Since the last Mondato Insight that looked at Bitcoin it has certainly been a bumpy ride for the cryptocurrency. Just two weeks ago the digital currency’s value was down by over a third compared to early February, and though it has rallied over the course of the past week, it is still 15% lower than on Valentine’s Day, not to mention anything of the dizzy heights of late 2013 when it was valued at over $1100.  Bitcoin’s security (or rather vulnerability) has also been under intense scrutiny following the collapse in February of the largest Bitcoin exchange, Mt. Gox, and the revelation that over US$250 million of bitcoins had been “stolen”. A recently published report has further concluded that the price heights of November last year were probably the result of a computerized ‘bot’ attack on Mt. Gox involving the creation of thousands of accounts that were buying bitcoins, thereby driving up the price. Nonetheless, interest in the cryptocurrency remains high, and it appears that despite its teething problems and what some view as a bottoming out of the Bitcoin market, people have been buying up bitcoin in large quantities over recent weeks. The world’s most popular cryptocurrency looks set to remain a feature of the MFS landscape for quite some time to come.

 

Is Bitcoin a tool of financial inclusion?

 

The theoretical benefits of Bitcoin for the unbanked are enormous, operating as it does on a peer-to-peer volunteer computer network without the need for a third-party bank or mobile money platform. Yet, the theoretical benefits of mobile money for the unbanked are also huge; transforming that theory into practice, however, has proved to be a significantly harder nut to crack, as is well known. And in this regard cryptocurrencies have to overcome the same hurdles that mobile money does, if people in emerging markets are going to be likely to entrust their money into a volatile cryptocurrency system which, if we are being honest, very few people in more advanced economies actually understand.

As Mondato previously noted, customers in developing economies want access to mobile money not for its theoretical benefits, but so they can light a bulb for their daughter to do their homework. It is difficult to see how, in the short-term at least, Bitcoin facilitates that. Currently, to have useful Bitcoin you need to have access to either a smartphone or a computer. Yet the potential for Bitcoin to act as a competitor to or replacement for mobile money in developing economies has started to catch the attention of mainstream media. Business Insider has taken a particular interest, and the idea has also received coverage on Bloomberg. Opinion remains divided as to whether Bitcoin poses a threat to mobile money in the developing world, and whether the technological requirements of Bitcoin mean it inhibits financial inclusion rather then furthering it.

 

Bitcoin as a remittance method

 

However, as discussed in last week’s Insight, the area of international remittances is one in which mobile money lags behind traditional remittance methods. In this sphere, even in the short term Bitcoin may offer fairly immediate solutions but only if it can overcome the same hurdles that international mobile money remittances face (as the enduring popularity of international airtime top-ups proves). It is into this space that BitPesa, a Kenya-based start-up is moving, seeking to take advantage of Bitcoin’s bitchain peer-to-peer processing and cryptology. This Bitcoin-based remittance platform will initially focus on the UK to Kenya remittance corridor and link Bitcoin to Kenya’s ubiquitous M-PESA mobile money platform. (BitPesa will formally launch at Mondato’s Africa Summit, which will take place in Johannesburg on June 17th & 18th).

Like all other international remittance platforms, many of BitPesa’s biggest hurdles come in the form of gaining consumer trust and acceptance on the part of the sender, something which may be difficult given Bitcoin’s recent bad publicity and the fact that most people don’t really understand what Bitcoin is. Elizabeth Rossiello, CEO of BitPesa, is keen to emphasize that BitPesa uses Bitcoin as a payment protocol and not as a currency. She told us that she thought that Bitcoin is just the first popular digital currency and there will be other iterations and options by the time the last Bitcoin is mined. “We plan on diversifying into other digital currencies to give consumers options,” Ms. Rossiello told us. “It is hard to predict where this sector will be in the few years it will take to reach the 21 million mark [when all the available bitcoins have been mined], as this is a rapidly evolving space.” For Ms. Rossiello and BitPesa, managing that evolution involves working closely with stakeholder and regulators in Kenya, to avoid the fate of Kipochi, a feature-phone Bitcoin wallet that was shut down by Safaricom after only a week of operation last year. Another crucial difference is that BitPesa is an exchange for converting Bitcoin into value on the M-PESA wallet, rather than a distinct wallet. “We have really tried to involve the Central Bank, the telcoms, the banks, the payment processors and the tech community from the beginning” said Ms. Rossiello. “We believe that retail acceptance in a frontier market will take an inclusive movement.”

 

What you need to know about Bitcoin but were afraid to ask

 

In this light, talk of Bitcoin as a currency in many ways confuses more than it enlightens the non-specialist, and it is more helpful to think of it as two separate concepts: as both a commodity (which may be used as a medium of exchange), and as a protocol or system. Bitcoin (with a small ‘b’, i.e. the unit of currency)’s terminology assists in this regard: bitcoin is issued (“mined” in Bitcoin-speak) as a reward to those who contribute their computing power to the peer-to-peer computing network that collectively verifies the cryptology and processes transactions from one party to another. Although the first US Federal Reserve note to discuss Bitcoin described it as a “fiduciary currency”, the Internal Revenue Service (i.e. the American taxman) will treat it as property. This means that capital gains will be taxable and every bitcoin transaction will have to be recorded as a potentially taxable event. Having to report every transaction made using bitcoin to the IRS creates a potentially complex book-keeping requirement that will be unattractive to many, and the prospect of having the IRS keep a record of their every purchase is likely to dampen enthusiasm for the cryptocurrency among its American libertarian proponents, some of whom have been among its most enthusiastic backers.

Indeed, as Lawrence Parks, Executive Director of the Foundation for the Advancement of Monetary Education, noted this week in a Wall Street Journal opinion piece provocatively entitled “Bitcoin’s Futile Quest to Be a Currency”, the world already has a number of very effective and widely accepted digital currencies: the US dollar being the most popular. No longer backed by gold, like the euro, pound, and yen and all other major currencies, the dollar is not representative money, rather it is “an idea of money”. As mobile financial services become more ubiquitous across the world, expressions of this idea in an electronic form, e-money, will become the norm. The world will be dominated by what will be essentially digital currencies.

Bitcoin as a system (with a capital ‘B’) is the computing protocol and cryptology, based on the ‘blockchain‘, the public collectively-held and organized ledger of all Bitcoin transactions. For being part of Bitcoin, you get bitcoins, which is the element of the system that appears a little too like a Ponzi scheme for some people’s liking. Enthusiasts, however, point out that there is a fixed quantity of bitcoin (21 million), the last of which will be mined in 2040; everyone knows this and that fact over time will provide stability to the system. Nonetheless, systems collapse for unanticipated reasons, just like currencies do and commodity bubbles burst.

 

Bitcoin 2.0

 

2040 will be a key date for Bitcoin, for when the last coin is mined, participants in the network are going to need a financial incentive to continue processing transactions and keeping the system going. (The transition will actually come a lot earlier, as the difficulty in earning coin increases over time). That incentive is, of course, likely to amount to a fee, which is currently not paid on almost all bitcoin transactions. From where we stand now, then, it seems that the most likely system that Bitcoin will evolve into will be a payments rail. That prediction, however, is tempered by the limitations of the world as we see it today. Innovation is likely to take Bitcoin and its open-source software on a trajectory the endpoint of which was clear to no-one 25 years previous. The first steps in that direction have already been taken by the development of Ethereum, described by Wired magazine as a “Bitcoin for everything”. As BitPesa and indeed a raft of other technology-based solutions that have blossomed in the Global South have shown, that innovation may well come from Africa, where Bitcoin might prove to be the answer to a question that its developer, “Satoshi Nakamoto”, has never even considered.

In the short-term, bitcoin is not going to help a Tanzanian rural dweller get electricity in her home, but it might reduce the cost her grandson has to pay to send money back home to her from London. Nor is bitcoin likely to replace the dollar, peso, euro or yen in your pocket or mobile wallet, except at a very small number of establishments that accept it for payment (though the list of growing). But by creating a faster, more efficient, secure and most importantly independent and open-source system, Bitcoin and its blockchains have planted a hotbed for innovation. That is likely to be its most enduring legacy.

See our Twitter Chat on Bitcoin’s future here.

©Mondato 2014. Mondato is a boutique management consultancy specializing in strategic, commercial and operational support for the Mobile Financial Services (MFS) industry. With an unparalleled team of dedicated MFS professionals and a global network of industry contacts, Mondato has the depth of experience to provide high-impact, hands-on support for clients across the MFS ecosystem, including service providers, banks, telcos, technology firms, merchants and investors. Our weekly newsletters are the go-to source of news and analysis in the MFS industry.

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