Nikunj Handa, one of the entrepreneurs behind DEMO Africa 2014 selected company Kitiwa, explains why and how Bitcoins may be a vehicle for a financial revolution in Africa and other parts of the ‘developing world’.
Cheap and easy access to global payment networks and international money transfers is a first world luxury.
For many in developing nations, making online payments on websites like Amazon or eBay can be extremely difficult or even impossible. Merchants in developing countries also find it incredibly difficult to accept payments using globally renowned payment services like Visa and MasterCard. Comparatively, merchants and consumers in countries like the United States enjoy a full suite of convenient services from e-payment companies like Paypal.
As a result, merchants in major African economies like Nigeria (GDP: 262 bn) find themselves largely cut off from the global payments network. While PayPal has slowly begun introducing some of its services to Nigerians (Nigerians can now pay for certain goods online using PayPal), it is still impossible for a Nigerian merchant to accept payment through Paypal because the company blacklists the entire nation from its merchant services.
A quick conversation with a Nigerian merchant will also make it clear that getting a Visa or MasterCard merchant account is a complete bureaucratic nightmare. While it’s understandable that these payment companies are attempting to guard against the fraudulent actions of Nigeria’s infamous “419” criminals, the thousands of Nigerian merchants with legitimate businesses are unfortunately also affected.
These issues are not only prevalent within the countries themselves. It is extremely expensive, difficult and slow for those living outside their home countries to send sums of money (or remittances) back home. Companies like Western Union and MoneyGram charge an average fee of 12% and take up to 2-3 days to deliver remittances. In addition, these companies primarily use a traditional agent model where people have to physically pick up cash from brick-and-mortar outlets. There is a relatively low integration with local mobile money solutions, resulting in a highly inconvenient experience.
In some more unfortunate developing nations, public financial governance is also an issue. Some currencies are losing their value so rapidly that people in those countries are switching to more reliable forms of payment, like the US Dollar or the Euro. This, however, is often illegal. An excellent example of a country struggling with this is Argentina (the Argentine Peso has fallen over 50% over the past year).
These problems create a vicious cycle of deterioration. Expensive online payments reduce spending. Expensive money transfers promote the illegal importation of foreign currencies (often hidden like drugs in suitcases). Rapidly devaluing currencies lead to the emergence of underground forex markets and cause merchants to illegally accept, and consumers to illegally spend, foreign currencies within their countries. All of this increases the amount of “black” or untaxed money within a nation, hindering the country’s progress and development.
There is a need for innovation to alleviate these issues, and one of those innovations comes in the form of Bitcoins. Bitcoins are a crypto-currency that have a different way of working behind the scenes. But to a non tech-savvy consumer, they’re pretty much the same as the US Dollar or the Euro. They can be exchanged to and from fiat currencies (currencies that a government has declared to be legal tender, like the US Dollar in the United States) on websites like Coinbase or Bitstamp and can be spent by consumers or accepted by merchants using services like Bitpay.
Bitcoins, however, are fundamentally better for the developing world due to the fact that they are decentralized. They are not subject to incompetencies in financial governance by a single entity, and can be used by anyone with access to the internet or text messaging (using Coinbase SMS Service, 37Coins, Coinpip) for instant and extremely inexpensive money transfers. The median Bitcoin transaction fee over the past year has been just $0.004 as compared to the $30 SWIFT fee charged by banks.
This allows anyone in the world to make payments, accept payments and make transfers using Bitcoins. All that’s needed is an effort by companies in the developing world to allow residents to exchange Bitcoins for their local fiat currencies and increase adoption and education on Bitcoins within the community. Companies currently doing this around the world include Kitiwa (Ghana, Nigeria), Bitpesa (Kenya), ICE3X and BitX (South Africa), BitPagos (Argentina), Coincove and Bitso (Mexico) and Coins.ph (Philippines).
In the majority of countries that have passed Bitcoin regulation, Bitcoins are not considered a currency but a digital asset. This allows people in countries with rapidly devaluing local fiat currencies to hold Bitcoins legally. BitPagos in Argentina, a company that allows Argentinian companies to accept payments in Bitcoins and convert them to the local Argentinian Peso, has realised that most of its merchants prefer to hold Bitcoins rather than convert them to the local Peso. They find Bitcoins to be a more reliable store of value and, as Bitcoin is not a currency, this process is entirely legal.
Status of Bitcoin around the world. Source: http://bitlegal.net/
But will it continue to be legal? Most governments of developing nations are taking the wait-and-see approach and have not yet formally regulated Bitcoins. This is one of the most uncertain aspects for Bitcoin companies in the developing world.
These companies have to take it upon themselves to not only educate the public on Bitcoin, but also to educate the governments of these nations on the potential of Bitcoins for improving financial development and raising taxable income. This is a challenge that is often too much for startups with limited funding to handle. There is an urgent need for PR companies, NGOs, and Bitcoin enthusiasts to help with these efforts before the financial freedom provided by Bitcoins is stripped away.
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Nikunj Handa is one of the entrepreneurs behind VC4Africa listed and DEMO Africa 2014 selected company Kitiwa, based in Accra, Ghana. Nikunj was most recently a Technology Teaching Fellow at the Meltwater Entrepreneurial School of Technology (MEST). You can read more of his posts here: http://blog.nknj.me/