Could digital currencies improve financial conditions in war-torn countries? Boston University's Center for Finance, Law and Policy (CFLP) has convened a task force to explore whether they can.
The research effort, which began earlier this year, follows on the heels of an October 2013 report on remittances in regions of beset by strife and turmoil. That report had a particular focus on the Middle East and Africa, and did not analyze digital currencies.
From Commonwealth central bankers to major credit card networks, digital currencies have been cited by many observers as a possible game-changer for the world of remittances, despite pushback from industry incumbents.
Organizations such as the Bill & Melinda Gates Foundation have also begun looking at blockchain implementations as a means of developing new payment systems for the unbanked.
The task force is being led by Daivi Rodima-Taylor and William W Grimes of the CFLP, an interdisciplinary research initiative focused on financial issues. The CFLP recently hosted a panel that explored bitcoin and the blockchain and how they might fit into the broader world of formal and informal remittance flows.
Moderated by Circle’s John Beccia, panelists included Counterparty community manager Chris DeRose, Pillsbury Winthrop Shaw Pittman attorney Marco Santori and entrepreneur Joshua Unseth.
Rodima-Taylor believes that in regions where financial infrastructure, particularly central banks, aren’t functioning, digital currencies as a technology offered a means to enhance what is already a diverse ecosystem of remittance methods.
She told CoinDesk:
"Financial technology innovations such as digital currencies have offered productive solutions for the remittance sector for some time now, and have a potential to revolutionize transnational remittance transfers particularly in fragile and post-conflict contexts."
According to Grimes, the task force assembled by the CFLP "seeks to understand the potential for mobile and digital technologies to reduce costs and increase efficiency of money transfer to developing countries, as well as any potential legal or political downsides", and will focus on other forms of electronic remittance in addition to digital currencies like bitcoin.
Remittance in digital form
According to the mission statement for the new task force, digital currencies like bitcoin "are creating additional opportunities for more efficient remittance transfers" yet, at the same time, "create certain risks and challenges".
The statement outlines how the research will take place against the backdrop of a broader look at digital money mechanisms in conflict nations, explaining:
"The Task Force research examines the emerging opportunities for social as well as technological innovation within digital currency communities and networks, and within emerging technological and institutional hybrids as digital currencies engage with various forms of mobile and traditional banking."
Rodima-Taylor told CoinDesk that, according to her past research, the growth of private remittance methods often comes "amid a breakdown of formal financial institutions and poorly functioning governments".
Pointing to examples like hawala, a trust-based payment system dating back to the Middle Ages, Rodima-Taylor said that informal money flows “draw upon existing social institutions and culturally embedded solidarity networks”.
"In fragile situations such as Somalia where a systemic risk of anti-money-laundering remains, digital currencies become especially important as offering potentially secure and legible alternatives for remittance transfers. These decentralized and peer-to-peer systems do not rely on central banking infrastructure, making them suitable for these chaotic environments."
Conflict breeds innovation
Rodima-Taylor also cited past examples, including the development of informal remittance channels in Somalia in the 1990s amid the region’s long-running civil conflict, as ways in which new technology is opportunistically seized upon to help solve societal challenge – in this case, the movement of money.
"As a result, conflict-ridden Somalia developed one of the most advanced telecommunication infrastructures in Africa at that time, demonstrating how conflict can fuel technological adaptations and competition."
Adaptation amid regional strife, Rodima-Taylor continued, has been seen to lead to scenarios in which mixtures of private and more public form of remittance take shape.
"As the cases of post-conflict Afghanistan and Somalia have shown, local creative combinations of existing remittance institutions and novel technological opportunities can harness adaptive potentials even in the contexts of widespread devastation," she told CoinDesk. "They can also produce novel opportunities for formal sector engagement and result in viable 'hybrid' arrangements."
Low adoption casts doubt
Grimes told CoinDesk that, for now, digital currencies haven’t reached the scale of adoption that would make them a clear cost-reducer in a remittance context.
The need for individuals to purchase a digital currency using a government-backed currency and then send that digital currency, he said, entails an added step that adds additional expenditure and risk.
"For the moment, the main problem for digital currencies in the remittance space is that none are widely used in developing countries themselves, so any use for remittances must depend on two exchange transactions, which means both transaction costs and currency risks," Grimes said. "And given the volatility of the value of bitcoin, it remains somewhat problematic as a store of value."
Should broader adoption happen, he continued, the potential advantages of using a digital currency to remit funds could become more apparent:
"A big question for digital currencies in remittances, as with all remittance methods, remains cost. If and when digital currencies become more widely used in the developing world and societies get used to them, they may be an important new vehicle for addressing the needs of those societies."