Can Bitcoin work in Africa?
Bitcoin gets bad press in most of the world, with controversies raging over the collapsed Mt Gox exchange and extreme price fluctuations. But until recently, there was a strong feeling that Africa - with its low credit card penetration and willingness to adapt to alternative forms of payment (like mobile money) - may be its most natural home.
Africans are paying the highest money transfer remittance fees in the world due to lack of market competition.David Ajala, NairaEx.com
Remittances are seen as central to this. Thirty million Africans in the diaspora sent home almost $40 billion last year. Yet the cost is high. Money transmitters such as Western Union and Money- Gram take an average of 12.3 percent in fees on every $200 sent, with total fees amounting to $1.4 billion annually.
Bitcoin was supposed to disrupt this industry, described by Kofi Annan's Africa Progress Panel as a 'super racket'. Companies such as BitPesa in Kenya, Beam in Ghana and Bitstake have been looking to lower the cost of remittances using Bitcoin. Charging fees of three percent or lower, and utilising mobile money, they were backed for success. BitPesa alone has raised $1.7 million in funding.
"Bitcoin is a major innovation that will impact the state of remittance markets in Africa because it is cheaper and faster than sending traditional currencies. Africans are paying the highest money transfer remittance fees in the world due to lack of market competition," says David Ajala, co-founder of Bitstake and founder of NairaEx.com.
Gilles Ubaghs, senior fi nancial services analyst at Ovum, agrees that Bitcoin has huge potential in remittances.
"In theory, Bitcoin enables anyone to send money to anyone almost instantly with pretty much no cost. It is nowhere near the high costs seen on traditional remittances," he says.
Yet this confi dence has been shaken recently. Beam, which launched its Bitcoin remittance service with such a bang last year, has already ditched Bitcoin as a payment method. Co-founder Falk Benke attributed this to lack of uptake among users, related exchange costs and the lack of merchants accepting Bitcoin. BitPesa is also refocusing away from remittances due to issues within the ecosystem.
According to Allen Scott, chief editor at global Bitcoin news site CoinTelegraph, changing people's habits requires time and communication infrastructure that is lacking in Africa.
"Bitcoin must prove that it is the better and more convenient option, something that really hasn't happened yet due to the conversion issues, security concerns, bad press and lack of education. And second, a significant share of people - at least ten percent of the population - needs to recognise this fact," he says.
Scott is optimistic on the chances of Bitcoin having a serious part to play in remittances, a feeling shared by Ubaghs, who nonetheless has reservations. For Bitcoin to take off, consumers need an understanding of the technology, which is currently lacking, and a way needs to be found of getting physical cash in and out of the system. Western Union and MoneyGram have managed this effectively with their agent system, while Bitcoin has not.
"There are a few big issues at the moment, and the biggest one is that it's still pretty complicated to use and isn't a very user-friendly technology," says Ubaghs.
"There are some platforms out there trying to help with this, but they still have a long way to go in getting people to understand what Bitcoin is, how you buy it, how you send it, how you convert it. I believe a service will crack this soon, but we're not there yet."
There are security concerns over remittances as well, while Bitcoin still has a reputation - deserved or not - of being used by online thieves. Although this may be a misconception, there's no getting away from the concerns that hinder adoption.
Its volatility will also prove a problem, as will the fact that it's very difficult to maintain liquidity in the local currency on the African leg of the transaction. It's hard enough to spend Bitcoin in its 'spiritual home' of San Francisco, never mind in Africa.
According to Preston Byrne, chief operating officer of software firm Eris Industries, Bitcoin does have a future in African remittances, but as a niche tool and an alternative to mainstream finance rather than as an architectural backbone.
"The business would still need to deal with liquidity issues and high regulatory burdens, both of which are effective barriers to entry, which will require regulatory reform in the remitting jurisdictions," he says.
But that reform has not yet taken place in respect of Bitcoin regulation, which needs to be adapted if Bitcoin is to achieve the objective of financial inclusion. Until that happens, Bitcoin, particularly within remittances, may remain an idea rather than a reality from an African perspective.
This article was first published in the [February 2016] edition of ITWeb Brainstorm magazine. To read more, go to the Brainstorm website.