NB Financial Health
Beyond the Bubble: What’s Cool, Potentially Cool, And Clearly Not Cool About Bitcoin in Financial Inclusion?
Editor’s note: Throughout 2017, NextBillion is organizing content around a monthly theme, dedicating special attention to a specific sector alongside our broader coverage. This post is part of our focus on digital finance for the month of December.
As you’ve likely heard, it’s a shockingly profitable time to own Bitcoin: As of this Tuesday morning, the cryptocurrency’s value had gone up 47 percent in the past week, 181 percent in the past month, and 2,119 percent in the past year – and each new day (indeed, each new hour) seems to push it to eye-watering new levels. So before the inevitable “market correction” hits, it seems like a good time to examine the pros and cons of the cryptocurrency and its underlying technology. Here are four elements of the Bitcoin narrative and how they register on the coolness scale, from the perspective of the financial inclusion and global development communities.
Not cool: Speculative bubbles
It is hard to argue that the spectacular rise in Bitcoin prices that we’ve been seeing on a daily basis for the last six months is driven by new information that gets revealed daily on the future of the currency. When prices get disconnected from new fundamental information, or to put it differently, when yesterday’s price rise is the only new signal that the market acts upon today, you are witnessing a bubble. Enter the market at your own risk.
A currency whose value goes up and down according to hype cycles is not likely to be one that low-income customers should use to save money, smooth out their consumption, or manage future lifecycle needs. And of course, we wouldn’t want that kind of instability to be the first experience of digital money for those who have been previously financially excluded.
Arguably cool, but not for me: A new global currency subject to no political control
Some people are drawn to the idea of a currency whose money supply is not managed by any central authority. That´s the case with Bitcoin and most other cryptocurrencies: They eliminate the possibility for discretionary monetary policy and instead fix the path of money supply mathematically up front for the rest of time. One can easily point to cases where central banks ran their currency into the ground, through hyperinflation or outright currency confiscations. And indeed, Bitcoin is becoming a popular financial alternative for residents of failing economies or countries in political turmoil, where dealing with Bitcoin’s price volatility may seem preferable to trusting a poorly run bank or holding a local currency whose value is plummeting due to inflation. But I for one am happy that our central banks had some room to accommodate the monetary consequences of the global financial crisis and the ensuing recession. In general, I define progress as achieving more democratic accountability of policymakers rather than necessarily less policymaking. So, the coolness quotient of sidestepping government control of monetary aggregates is questionable – as are the potential pros and cons for the poor.
Uncertain coolness: Blockchain-for-everything
The logic of a decentralized money network is now being extended to pretty much all other forms of value that people can think of: the authenticity of diamonds, the origin of fair trade goods, the ownership of financial securities, the sharing of trade finance documentation, the securing of personally identifying information, the sharing of farmer production data across value chain players, etc. I have no doubt that all these kinds of information can be digitized and put in the particular database structure that we call a blockchain, and that the database can be distributed among hundreds or thousands of peer users, rather than limited copies of this data being kept centrally. But would all that be transformational, in the way that freeing up the handling of money from banks could be? Well, only if it results in a truly decentralized system, where nobody gets to play gatekeeper, where keeping the system honest is our collective responsibility.
For me, the key question is whether the information that would go onto the blockchain could be validated in a decentralized way. That was the big breakthrough with the Bitcoin protocol: Anyone can participate in the mining process by which we determine which transactions are real and which are not, and hence which Bitcoins are real and which are not. But with the non-monetary applications I mentioned above, most often that information validation remains the preserve of a few in the know, whom we will continue to need to rely upon and trust. How could I possibly be involved in determining whether the diamond you just bought or the agricultural yield you just claimed were true? Only the seller of the diamond or the buyer of the crop could validate that. Interesting and novel as these blockchain applications may be, most do not as yet address the core problems of institutional trust and commercial value choke points.
Very cool: Decentralized digital money and payment rails
Remember the old days when you could take financial matters into your own hands? Remember when you could take a bank note and stick it under your own mattress to save or pass it on to someone else to settle a debt? With our current system of digital money, you can´t do that anymore: You need to involve one of a few licensed institutions to implement any and all of your financial thoughts. And when banks are not keen to help you (because you don’t have recognized forms of ID, you live too far from where they have their branches, or they feel you are too poor to be profitable), that’s when you fall into the ranks of the financially excluded.
Bitcoin and the other cryptocurrencies change all that by shifting the locus of essential trust from third-party institutions like banks or mobile money operators to software protocols, and by switching from a security model based on a web of closed/private systems to one based on fully transparent systems and open source software. In this scenario, no institution need stand between you and your digital money, though of course banks could still offer themselves as an upsell to financial self-help (such as by paying interest on saved balances and building up a profile with which to get loans). People would be financially included by having the right software on their phone that connects them to the Bitcoin network, and through that to everyone else – not just by currying the favor of a bank. To throw some payments jargon onto it: Using Bitcoin would be like all of us being free to connect to the national Real Time Gross Settlement System on our own behalf. Then we could truly say that bankarization (getting people bank accounts – a term often used in Latin America) is no longer a synonym for financial inclusion.
And there’s an added benefit: Imagine how much a payments system that doesn´t need banks to operate would undermine perceptions of banks as being essential, too-big-to-fail institutions that need to be routinely bailed out when they run into trouble.
The need to unpack bitcoin
If you want to get to the bottom of Bitcoin (and the growing cryptocurrency field), you need to unpack all of these different ideas. If that interests you, you may consider taking an online course I have developed under the auspices of the Digital Frontiers Institute called Bitcoin: Back to the Future, which will be offered for the first time in February 2018. This course is not designed to make you a convert. We’ll look at the real practical issues about Bitcoin and its underlying technologies that make it not ready for prime time, as well as exploring the full range of opportunities they present. But what I can guarantee you is that thinking about Bitcoin will challenge everything you thought you knew about how digital money and digital payments ought to run. I hope that a deeper understanding of the Bitcoin protocol will turn you into a bigger-picture thinker – if not necessarily a richer person.