Bitcoin and the Bottom of the Pyramid: How cryptocurrency can make good on its promise of financial inclusion
The buzz behind cryptocurrency — peer-to-peer digital currency networks such as the (in)famous Bitcoin — is remarkable. With persistent momentum, and despite both spectacular collapses and temporary setbacks of price and confidence — for the most recent doomsday threat, see one miner’s sustained takeover of 51 percent network share — Bitcoin and other blockchain-based cryptocurrencies are seeding their own startup ecosystem. Among its ranks are leading venture capitalists, benefactors, technologists, cryptographers, and entrepreneurs, all believing in the game-changing potential of Bitcoin, and building products and services on top of the protocol. From digital wallets to merchant services to cold storage and security, the pace of innovation signals a new chapter for cryptocurrency. Yet, Bitcoin remains largely confined to a sphere of the rich, the technically-savvy and the economically-included. What significance, if any, does cryptocurrency have for financial inclusion and the socioeconomic base of the pyramid (BoP)?
While the headline focus has been on bitcoin, the currency — lowercase and often abbreviated as BTC—the real opportunity is Bitcoin, the distributed network that allows for verified transfers without a trusted third party. This new medium of exchange is what Bank of America sees as a “clear potential for growth.” It is what famed venture capitalist Marc Andreessen describes as “a much deeper concept than currency. It’s the idea of distributed trust.” The challenge, then, is to offer the BoP the advantages of this new medium of exchange without forcing it to adopt a volatile store of value.
To be clear, holding BTC in and of itself is not and should never be considered “financial inclusion.” Rather, if cryptocurrency is to play a role in helping the underserved get improved access to financial services, it will almost certainly do so by helping people transfer and transact more quickly, safely, and cheaply. While over the long term this may enable new forms of credit, micropayments, and online commerce, in the near term the most concrete opportunity is to decrease the costs of international remittances, particularly as it becomes easier and cheaper to cash-in, cash-out and exchange currencies cross-border (as companies like Ripple are trying to do with something like a distributed exchange or “trust network”). Today, over $410 billion flows in remittances to developing countries. Many money senders and even more of the recipients are low income and financially underserved. Remittances are expensive, opaque, recurring transactions of necessity, with costs borne predominantly by the poor. Globally, these costs average 8.4 percent of the typical amount sent, exceeding 12 percent in certain corridors such as Sub-Saharan Africa and the Pacific Islands. These persistently high costs are in a standoff with technology.
Cryptocurrency, essentially a distributed or shared public ledger, offers the promise of disintermediated, verifiable, instant transfers at virtually zero cost. And a new crop of startups is tackling this development challenge head on: BitPesa is using Bitcoin to decrease the cost of remitting money to Kenya, and launched a pilot between London and Nairobi in May. Kipochi, a competitor, is designing a mobile wallet in Africa, and plans to extend its service to international transfers. South African Switchless is building enterprise software to help banks provide Bitcoin products to their customers. In Latin America, HelloBit is launching a peer-to-peer network for Bitcoin remittances focused initially on the U.S.-Argentina corridor. Coincove, a Mexican startup, is working on local Bitcoin infrastructure for commerce, credit and transfers. BitPagos is building a Bitcoin-enabled payments processor. 37Coins is developing a SMS-powered Bitcoin wallet for emerging markets. Globally, LocalBitcoins continues to provide cash-in and cash-out liquidity. And many of the fast-growing online remittance challengers (like Azimo, Remitly and Xoom) have their eyes on ways they can leverage Bitcoin and related protocols to lower costs and grow faster. Even companies like ZipZap, better known for providing the on-ramps and off-ramps of digital currency systems, have expressed a desire to start doing Bitcoin-based remittances directly.
So, Bitcoin to the rescue? Not so fast.
At Accion Venture Lab, we view cryptocurrency not with categorical excitement, but with cautious optimism that it can over time make significant durable improvements to how money is moved across borders; improvements that could create lasting cost savings and convenience for the BoP. But in order to realize this potential, cryptocurrency entrepreneurs need to design products that solve clear problems for customers in developing markets. We have developed the following set of principles to serve as a starter road map for doing so (and hope to deepen and refine these with other entrepreneurs, investors and thought leaders in the space, many of whom have thought more about this than us!):
Materially decrease transaction costs. The cost of remitting money averages 8.4 percent globally, driven in large part by the legacy brick-and-mortar distribution networks and multi-bank settlement chains of incumbents like Western Union and MoneyGram. We’d like to see Bitcoin not just reduce fees modestly, but bring down these fees dramatically – ideally cutting fees in half or more. Not only will this lead to more value accretion to remitting customers, but it will also be the kind of radical value proposition improvement that will be required to attract customers and break them from established habits around sending and receiving money. Note that this also depends on collapsing the multi-stepped BTC process (cash-in, foreign exchange, cash-out), which will take not only expansion of protocol innovations but also back-end agreements and partnerships and cooperative regulators.
Make pricing transparent. Traditional remittance pricing is opaque. Money transfer companies profit from openly-advertised fixed fees, but often even more so from less-transparent exchange-rate spreads. Receiving banks and agents then apply lifting fees to incoming transfers. Effective cost is thus obfuscated. If Bitcoin transfers are to be consumer-friendly, the effective cost should be completely transparent to the customer.
Solve the cash-out problem. If Bitcoin is to transform the front-end of remittances (rather than simply the back-end settlement process), customers need easy on- and off-ramps. Cryptocurrency cannot disrupt a multi-billion-dollar transfer market without the infrastructure to cash in and out in local currency. A solution will require a network of financial institutions, agents, or individuals to provide reliable, scalable liquidity.
Manage currency and security risks. BTC has proven to be volatile, vulnerable and unpredictable. To become widely accessible, Bitcoin services need to shield customers from both specific and systemic risk. When a transaction is initiated, the customer should know exactly how much local currency will be remitted on the other end with no exposure to currency swings or wallet security.
Make Bitcoin brain-dead simple. Customers should scarcely know they are transacting in BTC. Today the BoP does not have the requisite technical proficiency, risk tolerance, or desire to experiment with new currencies, particularly ones with the prefix “crypto.” The customer should be distanced from BTC (the currency) while still transacting over Bitcoin (the distributed network)—i.e., keep the good, leave everything else.
Land transfers in the local financial system. While cash-to-cash remittances solve an immediate problem, cash-to-digital-cash remittances can help build financially-inclusive infrastructure in receiving markets. Rather than focusing on traditional cash-out agents, we would like to see more focus on landing transfers into bank accounts or the range of other “branchless” and mobile account alternatives, like M-PESA in Kenya and Easypaisa in Pakistan. Not only will digital distribution further reduce costs for money transfer providers, but it also serves as an on-ramp to formal financial services for underserved customers in developing markets and grows the local financial ecosystem around savings and payments.
Proactively manage regulations. The global regulatory environment around cryptocurrency is constantly evolving. New entrants need to get ahead of the ball by understanding what regulations they are subject to today, and what they may become subject to tomorrow. Money-remittance, banking-agent, AML/CFT, currency, tax and a variety of other regulations may apply. Startups that have a firm grasp on the existing regulatory and legal landscape and can anticipate the regulator’s future concerns will be at a distinct advantage.
Prepare to scale. Few single remittance corridors are big enough to support scale on their own, and those that can are hotly contested. So from day one new entrants need to be ready to go big and go global. Startups entering this space need a vision and strategy that can scale beyond a single geography, which entails significant investments in marketing, distribution, and regulatory compliance. In fact, this suggests that the pioneers of using cryptocurrency to transform remittances might not be startups, but rather those players with an existing brand and distribution infrastructure who are still nimble enough to reinvent or diversify aspects of their business models and value chains to capitalize on new technology.
The future of cryptocurrency is full of both known and unknown “unknowns,” and the road ahead will surely be laced with surprises. That said, despite the Bitcoin hype-cycle histrionics, we at Venture Lab are cautiously optimistic that the new cryptocurrency ecosystem can have a significant and perhaps even (eventually) transformative role to play in financial inclusion. We’ll be keeping our eyes peeled.
Paul Breloff (@paulbreloff) and Nathan Krishnamurthy (@nathankrish) are with Accion Venture Lab (@Accion_V_Lab), a seed-stage investment initiative that provides support to innovative financial inclusion startups globally.