Weekly Roundup – 3/1/14: A digital heist, mobile money power-plays and controversy in Africa cap a turbulent week in finance
On Friday, the Tokyo-based Bitcoin exchange Mt. Gox filed for bankruptcy, after close to half a billion dollars of the virtual “cryptocurrency” went missing from it earlier in the week. Though some speculated that the bitcoins had disappeared due to a technical glitch (the currency exists only in digital form), Mark Karpeles, the CEO of Mt. Gox, claimed it was theft and blamed hackers. “There were weaknesses in the system,” he said at a press conference, before – in perhaps the biggest understatement of the year- apologizing for the “inconvenience.”
If Karpeles’ statement is accurate, we may have just witnessed one of the largest, strangest bank heists in history – one whose perpetrators may never be found, or whose methods may never be entirely understood. And since it affected Mt. Gox, one of the oldest (relatively) and best-known bitcoin exchanges – which once accounted for four-fifths of the world’s bitcoin trading – the theft may have serious repercussions for the public image and future of the currency. Unfortunately, it comes just as Bitcoin’s potential as a tool for financial inclusion and poverty alleviation has begun to draw increasing interest – see here, here and here.
Bitcoin’s possible value to the poor is closely tied to the vulnerabilities highlighted by this week’s apparent heist. As a money transfer platform, it is easy and essentially free to send bitcoins from one person to another, anywhere in the world. That makes it a potentially disruptive alternative to the costly remittance services that many poor people (and countries) depend on. But that ease of transfer apparently also makes it easy to steal. And as a digital currency, independent of national banks and (for the moment) regulators, there’s no deposit insurance for the exchanges, like Mt. Gox, where many bitcoins are stored. So in case of theft, bitcoin traders are out of luck.
In light of Mt. Gox’s downfall, regulators around the world are taking a closer look at the crypto-currency. And the media interest around the theft is likely to contribute to continuing volatility in its value. We wondered at the start of this year if regulation and volatility would make for a difficult year for Bitcoin – we may find out soon enough.
In other digital payments news this week, Safaricom continued its push to take its mobile money transfer business global, signing a deal that will let users of MoneyGram in about 200 countries send cash directly to M-Pesa customers. The deal, signed by Safaricom’s majority shareholder Vodafone, comes on the heels of a new partnership between Safaricom and digital payments company Skrill, which has the capacity to handle money transfers in 41 currencies.
The partnerships will let Safaricom expand its reach into diaspora remittances – a source of lucrative commissions income – and they’re likely to further irritate commercial banks unhappy with the telco’s incursions into their business. But this week also saw signs that Kenyan banks are pushing back. In a move that some believe could “upset the apple-cart in the telecom sector,” one of Kenya’s largest banks is getting into the telco business. Equity Bank, which serves the largest customer base in the country, has applied for a license to become a mobile virtual network operator. The company will not operate its own network, utilizing the infrastructure of an existing mobile network operator. But it will roll out its own mobile telephone services – and seems highly likely to offer mobile payment and banking services as well. Although Equity is already offering these services through partnerships with telcos, independence would give it greater control. And if its 8 million-plus customers all join the bank’s mobile services, it would rocket to the #2 position in Kenya’s mobile telephone business – second only to Safaricom itself. Regulators are assessing Equity Bank’s application – we’ll be following the story with interest.
In other news, the World Bank announced on Thursday that it has postponed a $90 million loan to Uganda’s health system. The reason: a law that toughens penalties against gay people, defining some homosexual acts as crimes punishable by life in prison.
“We have postponed the project for further review to ensure that the development objectives would not be adversely affected by the enactment of this new law,” said World Bank spokesman David Theis according to media reports. Some observers see the move as unusual for an institution with 188 member nations – one that generally prefers to avoid wading into countries’ internal political disputes.
However, it may be a sign of changes at the bank. World Bank President Jim Yong Kim has expressed concern about discrimination against women, gays and others. In an email obtained by Reuters, he said, “In the coming months, we will have a broad discussion about discrimination with staff, management, and our Board on these issues. Now is the right moment for this conversation.”
Homosexuality is a taboo in most African countries and is illegal in 37. Cultural resistance seems likely to keep the expansion of gay rights from taking hold on the continent the way it has in countries in the West. But the World Bank has a $1.56 billion portfolio of projects in Uganda, and countries like Norway and Denmark have announced that they will also hold back donations to the country in response to the law. Other donors have threatened to do likewise, and the United States, the World Bank’s biggest member, is also reviewing its ties.
Will the financial world act to move countries toward greater tolerance – and will it have an effect? Whatever happens, it would be a shame if the controversy overshadowed some of the promising news coming out of Africa – from the surge in U.S. investments in African tech entrepreneurs, to the recently announced winners of the Rockefeller Foundation And Tony Elumelu Foundation’s Impact Economy Innovations Fund. We’ll be watching these developments, both positive and negative – along with the rest of the world.