Happy Holidays from OZY! Over the next few days, we’re bringing you some of our best ideas, profiles and trends from 2014. We’ll see you back, live and kicking, on New Year’s Day!
It’s OK to admit that you still don’t know exactly what bitcoin is or how it works — but you may now officially be behind the curve. Because all of Africa could soon be getting on board.
The virtual currency — straight up: computer money — created by an anonymous hacker in 2009 has captured hard-core geeks’ hearts. Its appeal? It enables bank-free (aka middleman-free) anonymous purchasing and, crucially, it’s a global currency that’s not tied to any central bank and not much different than a dollar or a euro. The key characteristics of this digital cash also happen to make it a great fit for people who aren’t so down with advanced digital technology: the 326 million Africans who lack access to basic banking services.
This isn’t such a crazy idea. Mobile payments that work on standard-feature phones have already made strong inroads in Africa, with 16 percent of Africans using the services. The largest provider of such payments, M-Pesa, already operates in Kenya, Tanzania and South Africa, as well as India and Afghanistan.
But if you were a member of the large and expanding African diaspora, and you wanted to send money home to Grandma or the hubby left behind, you couldn’t count on mobile payments. M-Pesa, for instance, lets foreign-dwelling folk send money through a partnership with Western Union — but the latter tends to charge onerous fees. Which makes bitcoin very appealing, if you can get past the expensive exchange rate — as of publication, one bitcoin was worth roughly $350.
It’d be a huge loss for Western Union if bitcoin cut into its business: Africans throughout the diaspora send home $65 billion a year, according to the African Development Bank Group. Right now, they pay dearly for the privilege: 11 percent of each transaction on average. Mobile money also doesn’t much address larger economic woes back home, such as inflation and scarcity. According to bitcoin advocates, the cryptocurrency could help solve both problems.
Because the circulation of bitcoins is capped at 21 million, the cryptocurrency is — at least theoretically — inflation-proof.
Companies like BitPesa and Beam have already begun to use bitcoin for those home-to-Grandma payments, known as remittances. Typically, bitcoin users need an Internet connection, but these companies have developed platforms for the standard-feature phones commonly used in Africa (rather than building apps for smartphones, which are more rare). They convert bitcoin into mobile money, which is issued in local African currencies. Beam, for instance, has partnered with MTN Mobile Money in Ghana and Splash Mobile Money in Sierra Leone to do so. Still, the challenge remains: There’s an unsettled debate about whether bitcoin is a currency or payment protocol — a crucial legal distinction that has made regulators especially wary, says Bill Maurer, director of the Institute for Money, Technology and Financial Inclusion at the University of California, Irvine. China, for instance, has barred its financial institutions from carrying out bitcoin transactions. African countries have also been hesitant, due to concerns about money laundering, but they’ve stopped short of a full embrace. In February, South Africa’s Standard Bank tested a bitcoin trading system but hasn’t yet offered the service to customers.
One of bitcoin’s strangest facets may be one of its biggest challenges on the continent: the way it’s produced through a process called mining. Developers use computer clusters to solve complex mathematical equations and verify transactions, thereby earning, or “mining,” bitcoin. But given the computer processing requirements, most people in Africa can’t easily mine bitcoin — instead, they receive bitcoin from someone else, often from outside the continent. Receiving the currency from outside “creates dependency,” says Will Ruddick, the co-founder of Koru, a nonprofit based in Mombasa, Kenya.
Yet it’s tempting to think about the inflationary troubles bitcoin could solve. Specifically, a broader application of bitcoin — as a complementary currency — could appeal to African consumers who are leery of their country’s inflationary troubles, which are a constant threat to economic stability. Hyperinflation in Zimbabwe once rendered the country’s currency nearly worthless, halting commercial activity. By contrast, because the circulation of bitcoins is capped at 21 million, the cryptocurrency is — at least theoretically — inflation-proof. As a result, proponents argue, it could serve as a trustworthy store of value in periods of economic distress. A group of entrepreneurs in Ghana has taken up this idea, launching a foundation to develop a homegrown cryptocurrency.
Still, convincing people to put their trust in new money systems takes significant effort. And bitcoin’s emphasis on anonymity runs counter to traditional means of doing business in Africa, in which relationship-building is critical. “Bitcoin comes with this notion of pseudo-anonymity, but do people want that?” Maurer asks.
This OZY encore was first published April 25, 2014, and has been updated to reflect new developments.
Why you should care
Because the cryptocurrency that everyone’s been talking about might make very real impacts on countries across Africa.