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:
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:
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”.
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.
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:
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