I have been a follower and enthusiast of Bitcoin for a while but only started engaging actively earlier this year when I downloaded the Bitcoin Blockchain and began to tinker. My learning and tinkering has been helped immensely by the Let’s talk Bitcoin show. I was working my way through past episodes of the show when I cam across episode 133 ‘The digital divide’ where Richard Boase talks about his experience in Kenya and slight disillusionment with the possibilities for Bitcoin in the developing world. As a Kenyan the discussion picked my interest and raised some questions that I will attempt to address below. Chief among these is whether thinking of Bitcoin as an investment opportunity is the wrong place to start for the developing world.
There is a strong incentive for people who are heavily invested in Bitcoin to put a lot of stock in its potential to rise in value in the future. However, listening to the debate in episode 139 of LTB on the validity of Appcoins made me question some of the arguments that are put forth on the likelihood of value increase narrative. I believe it was Daniel Johnson from the Satoshi Nakamoto Institute who made the argument in the debate that value accrues to a currency not because people are willing to use it for trade but because people are willing to hold / hoard it. This argument was made in the context of refuting the claim that Appcoins can retain value if the app that they support becomes successful. It was based on the belief that currency holding is a zero sum game in which it is always advantageous to a user to hold most if not all of their wealth in the most prevalent (liquid) currency in order to profit from a larger set of potential investment opportunities. Therefore, services will always be developed to minimize the amount of time users need to spend holding Appcoins, since Bitcoin is the most liquid crypto currency. He then claims that since in the digital world this ‘minimum holding time’ can be reduced to a fraction of a second by converting to Appcoin the instant before a transaction is executed, the value of Appcoins with tend to zero.
Turning to the developing world, it is my belief that, if Bitcoin ends up with a ‘killer app’ in Africa, it will be one that facilitates the disintermediation of the remittance market. This is a claim that is often made not just in the Bitcoin world but one that resonates with a growing tide of voices in the development world in which I have been steeped for the past one year as a graduate student. The annual value of remittances by migrants to poor countries is approaching half a trillion dollars. To put this in context, that is 3 times the total value of development aid according to this illuminating TED talk by Dilip Ratha.
The two main problems that plague this industry are high fees and long lag times. The global average for remittance fees is 8% of the amount sent and worse still this percentage increases, as countries get poorer. The average for Africa is 12% and to send money within Africa it goes up to over 20%. It is true that in countries like Kenya prices are going down but that is most likely because they perceive a threat from mobile money services like Mpesa and even then the fees are not going down fast enough. The majority of African countries don’t have the options that Mpesa provides and once again it is the poorest that end up paying the most. In this respect, Kenya might have been the wrong country for Richard to visit precisely because of its previous successes with mobile money.
The second issue with the current remittance system is the cost in terms of time. I recently sent about $2000 to my sister in Kenya and though it did cost me $5 to send the money (less than 1% not counting the exchange rate spread) it took almost a week for the money to be released and when it was, she had to go collect it at a post office. Given that a large amount of remittances are sent to cover emergency cost like hospital bills, this time cost can often be the difference between life and death for poor families in addition to being inconvenient for businesses.
Introducing Bitcoin to resolve these two problems has a lot of promise and this is why companies like Bitpesa a stepping into the space. But like any good solution, Bitcoin comes with its own unique set of problems; chief among these is the volatility of the currency. For poor people, shocks to income is one the main elements that prevent them from being able to climb out of poverty. With no access to insurance and volatile incomes to begin with, it becomes very difficult to plan long term and a lot of time is spent trying to smooth out income shocks through informal means like community lending pools. Introducing additional volatility into the lives of the poor is quite obviously a recipe for disaster. The question then becomes, what can be done to avail low-income consumers of the benefits of Bitcoin as a remittance tool while shielding them from the price volatility of Bitcoin and the resultant exchange risk?
This is where we circle back to Daniels point on liquidity and the sources of value accretion for currencies. It seams to me that the simplest way to do away with the exchange risk associated with holding Bitcoin is to reduce the holding time to its absolute minimum. Practically this means building a remittance service that buys Bitcoin in the remittance source country transmits it to a wallet in the destination country and cashes out into fiat in the shortest time possible, ideally under a second. Borrowing the concept of the ‘atomic transaction’ mentioned by Alex of colored coin in episode 131, it would be even better if the buy and sell transaction were performed as a single entity reducing the Bitcoin holding time to its absolute minimum. This would mean that the Bitcoin transaction would essentially be invisible to the end user and all they would see is that they are able to instantaneously convert from dollars in New York to Kenya Shillings in Nairobi. If this happens and the service is made accessible via the post office or in more advanced countries like Kenya accessed via an Mpesa like interface on a phone, I have no doubt it would take a big bite out of the remittance industry. It will likely dramatically increase the volume of funds transferred annually in the process increasing financial security for millions and saving lives.
What does this mean for the value of Bitcoin though? What happens when even 10% of the 180 million migrants from poor countries who remit money home turn to instant, minimum hold Bitcoin money transfer as their remittance channel of choice? That is, what happens when $40 in ‘minimum hold’ currency trades enters what is currently a $5 billion market cap Bitcoin economy? If 90% of Bitcoin users hold Bitcoin for under a second, what effect will this have on the price? I’m not sure, but if Daniel is right and the value of the currency depends not on how many people are willing to use it but on how many people are willing to hold it then the effects are potentially large and negative for price.
I think that Richard Boase brings up some good points in the interview and I want to congratulate him on being willing to be convinced away from his initial idea of success. He alluded to an issue that in my view has resulted in the demise of a lot of (usually foreign led) interventions in Africa when he said, quoting William Gibson, that ‘the street finds its own uses for things’. Too often people arrive on the continent not only with a project but also with a specific prescription as to how it is to be used. This is almost always doomed to fail because the how is divorced from the local context. The cellphone revolution in Kenya might not have happened because the ‘how’ that development practitioners arrived with for cellphone technology was making phone calls and landlines could do that just as well. It was not until companies like Safaricom turned this use case on its head that the potential for cellphone technology to transform entire economies became apparent. Keeping this in mind, I would like to close by saying that I have no doubt digital money will transform African economies, I just don’t know how.
