Bitcoin's Big Remittance Problem

Why it may be harder to use bitcoin for developing countries than we thought.

One of bitcoin’s biggest promises was to level the playing field and make it possible to send funds anywhere across the world. Advocates were excited about a new world, in which communities in developing countries were just as financially empowered as people in developed economies. It might not really be working out that way, though.

International remittance to developed countries was going to be a killer app for bitcoin.

Many parts of the world have migrant workers who earn money and send it home to their families. The problem for them is that the cost of sending that money can be pretty high. The World Bank Database of Remittance Prices shows an average cost of 7.9%, with transfers to some African countries costing upwards of 11%.

Bitcoin is designed to be fast and friction-free, with digital cash transferrable in seconds using the block chain. There are transaction fees associated with the technology, but they are minimal, and in some cases non-existent. So surely this would be a better way?

Regulation

There are challenges associated with international bitcoin remittance, though. The first of them is regulatory. Some governments in developing countries are very strict about how their monetary systems work. They may ban the concept of bitcoin altogether, or if they allow it, they may impose stringent anti-money laundering requirements, to avoid digital cash systems like bitcoin from being used for criminal purposes.

All of this makes it difficult for business to set up that can exchange bitcoin for local cash, and it also makes it harder for citizens to participate.

Volatility

One of the other challenges for people in developing countries wanting to use bitcoin is volatility. The currency is still highly volatile compared to many forms of fiat currency, meaning that it will go up and down dramatically, often in response to events and market dynamics far away from those in developing countries, and outside their control.

That’s a problem for families in developing countries with a far lower income than others. A 10% fluctuation in bitcoin’s price may be irritating for a western investor hoping to make a buck, but they can wait for the price to rise again. For a family trying to put food on the table in an Indian village, that could be catastrophic. It isn’t just nice for them to be able to rely on the value of the money being sent home to them – it’s vital.

Liquidity

To buy that food or those other household items, those families are going to need to transfer the bitcoin that they receive into their local currency, because there are probably no outlets selling their required items in bitcoin. That transfer process can be difficult, because of an issue known as liquidity. In a highly liquid market (such as the market for fiat currency), it’s easy to transfer money from one currency to another by buying and selling currencies, because there are so many people willing to trade.

Conversely, bitcoin is a low-liquidity currency, meaning that there are far fewer people willing to buy and sell it in exchange for local currency. That can push the value of bitcoin down still further for families who may be desperate to trade the bitcoin that they have received, so that they can get access to ready cash.

Some countries may have no one at all buying bitcoin, and no exchanges to conduct trades on.

There are alternate means of financial exchange that people in developing countries are already used to. In parts of Africa, for example, Vodafone has introduced a system called mPesa, which allows people to send money to each other via their mobile phones. It’s extremely popular, although it is only designed for sending money inside the country.

For both national and international transfers, a vast network of money traders known as Hawala has existed for many years. This network extends pretty much globally at this point, and many will be used to dealing with trusted individuals on this basis.

Nevertheless, some companies are still trying to make bitcoin remittances work. BitPesa, for example, accepts bitcoin sent to Africa, and then exchanges it for Kenyan and Tanzanian Shillings.

It can then be sent to a mobile wallet using mPesa. However, that will still incur a 3% fee along with the bitcoin transaction fee, which while minimal, must still be considered.

None of this means that bitcoin won’t emerge as a market for remittance. It has potential, but what would really help is the ability to buy and sell everyday goods in bitcoin in these developing economies. In most parts of the world, that’s a long way off, and it’s a catch-22 problem: until bitcoin is popular, such retail options won’t develop. But until they develop, it will be difficult for bitcoin to become popular.