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Banking with Bitcoin

by Guest Blogger for Isobel Coleman
August 5, 2014

A Bitcoin sign is seen in a window in Toronto, Canada, May 2014 (Courtesy Reuters/Mark Blinch). A Bitcoin sign is seen in a window in Toronto, Canada, May 2014 (Courtesy Reuters/Mark Blinch).


Emerging Voices features contributions from scholars and practitioners highlighting new research, thinking, and approaches to development challenges. This article is by Sarah Martin, CEO of Boone Martin, a global communications firm that focuses on social impact investing.

More than 50 percent of the world’s population lacks access to banks — meaning nearly 2.5 billion people are cut off from financial services, such as credit, savings, and loans, needed to start new businesses, grow emerging markets, and tap into the global economy. Remarkably, however, more than one billion of the unbanked do have access to a mobile phone. The rapid rise of the mobile phone offers a platform to deliver services far beyond just calls. Money transfer businesses like Kenya’s M-Pesa piggyback on mobile networks to provide payment programs and basic financial services. With greater reach into previously neglected regions, mobile money offers market access to historically under-banked groups, including female, poor, and rural populations.

Mobile money has spread because it’s convenient and easy to use, but remains limited by interoperability problems. Sending mobile money works only if both the sender and the receiver use the same service. This requires robust agent networks, customer coordination, or partnerships among providers. Scalability is also a challenge; mobile operators have yet to succeed in Nigeria. A new option is emerging that allows the same simple payment and banking services as mobile money, but without the cross-border friction and at a fraction of the cost: Bitcoin.

Bitcoin has captivated world attention since its recent debut as an easy way to streamline global payments and transform existing financial services. Unlike traditional banking, Bitcoin does not require a central coordinator. Rather, it trades freely worldwide using a peer-to-peer network and a global digital currency. Anyone, anywhere can use Bitcoin to buy or sell goods and services, create contracts, and develop credit and savings. Users receive a personalized Bitcoin address (like an email address) to send money or scan as a Quick Response code from their mobile phone when shopping at local markets or paying local vendors.

Consumers use the digital currency because it’s fast, easy, and more convenient – and secure – than carrying cash. Merchants like it because there are no transaction fees or chargebacks. This is especially helpful for small businesses trading in low-cost goods or micropayments who take a hit on 3-5 percent credit card and PayPal fees. Bitcoin also eases access to liquidity, credit, and savings to start and grow new ventures.

Bitcoin’s promise is most evident in the remittances market. The World Bank estimates that $414 billion in remittances will reach the developing world in 2013, nearly three times the size of official development aid. Remittances not only impact individual family income, but also currency stability and GDP. India, one of the top recipients, collects more from remittances than earnings from IT exports. Wire services cost 9-12 percent in fees, whereas Bitcoin charges only 1-3 percent. This reduction can make a meaningful difference to overseas workers and home country recipients.

In volatile economies, Bitcoin may also safeguard against currency fluctuation. Like gold, there is a fixed supply of the currency, meaning it is inflation-proof. Notably, Bitcoin has recently grown in popularity in Argentina, where economic conditions remain precarious and the alternative currency provides a way to protect against risk. Conceivably, Bitcoin could serve a similar function in other historically complicated economies, such as Venezuela or Zimbabwe.

Although it is still early days for new currency, initiatives to leverage the new technology are moving at light speed. As mobile phones continue to spread throughout the developing world, Bitcoin may extend a new, global option for low-cost financial services. The hope is that it could free money services in the same way that email did for mail, Skype did for phone calls, and the internet did for information. With open access to anyone — regardless of gender, income, or geography — Bitcoin may equalize market opportunities and support more inclusive economic growth.

Post a Comment 2 Comments

  • Posted by LordCukingston

    As with most bitcoin articles, this one is full of misinformation.

    Bitcoin in its present state is not a guard against inflation. The massive inflationary mining subsidies that currently finance the network churn out like clockwork, at a rate of approximately 3600 bitcoins a day, regardless of actual demand. It is a monetary policy dreamed up by a random guy who currently sits on 1 out of every 13 bitcoins ever produced, and 1/21 bitcoins that will ever be produced. This lack of coherent or adaptable monetary policy is only made clearer by bitcoin’s loss of 50% of its value over the last seven months.

    These same inflationary subsidies obfuscate the actual cost of running the network. The current cost per bitcoin transaction approaches $40 and the deficit between transaction fees and mining subsidies is millions of dollars a day.

    It also isn’t fast. The recommended wait of six confirmations to reduce the risk of double spending by the increasingly anonymous and centralized mining cartels will take an average of an hour to complete. There is no guarantee that it won’t take much longer, or be ignored entirely if the correct fees aren’t included.

    You’ve also ignored the other costs associated with bitcoin usage by people who are not early miners. You generally will be eating the exchange spread both ways, while still paying prices that have the assumption of credit card processing fees built into them. You will also be hit up for exchange fees.

    This entire article reads like a bitcoin advertisement from one of the gaggle of bitcoin pumping investors who stand to make a bundle by selling the public on a terrible investment with half-truths and misdirection.


  • Posted by William Suk

    Interesting article. I am not compelled, however, by the humanitarian argument often made by Bitcoin enthusiasts. Whereas Bitcoin may save poor people money in some cases, it will do little to change the underlying structures of oppression that make them poor. If poor migrant workers can save money on remittances, that is great, but it this alone will not change the fact that they are working under exploitative conditions.

    Also, I dispute your claim that Bitcoin only charges 1-3% for remittances. The true cost of using Bitcoin as a conduit for remittance is best expressed by the equation: Cost_to_buy_BTC + Cost_to_transfer_BTC + Cost_to_cash_out_BTC + Bitcoin_Network_transaction_fees.

    An actual example might be helpful. You can check a recent blog post I wrote on BitPesa, a Kenyan startup that uses Bitcoin to channel remittances:

    Bitpesa really is an ingenious company. The user uploads BTC, and the receiver gets Kenyan Shillings credited to their mobile money account. The transaction is painless and speedy. It is also useful for sending small amounts (micro-remittances).

    BitPesa charges 3% for this service, which covers the cost of sending and the cost of cashing out. However, you must also factor in the cost for the sender to acquire Bitcoin, which in my case is an additional 1% + $0.15 (Coinbase), plus the Bitcoin network transaction fees (I paid about $0.06 from my Mycelium wallet, but it could be cheaper if you sent directly from Coinbase).

    Of course, not all migrant workers have access to low-cost exchanges like Coinbase. Furthermore, we do not know if BitPesa is profitable at 3%, or if this is a loss-leader to build a user base. Additionally, you must factor in the cost of cashing out from MPesa the M-Pesa system, if that is what the recipient intends needs to do.

    In sum, Bitcoin might very well shake up the $100 billion+ remittance market. If it does, migrant workers will probably save money on remittances in some cases. However, the ones who will benefit most are companies like Bitpesa who make it happen, as well as wealthy, first-world investors who already hold Bitcoin and will see the value of their holdings rise because of the increase in Bitcoin’s value that would result from increased transaction volume.

    Bitcoin may help the poor in some use cases, but mostly it will help the rich.

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