Bitcoin is a new and disruptive technology that is currently going through development and testing phases and the uncertainty of it being a substitute of traditional currencies still exists. But it’s certainly the most widely used of several hundred crypto-currencies available today (Cusumano, 2014). The reason we say that bitcoin is disruptive and one of the leading virtual currencies available is because it has taken attention from government policy makers and financial institutions. The benefits that come with it are huge and so are the risks and there has been applications of risks that put bitcoin more under the radar. This paper is not going to discuss the threats and risks that bitcoin provides to banking system or money transfer in general but rather discuss its real world applications and benefits that we’ve seen in some developing countries. To understand, how bitcoin is contributing to the socio-economic structure of some developing countries, it’s important to understand what bitcoin is, how it operates, who controls it, its benefits and the associated risks, and then measure the theoretical benefits and risks against the actual applications in countries where basic infrastructure either does not exist or does not function properly.
What is bitcoin?
There are some experts who think bitcoin is not a currency but a software system or a technology built on highly complex mathematical algorithm (Moulton, 2014). Bitcoin in essence is a currency that is mainly operated virtually and doesn’t have paper existence like the traditional currencies. Bitcoin is a digital currency that enables peer-to-peer payment system without a central authority or middleman. Bitcoin was first described by a pseudo name Satoshi Nakamoto in 2008 and introduced in 2009 based on an open source software (Cusumano, 2014). All transactions are recorded in an online ledger which cannot be modified but can be read publicly, however these transactions are highly secured and information about the sender and the receiver are kept anonymous. The two important features of bitcoin, which have been the success factors for this technology, also allows the criminal or illegal use of the currency are the decentralized system of bitcoin and the anonymity of its users (Mihm, 2013).
The biggest advantage of bitcoin is the freedom of making the payment to anyone and anywhere in the world. It doesn’t define borders or limits. Traditional currencies are sometimes limited to certain geographies and will cost more to exchange and transfer. Bitcoin on the other hand has no transfer fees or very small. Users are sometimes provided the option of adding the transaction fee to the payment to get priority processing. Making payment using bitcoin system is generally faster than traditional bank transfers or credit card payments. Bitcoin is known as a crypto-currency, which provides encryption and security. Bitcoin is also irreversible protecting merchants from fraudulent chargeback activities associated with credit card payments (Bitcoin, 2014).
Bitcoin is still in a growing and development phase and most businesses are not using it which makes the degree of its acceptance low. Because of this low usage, the total value of bitcoins is circulation is small therefore the effect is big. This volatility will reduce as more business and individuals start to use it but businesses are shy to adopt the currency because of this volatility. Another major disadvantage of using bitcoin is the not having any protection or insurance when bitcoin is stolen (Bitcoin, 2014).
There could be other advantages and disadvantages of this currency but one of the major disadvantage that let the policy makers and financial institutions to point their fingers at bitcoin is the heavy use of bitcoin by online drug mafia on Silk Road and radical anarchists. But what is interesting to note is that it’s not the security or anonymity of transactions that raises flag against bitcoins but it’s the lack of control of the government or financial institutions over it. Credit cards are the most insecure method of payment system but yet it was regulated as an online payment option. Hundreds of thousands of credit card information is stolen every year making it difficult for average users to perform secure transactions.
Unlike other virtual currencies, bitcoin is growing rapidly throughout developed and developing countries. The adoption rate is fast enough to perceive that bitcoin will skip an entire generation of currency in some parts of the world. Most people in some developing nations have always used cash currencies for transactions because of lack of financial services or banking infrastructure. But the same communities have adopted most recent technology innovations such as mobile telecommunication technology and the internet using infrastructures like WiMax and microwave wireless technologies which are not heavily implemented in developed countries. Therefore the adoption of a new virtual currency providing the ease, speed and low cost benefits could be seen in practice in developing countries. Mobile payment system, which take place between mobile devices, have long been used in some developing countries. Some of the applications are M-Pesa in Kenya, Wizzit in South Africa, Smart Money in Philippines, Digicel in Samoa, Fiji and Tonga, and MiCash in Papua New Guinea (Darren Flood, Tim West, 2013). The developing world is not new to embracing and using the latest and greatest technologies.
Bitcoin offers a number of benefits and new opportunities for consumers in developing countries to send, receive and store payments. In countries and regions where banking system does not exist, mobile technology and internet bring other possibilities of communication, interaction and money transfer in easy, fast and secure way. These are huge benefits for most consumers where they had no option of receiving payments or remittances living miles away from the main city. The fundamental difference of Bitcoin application in a developed and a developing country is that in developing country the substitute of the product or service, which is the traditional banking system, does not exist, whereas in a developed country other methods of transferring money exist. Therefore the market demand is measured in terms of the differentiation of the product or service. The need or want of having a secure or even a non-secure payment system is the driving force behind the use and success of bitcoin and mobile payment systems. The benefits and risks associated with bitcoin that we see in developed world, cannot be applied entirely to the developing world. The effect of some of the risks that we discussed earlier such as the degree of acceptance and not having payment protection could be less or less important in developing countries. Technology has been known as an enabler in most industries in developed world and it has also been an enabler and opportunity creator in developing countries as well. Technologies like Bitcoin make transfer of money possible where it was not possible.
One such example is the use of Bitcoin for the education and freedom of women in Afghanistan. Women’s Annex Foundation, founded by two female Afghan entrepreneurs Fereshteh Forough and Roya Mahboob, is an organization that facilitates digital literacy for women in developing countries. The foundation aims to train women and children in digital literacy to create a sustainable economic model for their families (Foundation, 2014). They originally provided infrastructure support by creating computer labs and providing internet access to the labs where women and children receive education on the use of digital technologies. The foundation helps them create digital content and then use social media to generate revenue based on the content. The lack of online banking and operations of paypal systems in the country made it difficult for growing number of contributors to get compensated effectively. Bitcoin offered opportunities to the foundation where they could pay their contributors easily, efficiently and securely where these benefits are also synced with their social and cultural norms. In a country where security is a big concern especially for women, bitcoin offers protection and comfort by spending their bitcoins on the foundation’s online shop. The independence from a middleman for the contributors make the processes more efficient and effective, and as discussed earlier, the users of bitcoin also skip a generation of payment system that we’ve traditionally seen between cash and digital payment systems, which is the credit card or banking system. Forough, the co-founder of the foundation, defines bitcoin as “a digital currency that supports digital literacy in developing countries”, and Mahboob, also the co-founder of the foundation, defines it as “a digital currency to overtake banking limitations of developing countries” (Foundation, 2014). These definitions might not be primary objective(s) of bitcoin system but these are the value extraction and application of this technology in a developing world, which drives the strategic importance of this technology.
Bitcoin, which is seen as the tool for criminals and online drug markets in the developed world, is seen and used as a necessity for the function of the economy and the society. The scale of the use of bitcoin in these different geographic regions might be substantially different but the value that it brings and the possibilities that it creates cannot be overlooked.
Bitcoin. (2014). Bitcoin.Org FAQ. Retrieved from https://bitcoin.org/en/faq
Cusumano, M. a. (2014). The Bitcoin ecosystem. Communications of the ACM, 57(10), 22–24. doi:10.1145/2661047
Darren Flood, Tim West, D. W. (2013, March). Trends in Mobile Payments in Developing and Advanced Economies. Reserve Bank of Australia. Retrieved from http://www.rba.gov.au/publications/bulletin/2013/mar/8.html
Foundation, T. W. A. (2014). Digital Literacy with Digital Currency. Retrieved from http://www.womensannexfoundation.org/digital-currency-bitcoin/
Mihm, S. (2013, November 18). Are Bitcoins the Criminal’s Best Friend? Bloomberg View. Retrieved from http://www.bloombergview.com/articles/2013-11-18/are-bitcoins-the-criminal-s-best-friend-
Moulton, D. (2014). BITCOIN FEVER: The good and the bad of this hyped cryptocurrency: The Nova Scotia Business Journal.