and a greater control over the money supply would have a significant impact on the Bank’s power and usefulness. It could be positive, or it could be negative. We could see a consolidation of central banks’ influence. Or, we could see them blockchained out of existence.
One of central banks’ main functions is to act as a clearing house for interbank trades. A vast amount of money is electronically transferred between banks at the end of each business day, to make sure that the net positions reflect that day’s financial activity. The central banks coordinate and settle this, using a variety of transfer platforms. It’s efficient. But it could be more so, especially if the need for a central clearing house was eliminated. What if the network of commercial banks and other financial institutions could settle directly on the blockchain? The central banks’ obligations could be reduced to that of regulation and monetary policy.
Another main function of central banks is that of issuing the currency. What if, instead of fiat currency, they issued a blockchain-based digital currency? (Which would, technically, also be fiat in that it is backed not by gold or similar, but by faith in the central bank.) That way we could all hold money directly issued by the central bank. Right now the only way to do that is with cash. If we could all effectively “open an account” with the central bank, there wouldn’t be much point in also having commercial bank deposits. Apart from the additional unnecessary costs, commercial banks are not as secure. They do not hold enough liquid assets to offset the client deposits, which leaves clients at the (remote, but still) risk of not being able to take their money out when they want to. With the central bank, that’s not a problem.
But with no retail deposits, commercial banks couldn’t lend as much as they do. Now, they take their retail deposits and lend them out to other individuals and business, thus making money more efficient and giving the economy a boost (not to mention making a profit in the process). This has the added effect of increasing the money supply, by effectively “re-using” money. It’s good for the economy (at least on the surface), but it’s difficult to control. The startling reality is that we don’t actually know what the money supply is at any given time. Central bank deposits at commercial banks can be used to back loans, but the scope is obviously more limited.
So, with commercial deposits replaced by central bank digital currency, lending would dry up (unless we can come up with a way to leverage central bank deposits). But some economists argue that it wouldn’t be a bad thing at all. Either way, the central bank would have a much tighter control on the money supply, and a much greater influence on the economic performance of the country. In theory, anyway – we all know that when it comes to economics, that is rarely the same as reality. The idea is a radical departure from the current economic system that we know. But, coming full circle, that is the point of bitcoin, the reason technologists have been searching for decades for a solution to the persistent problem of decentralized trust. Yet while bitcoin wants to be an alternative to central bank hegemony, the central banks themselves want to get in front of the inevitable change that this new technology will most likely force on the traditional system.
And all of this is not as farfetched as it sounds. Central banks are looking into these ideas, and the past few months have seen a slew of pronouncements from central banks all over the world. Just last week the Bank of England released a report that claims that a central bank-issued digital currency would permanently increase GDP by 3%. In March, Bank of England Deputy Governor Ben Broadbent gave a speech in which he outlined what such a system of central bank digital currency and blockchain settlements could look like. In January of this year the Bank announced that it was looking into the possibility of using the blockchain for the UK interbank settlement system. Last September the Bank of England’s top economist, Andrew Haldane, proposed the idea of issuing a state-backed cryptocurrency while simultaneously applying a negative interest rate on paper currency, or even banning paper currency outright.
Also in March of this year, researchers from the University College of London (not affiliated with the Bank of England) proposed the RSCoin framework for cryptocurrencies issued by central banks. This would allow the central banks to centralize the money supply, allow direct access to payments, and give an exact figure for the money supply at any given time. The cryptocurrencies would run on nodes validated by authorized “mintettes” (I think they’re being serious, I’m not sure).
Just last month it emerged at a conference of 90 central banks from around the world, hosted by the World Bank, the IMF and the Federal Reserve, that several of them have been investigating the blockchain for some time. Earlier this year the Dutch central bank revealed the development of an internal digital currency prototype called DNBCoin, for experimental purposes. And the following month the French central bank announced that it has been actively looking into bitcoin, digital currencies and distributed ledgers. Even Russia’s central bank has expressed an interest in the possibility of a central bank-issued digital currency.
A few weeks ago the Bank of Canada revealed that it has been experimenting with how to apply the blockchain to interbank payments. In May, the Deputy Governor of the Bank of Japan urged central bankers around the world to consider the implications of this technology. India’s central bank is investigating how to use the blockchain to reduce the dependence on cash and improve tax collection. China’s central bank is looking into issuing its own digital currency. The central bank of South Korea is researching distributed ledger applications. Barbados, Kazakhstan, the list goes on. And we can expect many more similar announcements in the coming months.
Cryptocurrencies are a reality, and with technological improvements and increased opportunity, they will become a more widely spread mechanism of financial transaction. Central banks can watch while their power to control the money supply is whittled away by the increased use of money outside their influence. Or, they could try to compete by incorporating cryptocurrencies into their national spheres. This obviously is not a simple proposition, and the ripple effects will need to be seriously considered. And no-one likes the idea of “experimenting” with something as fundamental as national and global economics. But change is inevitable, cryptocurrencies offer significant advantages, and the demands of the market are evolving. Calling for the disruption of the central banks is at this stage irresponsible, especially since we don’t yet have a viable alternative. However, if the central banks start to disrupt themselves, we could gradually move into a new economic order, with potential and promise that reach far beyond lower costs, faster transactions and enhanced transparency.
So, you know how to get bitcoins. But why? What can I use them for? Payments, obviously. But let’s go into a bit more detail:
One of the most obvious reason is to send money across borders in a low-cost, fast and efficient manner. It’s often called “frictionless” because it doesn’t encounter barriers along the way, like a traditional money transfer which has to go through banks and clearing houses. True, you have to get the bitcoins to start with, that is a type of friction, but this article starts from the assumption that you already have them. Banks often charge between 4 and 10% for cross-border transactions, usually with a fixed component which can push the percentage even higher if the transfer is small. Using a money transfer business such as Western Union or MoneyGram would be more expensive, especially if the recipient or the sender doesn’t have a bank account. Furthermore, international transfers usually take a few days. Bitcoin transfers incur no or very low fees, irrespective of the amount, and can be in the receiver’s bitcoin wallet within minutes.
Bitcoins can also be used to buy things. The number of businesses accepting bitcoin grew over 30% in 2015, having more than doubled in 2014. That year, Microsoft added bitcoin as a payment method for US-based customers. Dell also started accepting bitcoins last year, and in January 2014 Overstock became the first general retailer to accept the virtual currency from over 100 countries. In Europe, leading ecommerce company Showroomprive started accepting bitcoin in September of last year. Coinmap shows most of the online and offline stores that accept payment in bitcoin. Paying in bitcoin even in offline stores is so easy: the check-out tills usually have a QR code that you can scan, which makes the payment a question of just a few taps.
And if what you really want to buy with bitcoin is only available at an online store that doesn’t accept bitcoin, there are always bitcoin gift cards. Purse.io lets you exchange your bitcoins for others’ unwanted Amazon gift cards (apparently there is such a thing). Gyft lets you buy gift cards for a wide range of stores with bitcoin. Or, Xapo and Coinbase both have debit cards linked to a bitcoin wallet. You can pay with your “card”, which automatically deducts and converts the necessary amount from your stock of bitcoins.
The low friction of bitcoin, and its divisibility, make it ideal for microtransactions (within sidechains or similar, to minimize transaction costs). Changetip and other platforms make it easy to leave small amounts to journalists, bloggers, commenters, artists, etc. This democratic form of monetization of content could well issue in a new era of creative business models.
Most of the bitcoins that have been mined, however, are held for investment. The price is volatile, but has been as high as just over $1000, and just a few years ago was as low as $10. At the time of writing, the market price is approximately $400. Bitcoin enthusiasts see use and acceptance increasing over the next few years as the advantages become more apparent, as more apps make use even easier and as regulation removes uncertainty.
As an investment, bitcoin carries some advantages. It is useful (you can use it for efficient and low-cost payments), and it has a limited supply. Thus, if demand goes up (because of its usefulness) and the supply remains controlled, the price of bitcoin relative to other currencies should also go up. And, your bitcoin investment is in your hands, especially if you keep it in an offline wallet. No political authority can confiscate it, no firm can wipe it off its books, and no hacker can reach it. No central bank can mess with its value by printing more, and no government can use a devaluation to make it worth less.
Bitcoin as an investment does come with significant risks. Its price is volatile, and it is still illiquid. Changes to the protocol, law and even technology can have a material effect on its value, and may even make it unprofitable as a global payments mechanism, so I am not endorsing it as an investment vehicle.
If you have nerves of steel, you can try to buy and sell bitcoin, making a profit (or not) on the difference. Coinbase estimates that 80% of its bitcoin movements are from speculators, who trade bitcoin as a commodity in search of profit. A long list of exchanges can handle bitcoin trading – some of the largest are Bitfinex, Kraken, and itBit. (Note: some estimates claim that 90% of bitcoin day traders lose money, so this is not an encouragement to take it up.)
Sending money abroad, buying things, micropayments, investment or speculation – which is the “killer app” of bitcoin, which will push it into the mainstream? There are advantages and obstacles to each use case – in which will the advantages win? Perhaps in all of them, as activity ebbs and flows, solutions are found and new business models emerge. Time will tell.
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.
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.
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.
Bitcoin has been hailed as the saviour of microtransactions, small payments of cents or even less that up until now have not been an option due to simple economics. Traditional online payment methods charge fees for transactions that they process, be it mobile payments, credit card transactions, or direct transfers. You’re not going to pay 2 cents cost for a 2 cent transaction, are you? Enter Bitcoin, a frictionless, decentralized system that allows anyone to send any amount of money anywhere in the world for little or no cost. Hello, efficient and cost-effective microtransactions.
Only it doesn’t work like that.
Bitcoin is not useful for microtransactions.
Here’s why: On the Bitcoin blockchain, most payments will eventually need to include a transaction fee to incentivize the miners. Why do miners need to be incentivized? Because running the powerful computers that perform the validation functions is expensive, due to the hardware needed and the electricity consumed. Miners get rewarded with new bitcoins every time they successfully validate a block, but the amount of bitcoins they get halves every four years and will eventually reach 0. Transaction fees, a sort of voluntary “tip” added on to each transaction, will become more important to the miners – if there’s no transaction fee attached, they might choose to leave your transaction out of the block, in favour of a more lucrative operations. And as the block size limit is approached (unless the community can agree on an increase), space will become scarce and allocated to those transactors willing to pay extra. Transaction fees, however small, make micropayments less viable.
Yet nature, sorry, programming abhors a vacuum. Brilliant minds are working at coming up with a way to make micropayments easy and cheap or even free.
One of the most-talked-about micropayment solutions is the Lightning Network. This proposal is an efficient way to process transactions, even micro-transactions, faster and cheaper than one can on the blockchain. It’s a clearing network that sits on top of the blockchain, and eventually settles on it. But until then, it can pass around payment information in a secure and trust-less fashion (trust-less means that you don’t need to know or even trust your payment counterparty). And because there are no miners that need incentivizing, transaction fees are low or even non-existent.
To understand this better (because it’s darn complicated), visualize a Bitcoin earth with lots of payment channel spikes leading up to little moons. Each Lightning user can have one or several spikes. If he or she has several, each leads to a different moon. It’s a bit like having several bank accounts, or several bitcoin wallets. Your choice. And the moons have thin tunnels leading to some of the other moons. In my case, say I have only one spike (I’m a simple soul, really). I upload some bitcoin to my spike. Say I want to send a payment to you via these payment channels. The transaction goes up to my moon, which then figures out the quickest route through the thin tunnels to your moon. It then trickles down your spike to you.
This may sound inefficient, but it’s not, and it’s how the Internet works today. This packet of information that you’re reading found its way to your screen via a convoluted yet efficient route of hubs, it didn’t get to you directly. But it got to you quickly.
So, since the transaction is just between me and you, and doesn’t have to be broadcast to all the nodes, it’s almost instantaneous. And, since no miners are involved and there are virtually no costs (except perhaps a payment channel creation and/or maintenance fee), it’s almost free. When we’re done transacting, we can bring the transactions back down to the Bitcoin earth for settlement. It is not as secure as Bitcoin, but with microtransactions, that shouldn’t be an issue worth worrying about. And it is much more convenient.
The Lightning Network is in development, with no release date announced yet. But the idea is generating buzz amongst developers and Bitcoin enthusiasts alike, who see it as a way to make Bitcoin more efficient without losing the decentralisation. Stand-alone implementations (that don’t need the blockchain) are being built for testing, and crypto think-tank/developer Blockstream has started Lightning application development.
Strawpay’s Stroem protocol (a Swedish company, be grateful that they didn’t insist on Ström) is very similar, with a few technical differences that I confess I don’t quite understand yet (working on it). They seem to be a bit further along the development rail, but they are making a lot less noise and receiving a lot less attention. Amiko Pay is another potential contender for a role in Bitcoin micropayments, but it is in early stages still.
So who will be the first to launch? My money is on Lightning. Keeping hefty brainpower focussed takes money, as even programmers need to eat. I mentioned earlier that Blockstream has begun work on the Lightning Network, hiring a specialized developer. Late last year Blockstream secured a $21 million funding round from 40 investors, including top venture capital firms. A few months ago Strawpay received a 500,000K (about $60,000) grant from the Swedish government, which is better than nothing, but probably won’t last very long.
The race is on, and the stakes are high. If we have access to an efficient micropayment platform, imagine what that can do for the media industry. It will be possible to pay per article read. The music industry could find a viable, fair business model. We could pay cents for each song listened to, and artists could receive income directly from listeners. Telephone bandwidth in which you pay by the minute, streaming in which you pay by the episode… With minimal overheads, the costs to the consumer would be low and proportional to consumption. With minimal overheads, the creators or originators receive more for their creation or service. And the economic boost to the intersection of creativity and quality will have ripple effects in culture, business and finance. Exciting.