What to Think About: Bitcoin, Virtual Currencies & Africa
Bitcoin and virtual currencies continue to make the news; more and more questions are being raised as to what are the implications for Africa. As Savannah fund we have been following the developments closely. I first wrote about Bitcoin back in April 2013 when the currency was trading for less than $100.
In November, we launched Afrikoin, an Africa digital money and currency innovation conference that featured startups and large players in the payment space- we had a panel on virtual currency that including some of the innovators and startups in the field. I enjoyed moderating this panel but also hearing from a Somali Hawala money network researcher. A good place to start to learn about virtual currency implications in Africa
Meanwhile, in returning to Silicon Valley for 6 weeks over December and January I talked to a variety of bitcoin experts and practitioners from investors to entrepreneurs to better understand the implications for Africa- in the process I discovered Dogecoin, another virtual currency that has shot up due to the community and emotional connection it provided. Otherwise I own about $1 worth of bitcoin that I used to experiment and learn more about the currency and technology.
Last week we saw a high profile bitcoin Exchange go bankrupt. Mt Gox, was actually founded by a mentor who was at Savannah Fund, Jed McCaleb before he sold it, who came to mentor our 2nd accelerator class last year in September. In the last few months, journalists have been contacting me and we can expect some articles to hit the press on the continent in the next week or so.
Last week, I gave the first virtual currency talk at kinu workspace in Dar es Salaam, Tanzania
I have a few positions on Bitcoin:
Bitcoin’s affect on remittance market holds great promise but we can expect all innovators in this space to deal with the same legal requirements that money remittance companies such as western union, paypal etc.. have to deal with and these requirements might not reduce the cost of sending funds to and across Africa by as much as the virtual currency industry advocates. Meanwhile- consumer understanding of using the technology in Africa is still low and there is a huge barrier of trust to overcome. The remittance is a complex market that not only involves regulatory issues that often need central bank approvals in each country, but entrepreneurs have to navigate the intricacies of the remittance corridors to market and reach the diaspora communities cost effectively, what amounts is one sending? How fast must the funds travel etc…? A particular corridor has to be large enough to support both an early adopter community willing to try bitcoin but be large enough to sustain a business initially- there is a high capital requirement to maintain the currency floats to fulfil remittances at competitive rates. Add on top of that, the money laundering and terrorism financing concerns in Africa and you might not find it easy to find a bank that will trust a startup venture dealing in Bitcoins in Africa.
As a payment network and potential for crowdfunding…
I am much more excited about Bitcoin as a payment network to overcome the barriers for bordless ecommerce transactions since it is so hard to pay for things online globally and especially in Africa; credit cards have high transcations fees and fraud issues, mobile money is restrictive to one country. As long as the merchant is happy to hold bitcoin, deal with the fluctuations and use exchange abroad to cash out the bitcoins in a foreign currency such as USD; not easy for local merchants. Given the low transaction fees of virtual currencies, its also possible to send microtransactions given how divisible these virtual currencies are- I have probably donated about $10 worth of virtual currencies to about 25 people across Africa in the last month since I started experimenting with Dogecoin via twitter– thats not something you can do very easily with mobile money nor normal money across borders cheaply and quickly. NGOs in Africa should probably start paying attention to this channel for fundraising small amounts from a large number of people. After all the Jamaican Bobsled team were able to raise close to $25,000.
As a reserve currency of hedge/trade against unstable currencies. This is perhaps one of the most compelling reasons for Africans to deal in bitcoins today, especially if they are already traders. I heard a story about the millionaires minted in Zimbabwe that dealt with 2 currencies (Zim dollars and USD) and 1 commodity (Gold) and played an arbitrage trading scheme that allowed them to grow very wealthy whilst exporting, circumventing capital controls and providing the much needed goods that Zimbabweans were demanding during the hyper inflation. But this is the domain of traders and hustlers who are willing to go to extraordinary lengths to seek out trading opportunities in inefficient markets for profit. In fact one could make more money doing this right now than investing in any bitcoin related startups on the continent if you were betting on making money quickly. Of course, I should say that there are tremendous risks involved here in addition to the usual given bitcoins price volatility and exchanges like Mt. Gox going down.
Regulation catching up with reality
So what are we left with those working on virtual currencies in Africa? To date, I have only seen one bitcoin exchange in Africa- Bitx in South Africa- that allows cash in and out in Rand. Many will need to convince local regulators to let them operate legitimate businesses whether its setting up exchanges and dealing with the KYC/AML requirements to ensuring central banks understand benefits to their economies of adopting bitcoin. In emerging markets, we are seeing many in China trading bitcoin right now as a store of value/investment and some of the leading exchanges are based there- however, bitcoin as a payment network and currency are still outlawed in China. I found this great post that describes the regulatory issues for bitcoin in India that shows a possible path for bitcoin advocates in Africa might need to follow in “friendlier”countries- but right now it seems South Africa is the most bitcoin friendly country on the continent.
More than a currency.
Its easy to focus all the attention on bitcoin on mega markets such as payments, remittance but we should not overlook the underlying technologies virtual currencies might provide to Africa to other important problems. For instance, the general ledger (using block chain explorers) the bitcoin technology provides could be incorporated into monitoring spending for Governments and institutions, or the enabling better tracking and transferring of digital property due to the cryptocurrency’s unique properties- these technologies could allow for secure transfer of title deeds and securities in countries where outdated systems and 3rd parties created by the financial industry in the west don’t fit Africa and new opportunities made possible by virtual currencies to leap frog that make impact investors look twice at the potential of this nascent technology for the poor. Imagine if M-PESA went “crypto” and truly “virtual”. Right now I have to put up with being able to only request 3 months of my M-PESA transactions…