Bitcoin for the Unbanked

Roughly 2.5 billion adults in the world don’t have access to banks, which means somewhere in the order of 5 billion people belong to households that are cut off from a financial system that the rest of us take for granted. They can’t start savings accounts. They don’t have checking accounts. They can’t get credit cards. They live in places where banks don’t want to go, and because of this, they remain effectively walled off from the global economy. They are called the unbanked. But they are not unreachable, not by a long shot, and one of the biggest and most exciting prospects bitcoiners talk about is using their cryptocurrency to bring these billions of people roaring into the twenty-first century.

The Caribbean is an area of the emerging-market world where a strong case can be made for locals to use bitcoin to get around a restric­tive financial system. 

Jamal Ifill, a young, soft-spoken artist with a head full of dreadlocked hair and a warm smile, has been blowing glass in Barbados for 11 years and has had his own one-room studio-cum-showroom for five years. One of his latest pieces is a two-foot-high, rectangular, latticework lamp that to our New York eyes looked like one of the Twin Towers. He sells his artwork locally and has attracted some attention; a piece he made was presented to Prin­cess Anne when she visited the island in 2011. He wants to expand into the U.S. market, but the logistics and costs of moving money from there to here are prohibitively high, so most of his business remains local. 

“I tried everything,” Ifill says, sitting at the desk that doubles as his office and workspace in his small glass-blowing studio in Bridgetown, Barbados. “Credit cards, PayPal, Western Union. They’re too expensive.” 

Leroy McClain, managing director of the government-run Barbados Investment Development Corp., explained why that is: The big international banks are happy to provide merchant-banking services to companies in the United States and Canada, but they make island businesses jump through far more hoops for the same services.

Ifill understands the problem all too well. In fact, he has all the problems of an international business. The partic­ular glass he uses must be imported from Ukraine. His customers are not only on the island, but overseas. He is competing with foreign artists who aren’t hamstrung by the costs that tie him up. He tried e-commerce—through a local company—but gave up on it because not enough customers were using it, which meant he wasn’t getting any business out of it. A vicious circle. “I even tried Etsy,” he says, the online arts-and-craft site. Again, he couldn’t compete on costs with U.S. artists.

Ifill’s problem stems in part from the difficulty in shifting money around the region’s island nations, which requires constant and costly currency exchanges. Barbados and virtually every nation in the British West Indies has its own, sepa­rately printed currency—each called the dollar, each fluctuating in value against the others and against the better-known U.S. dollar. And the for­mer Spanish, Dutch, and French colonies all have their own pesos, guil­ders, and gourdes. The governments of the region have long talked about creating a monetary union to deepen the region’s free-trade arrangement, the Caricom common market. But as with the development of that free-trade area, progress toward building a single monetary authority and the other institutions needed for a common currency has been fitful. A Ca­ribbean dollar remains a pipe dream.

To make matters worse, a number of central banks impose capital controls on their citizens. Barbadians such as Ifill, for in­stance, are limited in the amount of foreign currency they can buy. That Barbados, the Cayman Islands, the Bahamas, and other Caribbean na­tions serve as tax havens for hedge funds and other foreign financial in­stitutions is an irony not lost on the region’s tightly controlled residents. This mix of monetary systems and financial regulations, and the frustra­tion that it breeds, make the sunny islands of the Caribbean ripe for bit­coin—or so says Gabriel Abed.

Abed, 27, turned to cryptocurrencies as the answer to a problem: how to expand e-commerce. He is the CEO of Web Designs, a local business that sells Internet domain registrations, Web site designs, maintenance, and e-commerce platforms. The last has been a particularly tough sell. Because of the costs of foreign exchange, credit cards, and PayPal, which can add up to eight or nine percent, he said, most merchants—Ifill was one of them—simply avoid sell­ing abroad.

Abed learned of bitcoin early on and saw its potential to solve this problem. He began with the idea of a Caribbean cryptocurrency, which he dubbed CaribCoin, but realized quickly it was a bigger project than he wanted to take on. He pivoted to the idea of a bitcoin exchange, and a merchant service that he could bundle with his Web-design and hosting service, and began building Bitt (the URL is actually bi.tt, the .tt being the domain for neighboring Trinidad and Tobago). He also began min­ing his own bitcoins—in Trinidad, taking advantage of relatively low electricity costs there, and using the profits from that and from Web Designs to fund Bitt. 

Bitt is designed as a Caribbean-focused online exchange and mer­chant service, providing trading between different cryptocurrencies and fiat currencies, as well as a module for helping local businesses adopt digi­tal currencies for payment. His appeal to them is simple: What if I can give you a payment option that costs only one percent?

The catch is that the one percent fee comes with bitcoins, which as of this writing can’t buy you much in Barbados. To say that cryptocurren­cies are not big in Barbados would be an understatement. They effectively don’t exist on the island, and neither does mobile commerce. While vir­tually everybody has a cell phone, the proverbial badge of a digital citi­zen, people use them only for texting and talking. E-commerce is barely getting started, as is online banking.

The way to get over the chicken-and-egg problem and encourage adoption, Abed believes, is to focus on the merchants. He believes that if he can offer them a dramatically cheaper payment method, they can be talked into accepting that method at their shops. But he has his work cut out for him.

EARLY ADOPTERS

The chicken-and-egg dilemma will require incentives. The promise of sav­ing money is certainly one of them. But there are others. As in the devel­oped world, one hope is that if big firms or institutions whose relationships run deep in the economy start using bitcoin, they can create incentives for their suppliers and customers to use it.

Patrick Byrne, the CEO of Salt Lake City-based online retailer Over­stock.com, which began accepting bitcoin in early 2014 to become what was then the biggest revenue-earning merchant to do so, believes his firm can play such a catalytic role creating a bitcoin “ecosystem” in the devel­oping world.

When we met in June 2014 in Utah, Byrne explained that he viewed bitcoin as a way to widen economic opportunity, if only he could get people to accept it. He was still figuring out the carrots he would use, but he had some ideas. “In the world of payments and dealing with vendors, there’s all this sensitiv­ity around the terms of payment. Vendors will sometimes give you a two percent discount for shaving off 20 days, because to them that’s like a 36 percent cost of money over the year. That affects all kinds of things. The very fact that vendors offer those terms means there’s an enor­mous opportunity for bitcoin to step up in this area.” A few weeks later, Byrne announced he would not only be paying bitcoin-accepting vendors one week early, but that he’d also pay his employee bonuses in bitcoin. 

What companies such as Overstock are trying to do with digital-currency payments has parallels with what Walmart achieved by pio­neering communications technology to revolutionize supply-chain management in the 1990s and early 2000s. The Arkansas-based retailer famously developed a sophisticated network with which to tie all of its suppliers worldwide into a single, integrated database for managing the goods and services flowing in and out of Walmart’s warehouses. Along with big improvements in shipping logistics, this allowed the company to optimize its just-in-time inventory management, which drastically cut costs. Walmart parlayed those cost savings into the cheapest prices any­where in the United States, which turned it into the iconic and, to some, infamous behemoth that now dominates American suburbia. 

Just as im­portant, its high-tech network had a feedback effect on suppliers, contrib­uting to the concentration of manufacturing in hubs such as China’s Pearl River Delta. As Walmart became an increasingly powerful but relentless hunter of the cheapest manufacturing sources, and as other Western buy­ers caught on to its high-tech lead, factories paying low wages in the de­veloping world would congregate in locales where it was most efficient to tap into Walmart’s network. Byrne now sees similar opportunities for firms like his to build influence by leveraging bitcoin in its international payment relationships and thus creating a tipping point from which change starts rippling over the global economy. As a group of businesses in one region begins adopting the currency, it will become more appealing to others with whom they do business. Once such a network of intertwined businesses builds up, no one wants to be excluded from it. Or so the theory goes.

“Just as American retail collapsed into Walmart, who knows how much can collapse into us? And I don’t mean Overstock. I mean bitcoin,” Byrne said. “You start getting network effects. You are incentivizing everyone—it’s like we have the first fax machine but nobody else has a fax machine, so it doesn’t do you any good. But you start adding other nodes and making incentives to add nodes and eventually get a critical mass. Now people aren’t just faxing us, they are faxing each other.”

FROM M-PESA TO BITPESA

The remittance business, where emigrants and expats living abroad send money home, is another market that should be ripe for disruption by low-cost cryptocurrencies. The current business model relies on electronic transfers over the old banking rails, and its practitioners charge high fees for that priv­ilege. Globally, it’s a huge business.

Emigrants are expected to send home more than $500 billion in 2016, according to the World Bank. “Those are only the official flows,” says Dilip Ratha, an expert on the subject who tracks it for the World Bank. Another estimated $200 billion is sent that isn’t tracked by the bank. Those numbers dwarf the roughly $125 billion the developed world sends annually in aid. For many countries, more money comes in through remittances than through exports. Moreover, the to­tals are net of the charges and fees emigrants pay to transfer agents such as Western Union; on average those costs are about 8.5 percent globally, but in many countries, it’s roughly 10 percent or more. In countries where annual salaries can be counted in hundreds of dollars, those costs are a serious burden. 

Kenyans living abroad who want to send money home can choose be­tween, say, Western Union and MoneyGram, but both charge high fees. Although at 42 percent the proportion of Kenyan adults with a formal banking relationship exceeds that of many countries, a majority in the country are still unbanked. But Kenya’s experience with microfinance and telecommunications has inspired people’s imaginations over how to ad­dress some of these problems. In particular, the excitement revolves around one key product: M-Pesa.

M-Pesa (the M is for “mobile,” and “pesa” is Swahili for “money”) started out as an experiment by Kenya’s biggest telecom company, Safa­ricom. Because many more Kenyans had phones than bank accounts, mi­crofinance experts realized during the 2000s that they could use those phones to deliver loans to borrowers and receive repayments from them. So in 2007, Safaricom began a pilot program that allowed users to send money via their phones—effectively converting the standard units of pre­paid calling minutes into a form of currency. The system proved wildly popular. Today two-thirds of Kenyans use it, and about 25 percent of Ken­ya’s GDP flows through it. 

M-Pesa had a few things going for it. For one thing, Safaricom al­ready had a massive infrastructure in place, not just the telecommunica­tions equipment, but also thousands of agents. M-Pesa was also lucky enough to escape government regulation early on.

But here’s the rub: M-Pesa is not a frictionless system, and what appears automatic to the user has a massive, unwieldy, and expensive infrastruc­ture behind it. Safaricom’s agents must deal with huge amounts of cash daily. This is not only cumbersome, but can also be dangerous. When agents run out of money, they have to either stop what they’re doing, close the shop, and go to a bank, or stop what they’re doing and send some­body on their behalf. Agents in rural areas, where the customers are more likely to be withdrawing money rather than depositing it, face a special challenge: Not only is their liquidity—their literal cash pile—drained faster, but the odds are higher that they are farther away from a bank branch, meaning a trip there takes longer and leaves less time to do ac­tual business.

Then there’s the question of how to import funds into the M-Pesa system from overseas. It is not borderless. Its mobile, phone-linked sys­tem offers an easier “on-ramp” for remittances than other countries’ more traditional financial systems, but it’s still going through traditional pipe­lines. Vodafone has partnerships with MoneyGram, Western Union, and other payment networks—with all their routine fees and banking-system­ dependent costs. With bitcoin, it is possible to send money via a mobile phone, directly between two parties, to bypass that entire cumbersome, expensive system for international transfers.

Perhaps inevitably, then, someone like Duncan Goldie-Scot, a vet­eran of microfinance, would come to see Kenya as the right place to start a full-scale remittance business. He approached fellow microfinance ex­pert Elizabeth Rossiello, a native of Queens, New York, who was then working as a consultant in Kenya, with an idea: How about combining M-Pesa with a digital currency? It would offer all the advantages of M-Pesa, but would make the costs to users even cheaper for those who import money into that system from abroad, because those remittances from rel­atives in London or New York would arrive via bitcoin rather than the traditional banking system. Call it BitPesa.

They would begin with a simple and achievable goal: Take a single “corridor” in the remittance business—between the United Kingdom and Kenya—and build a bitcoin-based money-transfer business around it. They hired a development team to build the initial prototype, then a coder to revamp it. Next, they sent a staff member to London, to go into the cafés in the Kenyan neighborhoods and recruit beta testers for the ini­tial trials. They began their beta test in the summer of 2014 with about two dozen emigrants.

Rossiello hadn’t even heard of bitcoin until Goldie-Scot mentioned it to her. But she quickly caught on to the possibilities and now has am­bitions for BitPesa that go beyond bitcoin, or digital currencies. For all the good it has done, the microfinance industry pioneered by Nobel Peace Prize-winning Muhammad Yunus’s Grameen Bank still operates within what she described as “a busted financial system.” An alternative based on cryptocurrency could bypass a lot of the costs of the existing system, and it offers the promise of doing more than just allowing cheap remit­tances.

Rossiello sees bitcoin as a way to spark not just a financial revolu­tion in Kenya, but a technological one as well. The idea is that cryptocur­rency fosters innovation, as we’ve seen in San Francisco and other places. She has started a meetup culture and teaches coding to schoolchildren. Five people were at her first meetup; six months later, there were 40, and they were doing coding and coming up with their own apps. “People are responding, people are excited about it,” she says.

As is the case with all efforts of outsiders attempting to better the lives of distant people, an uneasy awareness exists of the legacy of colo­nialism and the fine line between assistance and paternalism. It’s important to resist the impulse to view cryptocurrencies’ tech­nology, or any technology, as a panacea. For all the promise that tech­nology holds—this idea that developing nations are going to “leapfrog” decades of development thanks to cheap, distributed, decentralized technology—the reality on the ground resists easy solutions. What M-Pesa has achieved, and what BitPesa promises, matter because they are effec­tive tools for promoting economic activity, and thus development. This is why the stories coming out of Silicon Savannah are important—not only for Kenya but for the developing world as a whole. “There’s a much big­ger story here,” Rossiello says. “We’re just getting started.”

From The Age of Cryptocurrency by Paul Vigna and Michael J. Casey. Copyright © 2015 by the authors and reprinted by permission of St. Martin’s Press, LLC.