Can Bitcoin Deliver on its Promise to the World's Unbanked?
Bitcoin offers financial services for underserved populations, but hurdles still remain before its potential can be realised.
Jason Tyra is a Certified Public Accountant and ACFE Certified Fraud Examiner. In this article, he evaluates the potential benefits bitcoin offers for the world's impoverished and unbanked, and outlines what needs to be done to give this underserved population access to its ground-breaking technology.
While many relatively affluent westerners have adopted bitcoin as a political statement, a cost-saving measure or a technical curiosity, a very small portion of its users have done so as a result of the demands of their own political or socioeconomic circumstances.
However, for those that potentially stand to gain the most from the digital currency – impoverished and unbanked people living in developing regions of the world – bitcoin remains largely inaccessible.
An objective look at a few of bitcoin’s characteristics and how these apply to developing countries shows that the ecosystem has some room for improvement before it can gain traction among the world’s poor. By pointing out some of these limitations, I hope to help spur development of innovative solutions to mitigate them.
A refuge from insecurity
Bitcoin is a good option for storing wealth where governments and/or banks are untrustworthy, restrictive, or unavailable. Here I mean untrustworthy in the most literal sense.
In spite of the lack of social justice decried by some bitcoiners, rule of law and sanctity of private property are still reliable assumptions in the United States and most other western countries. The vast majority of people living in developed countries don’t fall asleep at night wondering whether their bank will be nationalized overnight or their house seized by the state.
Wealth held in bitcoins can be securely stored free of transaction fees for an indefinite period. Bitcoins cannot easily be expropriated by the state, or limited in any meaningful way in their movement between jurisdictions by capital controls. They cannot be devalued over time by inflationary monetary policies.
Starting with the question of why people lack bank accounts in the first place, bitcoin isn’t necessarily helpful. A World Bank report in 2012 cited cost, distance to a banking facility and bureaucratic hurdles as reasons that more than 2.5 billion of the world’s poor lack a bank account.
Among these, cost may be bitcoin’s sole weak point, but it’s a significant one. Cost is not only a measure of the fees charged by banks for the privilege of maintaining an account, but also one of opportunity to consume.
Unless you are a miner, the only way to get bitcoins is to receive them in payment or purchase them with fiat currency. Purchasing with fiat currency usually requires a bank account or at least some way to send money internationally. Having a bank account means that you have official identification (a bureaucratic hurdle) and also that you have been able to defer consumption long enough to have money that you don’t need to spend right away.
The same would be true for wealth 'stored' in bitcoin. This can be extremely difficult for people living hand to mouth.
On the subject of mining, the amount of computing power and electricity now required to mine bitcoins places this activity well out of reach of all but the wealthiest enthusiasts. For a citizen of the developing world, mining diamonds or gold is likely to be far easier than mining bitcoins.
It is worth pointing out here that remittances are a major source of cash-flow for families in developing countries who have relatives living in the US or other more developed nations. Bitcoin has a niche use here for very low-cost transfers, provided the recipient has a way to spend bitcoins or convert them to fiat.
Most of bitcoin’s users will eventually need to convert to fiat currency to pay taxes or shop in places that don’t accept cryptocurrency.
In the United States, doing this kind of business with reputable vendors typically requires a bank account, while purchases may also require a credit card. If you don’t have a bank account and credit card in the US, then you are out of luck.
In other countries, street-level money changers may be capable of meeting this demand up to a point. However, money changing and currency speculation are illegal for private citizens in many countries without a license (or at all). Incidentally, these are the countries where bitcoin is likely to be attractive due to oppressive governments.
The features of bitcoin that empower users to 'be their own bank' also place it out of reach of vast swaths of humanity.
Today, you must have one of two things to use bitcoin: a computer with an Internet connection that is powerful enough to handle direct interaction with the block chain or the ability to access a third-party servicer (eg: using your own computer, using a public computer, such as at an Internet cafe or library or using a web-enabled cellphone).
Micro-lending and SMS
Bitcoin is perfect for the kind of small-scale entrepreneurship that is advocated by micro lenders (Kiva being a good example) and not-for-profit organizations in impoverished areas.
In essence, small loans or grants may be used to purchase a motorbike, cellphone, livestock, and so on. These items, in turn, are used as capital for small businesses, the profits of which are used to repay the loan. Bitcoin is an extremely cheap and low risk way for nascent entrepreneurs to accept payment, but only when the purchaser and seller both have Internet enabled smartphones running bitcoin software.
According to a survey of 24 developing countries conducted by the Pew Research Center, even where Internet service is available, smartphones are still relatively rare and many of the world’s poor access the Internet using public computers.
Cellphones are commonly used to make payments in these countries, especially using services like M-Pesa, but such services normally use SMS functionality rather than a sophisticated app. While, some startups are now offering services that can allow people to send and receive bitcoin via text, they still have some way to go before being commonly used.
Realistic solutions needed
So, right now, if you have no way to get online, then you have very limited ways to send or receive bitcoin. And, if you don’t have a bank account, then bitcoin is unlikely to be an effective solution to your problem, since bitcoin itself requires a bank account for most users to transact business effectively over long periods of time.
For all of their positive features, cryptocurrencies are mostly inaccessible to the developing world for now. Changing this will require bitcoiners to develop robust and realistic solutions that will put it into the hands of the people who need it most.
Have some ideas of your own? Feel free to share in the comments.
This article has been republished here with permission from the author. Originally published on Jason's bitcoin tax blog.
Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.
Cellphone image via Shutterstock
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