Numerous challenges to Bitcoin remittances are discussed in the course videos, especially during the interview with Luis Buenaventura, who was very informative as an entrepreneur with firsthand experience in the “rebittance” trenches of the Philippines . This paper will identify the most imposing challenge facing Bitcoin remittances to LDCs and propose methods of surmounting it using BitPesa and Abra as case studies because I agree with their approaches. My view of how the Bitcoin ecosystem may evolve in the coming years, and thereby eliminate any and all obstacles to truly global P2P money transference, will also be discussed in this context.
Developing countries depend on foreign resources to varying degrees to improve their economic destiny. The primary sources of external funds that flow from MDCs to LDCs can be divided into three broad categories: FDI, ODA, and remittance. Foreign Direct Investment is broadly defined as an external country controlling and owning a significant portion of a domestic enterprise; ten percent equity ownership is a typical threshold. FDI flows wherever economic conditions are conducive to positive development and is therefore not just limited to LDCs. In fact, the least developed regions in the world tend to have great difficulty in attracting significant amounts of FDI until at least a minimal level of economic traction is attained .
In contrast, Official Development Assistance measures the flow of international aid from the governments of MDCs, specifically aimed at promoting economic development and welfare in LDCs. ODA can include grants and loans with highly favorable terms . The third category of foreign funding, which is the focus of this paper, is remittance—migrant workers sending money back to their home countries. As remittances grow to an ever larger proportion of total foreign funding, the importance of these financial flows increases and acts as a stabilizing influence when hardship strikes a region [4,5].
The costs associated with remittances are notoriously high—some corridors, e.g., to Sub-Saharan Africa, typically charge fees in the double digits. At first glance, Bitcoin may appear to be a panacea for a rapacious industry charging excessive rates. With smartphones and tech savvy, it is viable to transfer bitcoin P2P between anyone, almost anywhere in the world. However, the actual “nuts and bolts” of transporting money from a migrant worker employed in a MDC to a family member who lives in a less developed country is not so simple. The receiver of money generally expects and needs local currency. Using Bitcoin as a payment rail to transport value internationally is very efficient, reducing settlement times to minutes vs. days for bank wires. However, the logistical and regulatory hurdles to putting local currency in the hands of the recipient account for most of the costs .
There is a similar challenge for the first mile; however, because remittance funds generally originate from MDCs, one can assume greater accessibility to Bitcoin exchange services such as Coinbase, Bitstamp, or Circle. There are, of course, educational hurdles to also overcome before migrant workers would necessarily embrace Bitcoin. If the remitters are unbanked and living in a MDC, I.e., rely primarily on cash, then the incumbents such as Western Union or MoneyGram are the preferred options for sending money overseas because of their large network of agents located worldwide [7,8]. The trust and reliability of these established money transmitters also gives them market advantage over remittance upstarts. In reality, the Bitcoin ecosystem at this very early stage of global diffusion does not solve the last mile challenge of remittances, as Luis Buenaventura makes so very clear in his article, “Bitcoin Doesn’t Make Remittances Cheaper” . This fact presents a clear obstacle for Bitcoin as a potentially disruptive innovation, and the last mile is the major challenge. We have all seen this story before, and it has a happy ending.Internet Analogy
Last mile solutions for broadband penetration in MDCs took decades to develop and deploy. Improvements continue to be made, and new wireless methods of Internet access, which hold the promise to vastly reduce the global digital divide, are being made available in LDCs . Just as it took many years to disseminate high bandwidth infrastructure in MDCs, turning the Internet into fundamental infrastructure for modern economies, it will likely take a long time before digital bearer instruments such as Bitcoin reach their full potential. Layers of improvement will need to be built on top of the Bitcoin protocol. Low-cost and highly liquid on/off ramps between bitcoin and local fiat money will need to be extended to LDCs. If these conditions can be met, then global P2P value transfer can become ubiquitous. As mobile money continues to be embraced by developing countries as an alternative to cash, then a bridge to greater financial inclusion may eventually bypass legacy banking systems altogether.
What Will It Take?
Imagine a world where Bitcoin is a globally accepted currency that exists in parallel with local fiat monies and is easily exchangeable and relatively stable in value. In such a scenario, remittances become trivial because of the P2P nature of Bitcoin. There would no longer be logistical hurdles to jump and antiquated regulations would be scrapped and rewritten, relegating KYC and AML functions to algorithmically verified attestation of online identity and verifiable digital signatures. To arrive at such a vision, the last mile hurdle must be removed. Pragmatically, it’s going to take a lot of entrepreneurial energy to eliminate this obstacle, as well as successful diffusion of Internet access to all corners of the globe. Both bottom-up and top-down methods need to be implemented which, in my opinion, will eventually converge. Bottom-up Method
BitPesa, as a bottom-up example, is focusing on remittances in Africa and attempting to solve the last mile problem by partnering with M-Pesa and competing mobile money providers (e.g., Airtel) to distribute funds viamobile phones . Because of the high adoption rate of mobile money and the exorbitant fees typical of the African payment corridor, this appears to be a smart solution, despite being laden with its own particular logistical and regulatory issues. BitPesa is focusing on a region that historically lacks financial infrastructure. Credit card penetration is only three percent, and only two banks settle the majority of African payments . It appears that BitPesa recognizes the vast potential of leapfrogging extant financial systems and encouraging Africans to directly embrace a mobile banking model .
The BitPesa method of focusing on the idiosyncrasies of a specific market—in this case, Africa—attempts to solve the specific last mile challenges one region at a time. Because of the success of MNOs developing branchless banking and domestic payments using cell phones in Kenya and Tanzania, it makes a lot of sense to cooperate with services such as M-Pesa to create a last mile solution for international remittances. However, time will tell if the MNOs that provide M-Pesa will relax their obstructive stance towards BitPesa and enter into a mutually beneficial alliance . This is reminiscent of when AT&T was divested of the local regional operating companies in the 1980s to promote telco competition, long-distance companies had to cooperate with local phone companies to provide end-to-end service. BitPesa can effectively provide the long- distance value transfer leg using Bitcoin and then connect with M-Pesa, or other mobile money service such as Airtel, to complete the last mile of value transmission. By providing the money in digital form to the end-user, a significant amount of friction can be eliminated from the last mile challenge—costs can be kept low, and the inefficiencies of converting to cash removed from the equation. In addition, if BitPesa can succeed at working with, rather than against, M-Pesa and other mobile money providers, then more LDC markets may open up for BitPesa in the future. Top-down Method
On the other hand, a company like Abra is taking a global top-down approach to digital cash and is attempting to “democratize payments for everyone” by using Bitcoin as the back-end payment system and providing liquidity by recruiting a worldwide network of “human ATMs,” who will hand over local fiat currency in exchange for receiving bitcoin . The Abra app stores digital cash on a mobile phone, and lets a user send this money to anyone else running the same app. The digital cash is really bitcoin denominated and pegged to dollars for up to three days. This is a highly ambitious model, attempting to take the world by storm, and is similar to an Uber or AirBnB approach. Abra is most optimistic about their potential in China and Southeast Asia, and like BitPesa, hopes to leapfrog current banking models, believing that mobile digital money is ready to disrupt the status quo. Being an investor in BitPesa, I have a much better grasp of their business model. However, my guess is that Abra will succeed to varying degrees in different regions, depending on the cultural and regulatory environment encountered. The successful recruitment of cash tellers and the role regulation may, or may not, play could vary widely.
Abra’s global vision and top-down approach are all-encompassing, but perhaps they are spreading themselves too thin. BitPesa, on the other hand, is focusing on the continent of Africa and a market with minimal financial infrastructure, and leveraging the growing user acceptance of mobile money. Time will tell whether BitPesa or Abra becomes more successful. In any case, it is going to take creative, entrepreneurial ventures of both kinds—bottom-up and top-down—to conquer the costly last mile challenge of remittances.
|FDI||Foreign Direct Investment|
|KYC||Know Your Customer|
|LDC||Less Developed Country|
|MDC||More Developed Country|
|MNO||Mobile Network Operator|
|ODA||Official Development Assistance|
|P2P||Peer to Peer|
1. Video Interview with Luis Buenaventura and George Papageorgiou for DFIN 535. Retrieved from https://www.youtube.com/watch?v=oO3S-bRCy_E
2. About Foreign Direct Investment. (n.d.) Retrieved from https://en.wikipedia.org/wiki/ Foreign_direct_investment
3. OECD Data website. (n.d.) Official development assistance (ODA). Retrieved from https://data.oecd.org/oda/distribution-of-net-oda.htm
4. Asian Development Bank Conferences. (n.d.) Increasing Development Impacts of Remittances. Retrieved from http://www.scribd.com/doc/259222768/Increasing- Development-Impacts-of-Remittances
5. About Remittance. (n.d.) Wikipedia. Retrieved from https://en.wikipedia.org/wiki/ Remittance
6. Buenaventura, L. (2014, August 31). The Short-Term View on Bitcoin Remittances. Retrieved from http://www.coindesk.com/short-term-view-bitcoin-remittances/
7. MoneyGram website. (n.d.) Retrieved from https://secure.moneygram.com/
8. Western Union website. (n.d.) Retrieved from https://westernunion.com/
9. Bitcoin Doesn’t Make Remittances Cheaper. Retrieved from https://medium.com/ @Cryptonight/bitcoin-doesn-t-make-remittances-cheaper-eb5f437849fe#.dlx5go6f5
10. About Digital divide. (n.d.) Wikipedia. Retrieved from https://en.wikipedia.org/wiki/ Digital_divide
11. CoinSummit London 2014 – Start-up Showcase – BitPesa. Retrieved from https://www.youtube.com/watch?list=PLrou7z4TGqLNdkbpV9HlVM73ozm5jB67c&v=RTeQ3DikabY
12. BitPesa investor information. Retrieved from https://www.bnktothefuture.com/pitches/2659/_bitpesa-digital-payments-to-and-from-africa.html?type=1
13. Aker, J., et al. (2013, February). Can Electronic Transfers Help the Poor? Evidence from a Field Experiment. Retrieved from http://sites.tufts.edu/jennyaker/files/2010/02/Zap-it- to-Me_18feb2013.pdf
14. Allison, I. (2015, December 1). International Business Times. Bitcoin versus M-Pesa: Digital payments rumble in the jungle. Retrieved from http://www.ibtimes.co.uk/bitcoin- versus-m-pesa-digital-payments-rumble-jungle-1531208
15. Abra website. (n.d.) Retrieved from https://www.goabra.com/