Julienne Lauler

Can Digital Currencies Change the World?: Bitcoin is a tech-savvy alternative to traditional payment systems, but could it meet the needs of the financially excluded?

Riding on the Bitcoin hype, a legion of techno-optimists believes that digital crypto-currencies have the potential to transform ineffective global payment systems, and ultimately spur global financial inclusion. But is this just Silicon Valley technological “solutionism,” or will digital currencies such as Bitcoin truly change the global payment infrastructure and bring financial access to millions?

The Optimists’ View

For some, it is only a matter of time before our global currency systems are replaced by decentralized digital currencies such as Bitcoin. In a recent radio interview, venture capitalist and Bitcoin evangelist Ben Horowitz even bet a pair of alpaca socks (the first item purchased with Bitcoin) that Bitcoin was going to change the way people buy and sell things on the Internet. Digital currency optimists like Horowitz believe that the inefficiencies of our current payment system, particularly for online purchases, will drive merchants and consumers to flock to alternative platforms where they can make purchases faster and cheaper.

The current context largely supports this hypothesis. Bitcoin has been proven to dramatically reduce the cost of transferring money from one place to another. The currency is also safer to transport, less bulky, and cheaper to save and spend than its centralized distant cousin – cash. “The combination of ubiquitous Internet-connected mobile devices and digital currency presents a tremendous opportunity to radically expand access to financial services on worldwide basis,” testified Jeremy Allaire, CEO of Circle Internet Financial, at a recent U.S. Senate hearing to defend Bitcoin.

According to Allaire, Bitcoin or other digital currencies have the potential to lower transaction costs for businesses, decrease fraud risk for consumers and merchants, increase consumer privacy and protection and expand the market for consumer financial products on a global basis. In a world where 2.5 billion people do not have a bank account, digital currency also appears to many optimists as a beacon of hope that can expand financial inclusion among the unbanked and underbanked, and thereby replace aging, exclusionary systems.

The Skeptics’ View

While the Bitcoin craze has reached all-time highs, skeptics have argued that digital currencies might be transformative in the future, but not yet. Their main argument is that Bitcoin only solves one of the many challenges facing financially excluded populations: high transaction costs. Beyond cost, however, other huge (and often hidden) hurdles must be overcome in order to bring financial inclusion to the unbanked, from suspicion of new technologies to social or cultural factors. Illiteracy is often one of the primary barriers to financial inclusion, according to a recent CGAP blog post, and one that Bitcoin cannot solve.

So while Bitcoin might be a trendy and tech-savvy way to purchase alpaca socks or buy a house, skeptics would posit that it is still a long ways away from meeting the needs of the financially excluded. Felix Salmon, a finance blogger at Reuters and prominent Bitcoin skeptic, has noted that one of the biggest problems with Bitcoin is that its deflationary nature makes it more valuable as a store of speculative value than as a currency. “Because Bitcoin offers the potential for so much profit just by sitting on it – the longer you don’t spend it, the more you benefit – then everyone has an incentive to not spend their Bitcoins,” he argued in a recent interview. If speculators like the Winkelvoss twins continue to buy up enormous stocks of Bitcoins, this could make them far less useful as a currency and as a tool of financial inclusion.

In a recent Huffington Post article, CGAP CEO Tilman Ehrbeck noted that obtaining Bitcoin inherently requires economic inclusion, both in terms of Internet and financial access. The use of Bitcoin as a form of currency largely appeals to individuals with enough economic “cushion” to withstand large price fluctuations and potential losses, a population which is unlikely to include those at the base of the pyramid. Buying or selling goods or services using Bitcoin also requires a certain level of technological competency, as well as the ability to acquire Bitcoin in the first place.

Ehrbeck argues that electronic money (a digital form of fiat currency) solves many of the same problems as Bitcoin, but does so in a way that protects against price volatility and regulatory infringements. A recent CGAP briefing paper further expounds on the distinctions between Bitcoin and e-money, noting that “the current realities of Bitcoin mean it is still a long way off from reaching the unbanked.”

The Promise of Bitcoin for Development

Bitcoin skepticism has not stopped many enterprising individuals from seeking ways to harness the potential power of digital currencies to achieve economic benefits for the financially excluded. While this “Digital Currency-for-Good” movement is still in its early stages, innovators are confident that leveraging open source digital currency structures can achieve a dramatic reduction in the cost and time it takes to transfer money internationally.

BitPesa, for instance, a Kenya-based startup, aims to streamline international value transfer by tapping into the Bitcoin payment protocol. Once launched, the platform would enable individuals to change their local currency into Bitcoins, select a recipient destination, and immediately transfer Bitcoins to recipients’ digital wallets. The Bitcoins would then either be held in the wallet or cashed out immediately into the recipients’ local currency.

According to BitPesa CEO Elizabeth Rossiello in a recent interview, Bitcoin is the “next generation” of electronic money, as it enables individuals to move money via an open source protocol that bypasses traditional and often prohibitively expensive payment systems. She noted that one of the biggest misperceptions of Bitcoin is that it is completely anonymous and thus unable to be regulated. “In fact,” she said, “Bitcoin-based payment systems can be entirely responsible and risk averse if they establish standards, best practices and conduct thorough risk analysis, just like anything else.”

Despite criticism of Bitcoin as a volatile and unstable currency, Rossiello emphasizes that BitPesa uses Bitcoin as a payment protocol, not as a currency. Recipients of Bitcoin via the BitPesa system would thus have the option of either keeping the Bitcoins in their digital wallet or immediately cashing out, in which case they would not be affected by Bitcoin price fluctuations. While Bitcoin has also been criticized as unregulated and “anarchic,” Rossiello and many other innovators are part of a new wave of Bitcoin entrepreneurs that is seeking to work side-by-side with regulators to usher in a more financially-inclusive global payment system.

Beyond Bitcoin

Blindly accepting Bitcoin as a cure to broken financial systems is clearly short-sighted, and can even have a detrimental effect on efforts to spur financial inclusion. The CGAP briefing, for example, notes that regulatory confusion between e-money and Bitcoin could potentially detract from the progress made in enabling e-money systems to flourish under “risk-based proportionate regulation.”

But the fervent enthusiasm surrounding Bitcoin clearly illustrates that there is an appetite for a less costly and more inclusive global payment paradigm. Perhaps Bitcoin will only be a “vague memory” in five years, but other digital currencies may emerge as viable alternatives to existing systems. Perhaps these future currencies will play a key role in spurring financial inclusion. In the words of Rossiello: “I’m not married to Bitcoin. The coin that is used and how it is mined can change. We are simply interested in moving money in a way that it outside of the traditional system.” Whether Bitcoin or Coinye West, it is likely that digital currencies will transform the way we spend money, or, at least, pave the way for future innovations.

Julienne Lauler leads Mondato’s media efforts and supports research activities for its consulting engagements.

Editors note: This post was cross-posted with permission from Mondato, a specialized consulting firm in mobile financial services.

digital payments, financial inclusion, mobile finance, systems change