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

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.”