Background and Assumptions
The premise of this paper is that I am a farmer living in a rural region of a LDC; Mexico in my case. I have an entrepreneurial streak. My farm is a modestly successful enterprise, and in order to increase my profits, I have plans to expand and purchase 10 hectares of land next to my present farm. Fortunately, I live in a region with cell phone and Internet access, and use a smartphone to help manage my business affairs. I have also had the good fortune to be educated in a MDC institution of higher learning and am fully aware of the potential digital currencies and blockchain technologies can bring to my situation. My parents made great sacrifices to ensure I received an excellent education, and I was fortunate to receive grants to pay for my business degree with a minor in computer science. After studying abroad, I have returned to my home country to manage the family farm. There is a straightforward opportunity to increase our income and profits by acquiring the adjacent land and benefiting from economies of scale.
My first cousin, who is my best friend, still lives in Canada where we both went to college. He makes a good living in North America and has generously offered to send me $800. I will need at least $2,000 total to purchase the neighboring 10 hectares and have adequate working capital left over to make the land profitable. (Footnotes will be used to help separate factual capabilities of current DC services from wishful thinking that may soon be reality.)
My business plans face numerous challenges which include:
• How can my cousin remit the $800 to me from Canada without losing a large percentage to fees?
• What means can I find to finance the remaining $1,200 I need to expand my family farm? I do not trust traditional MFIs in my region. They have taken advantage of me and other community members.
• The local land title office is corrupt, and I do not trust them with proper record keeping.
The remainder of this essay will describe how I could use digital currency, I.e., Bitcoin in this case, and other blockchain applications to surmount these obstacles. I intend to embrace these twenty-first century innovations to help my farming business succeed as soon as they are viable.
Exorbitant Remittance Fees
Receiving money in my home country of Mexico from abroad is historically laden with excessive fees. Average remittance costs approach 8% when using well-known services such as Western Union . I cannot afford to lose nearly $65 in fees when my cousin sends me the $800; this cost is excessive. We have discovered a new, transparent financial service that bypasses traditional banking, and allows my cousin to effectively send funds from Canada to Mexico at practically no cost. The company is called Uphold, and it maintains 100% reserve of the funds on deposit with a real- time, verifiable account of its holdings . Uphold is not a banking service, but a new innovation for cloud-based money. Both my cousin and I have opened verified accounts with Uphold, I.e., submitted proof of identity and met AML and KYC requirements. He can either link his local Canadian bank account to Uphold, or make a deposit using his personal Bitcoin wallet. As soon as the $800 equivalent deposit is made, my cousin will send it to my account for free. (Currently, Uphold members can send up to $1,000 instantly and at no cost to other members.  ) I will then convert the funds to my local currency, Mexican pesos. For Uphold members, the foreign exchange is free and the value is then pegged to MXN. At this point, I will have received the $800 within minutes and at no cost. How can Uphold stay in business? They earn interest on their reserve deposits and are designed to be a customer-centric, cloud-based service . To withdraw my funds in local currency, I can use a Mexican bitcoin exchange such as Bitso .
Critique of Microfinance
Now that I have found a way to receive the $800 dollars from my cousin intact, the next hurdle is how to finance the $1,200 balance required to purchase the 10 hectares of land and start farming it. My past involvement with MFIs has been dismal. My colleagues confirm my experience. We found that the effective loan interest rates were extremely burdensome, frequently exceeding 35% and sometimes much higher . I had heard about Kiva, a crowdfunding site for small loans that are often channelled to entrepreneurs in developing countries. At first it looked very promising, and I thought my business plan would be well received on the Kiva platform. However, I was dismayed to learn that even Kiva relies on MFI partners in the field . This “last mile” partnership helps distribute microloans to borrowers, but the actual costs and onerous interest rates are obscured in fine print from the lenders. Being on the receiving end of credit, I am determined to minimize my financing costs. Recently, I learned about a newer P2P lending platform known as Zidisha that claims to have significantly lower lending rates than Kiva. Because Zidisha does not rely on MFI field partners, lower effective interest rates are actually available to borrowers . On zidisha.org I would be able to post my own loan proposal, and briefly explain my business plan and repayment plan. However, upon closer inspection, I discovered a couple of issues. First, Zidisha focuses on the African continent, and secondly, my initial loan would be limited to only $50, which is a far cry from the $1,200 needed. Unfortunately, I cannot wait to build up a credit history with Zidisha—I must find another way to finance my expanding business—if only I could use my currently owned farmland as collateral.
Unlocking Restrained Capital
Let’s pause for a moment and try and tackle the problem with my corrupt local land title office. Famed Peruvian economist, Hernando de Soto, makes a cogent argument for the importance of private property rights and trustable legal systems for unlocking the value of real estate owned and occupied by the poverty-stricken in LDCs. Without a reliable legal framework and means to hold land titles, a primary source of collateral and potential liquidity is kept dormant . Fortunately, blockchain technology can solve this problem in my country.  A startup called Factom is building a data layer on top of the Bitcoin blockchain. Factom can be used to create tamper-proof land title histories, recording each transaction, including change of ownership, lending agreements, mineral rights, etc . With such a system in place, I will be able to trust that when I purchase the additional 10 hectares, the title will be properly recorded and not subject to tampering. In fact, once I verify my current land title is recorded with the Factom app, I will have a much better opportunity to use this real estate asset as collateral. I could even finance the remaining $1,200 required at a very reasonable interest rate with a blockchain-based smart contract that would forfeit my current property title to my creditor(s) in the event I were to default on repaying the loan.
Bitcoin Lending Platforms
Another option to consider for funding my land purchase and business expansion is one of the various Bitcoin P2P lending services that have emerged in the last couple of years. BTCJam, BitBond, BTCPop, and Loanbase offer online platforms that connect lenders and borrowers using Bitcoin as the medium of exchange. Lender risk can be minimized by diversifying funds amongst many borrowers . Depending on my perceived credit risk, which would be estimated based on information I provide and using proprietary data mining techniques, I may be able receive financing at much lower rates than is typical of MFIs. As a medium to low risk borrower, I could possibly obtain an APR of 15% or less. BTCPop offers collateralized loans, so if I choose to post the parcel of land I presently own, I could expect to receive even more favorable lending terms .
The prospects for receiving P2P funding using Bitcoin are better than ever. However, I have to hesitate and consider my options very carefully because of the price volatility of Bitcoin relative to fiat currencies, and in particular relative to MXN. BitBond does provide the option to fund the loans in USD, which is less volatile than BTC . I could possibly obtain a USD-pegged loan from BitBond and use my Uphold account to convert to MXN, or rely on a local Bitcoin exchange such as Bitso. Presently, I am a bit apprehensive of being responsible for a loan denominated in Bitcoin because of volatility, its upward price trend, and lack of liquid hedging options. Tera Exchange does offer up to two year forward contracts for Bitcoin and USD, but even this is too limited for my purposes . I do not want to end up like many Eastern Europeans who took out mortgages denominated in CHF and found themselves significantly more indebted when the SNB unexpectedly dropped the Euro peg early last year .
Summary and Conclusion
I wrote this paper to illustrate my consideration on how to use digital currency and blockchain applications to reduce remittance and financing costs, secure land titles, and improve options for expanding my modest farming business. Current pain points that are especially challenging to overcome are exchange rate risks between bitcoin and fiat, especially for longer term loans. Innovative financial service companies like Uphold continue to make digital currency more user-friendly and have great potential as more countries and regions are included, and liquidity and pegging options are expanded.
In the years to come, as the crypto-currency ecosystem matures, there will be less friction, lower costs, and more options for P2P financial services to help entrepreneurs like myself who live in LDCs. In addition, data layer applications like Factom will have matured and diffused, building on top of the Bitcoin protocol, providing secure digital, tamper-proof property records, and thereby liberating the pent-up capital trapped in heretofore dysfunctional LDCs. In the not too distant future, blockchain apps that implement attestation will make online ID and creditworthiness even more reliable, granting people like me who reside in LDCs greater access and inclusion in global P2P financial markets. In the end, my cousin and I decided to proceed as follows. He sent me $800 worth of bitcoin from his local Canadian exchange wallet to my digital wallet at Bitso, a Mexican BTC exchange. It cost about 1% in fees on each end to convert from fiat to bitcoin and back to fiat. Because my cousin trusts me so much, he decided to give me a personal loan for the $1,200 balance at a very fair rate of 10% APR for five years. He has excess savings and can only earn about 1.8% in his Canadian bank account currently. We drew up an informal contract and signed the paperwork. This is good deal for both of us. We look forward to the very near future when such business deals can be simply created using smart contracts, at minimal costs, with built-in hedges against exchange rate fluctuations—and, importantly, not necessarily reliant on the trust and resources of a family member or friend.
1. In reality, Uphold accounts are only available in the US and European countries at this time, but new countries will be added as compliance and regulatory issues are worked out. Many currencies are available at this time, including BTC, USD, EUR, AUD, CAD, GBP, CNY, MXN, JPY, etc.
2. The Honduran government recently hired Factom to implement a blockchain based land title registry. Perhaps other countries such as Mexico will follow suit in the near future.
|AML||Anti Money Laundering|
|APR||Annual Percentage Rate|
|KYC||Know Your Customer|
|LDC||Less or Least Developed Country|
|MDC||More or Most Developed Country|
|MF||I Microfinance Institution|
|P2P||Peer To Peer|
|SaaS||Software as a Service|
|USD||United States Dollar|
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