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Bitcoin proponents have long been eyeing one of fiat currencies’ most vulnerable areas: international borders. Where one currency ends and another begins, what should be a straightforward transfer of value quickly becomes a headache—often an expensive one. Fees accrue, foreign exchange exposure looms, and regulators sniff away in the background.
If you’re a tourist or a business-type, this is irksome, but so are trans-ocean flights, phrasebooks and the rest of it. You will presumably focus on relatively accessible and accommodating countries, or relatively lucrative ones, as the case may be.
But you can’t choose where you’re born, which makes sending remittances among the most trying experiences in the whole fragmented global currency system. If you are working in Switzerland to help support your family in Sri Lanka, you’re going to send that monthly check whether you lose 9%, 14% or 18% in the process. Deciding you’d rather send it to Bolivia makes no sense, so you’re at the mercy of whoever—Western Union (WU) and Moneygram (MGI) are the usual culprits—is around to provide the service.
Enter Bitcoin. Borderless and practically fee-free, it’s the perfect solution to the torturous process of sending remittances. Which, by the way, are forecasted to total $608 billion this year, according to the World Bank. So are "rebittances" (there’s always a portmanteau) the blue ocean they appear to be at first glance, just waiting for a cheap, painless alternative in the form of Bitcoin? The reality as it stands may disappoint the more starry-eyed optimists, but the idea certainly has potential. The crucial step to realizing that potential is to understand the challenges.
Fees
The first objection Bitcoin remittance proponents have to the current system is high fees. “A typical money transfer costs up to 10% fees,” AXA Strategic Ventures’ Florian Graillot wrote for TechCrunch in May, and many others have quoted the same figure. Yet that is only sort-of true.
The World Bank’s second-quarter 2015 report on global remittance prices studied the cost of sending US $200 or the local equivalent in 227 corridors, from 32 origin countries to 89 destination countries. The average cost was 7.68%, basically flat from the previous quarter’s 7.72%. The weighted average, meanwhile, was 5.92% (5.94% in the previous quarter).
The reason for this spread between the weighted and unweighted averages is that certain corridors with large volumes of remittances are cheap: in over three-quarters of the corridors studied, fees were below 10%. In 2009, the proportion was closer to half. In certain corridors, such as the US to Mexico, transfers of $200 can be accomplished with fees as low as 1.49%, and even Western Union only charges 4.60%.
But aren’t Bitcoin’s transaction fees practically zero, at a fraction of a percent? Yes, but these are the fees involved in any Bitcoin transaction, charged by the miners who validate them; the analogous fee for a fiat currency cash transaction is exactly, not practically, zero. What matters in this case is the fee a business charges in order to turn a profit, which may or may not be competitive with the incumbents.
Then again, there are corridors where remitters are forced to set huge chunks of their money on fire. Sending $200 from South Africa to Malawi will cost at least the 11.27% charged by Moneygram—and up to 32.76%, courtesy of the First National Bank of South Africa. The World Bank helpfully tracks the rates different providers charge in different corridors, so you can see for yourself which markets are likely to be fed up with current providers.
The costs of remitting money vary greatly depending on the specific corridor, so sweeping assertions are not very helpful. From the World Bank’s perspective, the global average matters; from an entrepreneur’s, the focus has to start local.
Forex
Bitcoin proponents also point to the risk inherent in exchanging money, as volatile currencies threaten to compromise the value of the money being sent home. In Tajikistan, for example, where almost half of GDP depends on remittances, the fall in the ruble has been nothing short of disastrous.
But compared to Bitcoin, that volatility is nothing. The ruble might have lost half its value, but Bitcoin has lost three-quarters. Besides, there is practically no market for Bitcoins in developing countries, and very few employees in developed countries get paid in Bitcoin; this means that, far from eliminating vulnerability to foreign exchange, it adds another layer. Now you must convert British pounds to Bitcoin to Kenyan shillings, or US dollars to Bitcoin to Indian rupees—hardly an improvement as far as forex exposure goes.
Can It Work?
And yet the intrepid are trying to make it happen. Bitstake in Nigeria. Bitspark in Hong Kong. Palarin in the Philippines. BitPesa in Kenya (and now Tanzania).
I’ll focus on BitPesa here, because it provides an interesting glimpse into a particular country’s remittance market, its unmet needs, and how a Bitcoin startup could establish a foothold (mind you, this is neither an endorsement nor a prediction).
First, a note about Kenya. It is a lower middle income country in which a great number of people depend on subsistence agriculture. Infrastructure is often woefully lacking, and ethnic and religious violence is a constant threat in large areas of the country. It is not necessarily the place one would expect to find financial inclusion—defined as people over age 15 with an account of some kind—at 75%, more than double the average for sub-Saharan Africa.
Kenya has leapfrogged the developed world in terms of embracing mobile money. M-PESA, Swahili for m[obile]-money, was launched in 2007 by Vodafone (VOD) on behalf of Safaricom, Kenya’s leading telecom. It enables people in remote areas to transfer cash using their phones and a network of tens of thousands of agents. Today over 40% of GDP flows through the M-PESA.
So Kenyans are perfectly comfortable with digital money, of a sort. Why then, as Richard Boase can attest, are they so unenthusiastic about Bitcoin? It is important to note that M-PESA might subvert the brick-and-mortar banking system, but it is not really a currency. The value stays in—or is at least pegged to—Kenyan shillings, Tanzanian shillings, afghanis, or rupees, depending on the market.
Still, BitPesa CEO Elizabeth Rossiellio believes that M-PESA has blazed a trail for Bitcoin in Kenya (M-PESA did briefly integrate a Bitcoin wallet called Kipochi in 2013, but that project tanked). BitPesa raised $1.1 million in second-round funding in February, has expanded to Tanzania and is eyeing other markets such as Uganda. The company charges a transaction fee of 3%, beating every incumbent in the UK-Kenya corridor, but that is only one side of the transaction, as the sender must first acquire Bitcoins.
This is where we hit the real snag with BitPesa’s model: it is, in Richard Boase’s words, “half a business.” They receive Bitcoin remittances and give the recipients Kenyan shillings. But how sustainable is that? Will BitPesa not end up with a huge stack of Bitcoin and no way to trade it for local currency? Unless they plan on going underground, they’ll need to raise money the tax collector will accept, which presumably involves trading Bitcoin for Kenyan shillings. If they have to go through a third, intermediate currency, such as dollars or pounds, they could lose their edge in terms of transaction fees. So are there any buyers?
Perhaps, soon. Bitsoko is one startup “championing the use of Bitcoin in Kenya,” but its website currently lists only two local merchants that accept the cryptocurrency, a bar and a cyber cafe. Remittances alone do not a functioning Bitcoin economy make. Unless people in developing countries adopt Bitcoin for a wider range of uses, "rebittances" will have a hard time getting off the ground.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
