People are already starting to use Bitcoin in this way. When the Cypriot banking crisis hit during the spring of 2013 and fear of capital controls loomed across Southern Europe, the bitcoin price rose from about $15 to north of $200. In the latter part of 2013, the price ballooned again, rising from about $130 to over $1,000 due to Chinese interest. Much of that interest was speculative, but some of it was also money fleeing the country. Shanghai resident Zennon Kapron declared, ‘some people have the equivalent of tens of millions in dollar-equivalent value in China and they want to get it out. They want to send their children to school in Canada, the US, Australia. Wealthy families, new and old money — it’s not a lack of trust in the local system, it’s just a need to diversify their investments.’181
With Bitcoin, suddenly capital controls do not apply as they once did. This frees up the possibilities for money laundering and other illicit activity, of course, but it also frees up people. The implications of this possibility to instantly transfer wealth or ownership across borders without interference are, I think, considerable.
It means borders would lose much of their significance.
Why Bitcoin is an irresistible force
These kinds of stories are compelling to those that distrust governments, but they will not be enough to take Bitcoin into mainstream use.
What will take Bitcoin – or some other currency that replicates and improves the technology – into the mainstream is the efficiency and simplicity of its payment system and the savings it makes for its users. The political implications of Bitcoin are appealing to some, but it is the technology that will make it irresistible to the wider world. I’ll explain.
I earn my living as a writer, a speaker and a comedian. I’m based in the UK. With the growth of the internet and all accompanying media, I find I am hired for more and more work overseas – and for much of it, I don’t need to leave my desk.
As a writer, I might be asked to write articles for publications overseas. Over the last year, for example, I’ve been asked to write for publications in the US, Canada, Germany, Singapore and Australia.
With my irresistibly charming English accent, I am often asked to voice all sorts of different media overseas. It might be a documentary for Discovery or National Geographic in the US, it might be a video game made somewhere in Asia, a video for a Canadian mining company or some new altcoin based in the ether.
I am often asked to speak or do gigs overseas. In the last year or two I’ve done gigs or spoken in South Africa, Canada, the US, Dubai, Germany, Ireland and Romania.
International payment is almost always a headache. IBAN numbers, SWIFT codes, BIC codes, foreign exchange charges, fees to send money, fees to receive money, money getting lost, different time zones and bank opening hours and the time it takes for money to actually transfer. All in all, payment is needlessly expensive and inefficient. It’s verging on the archaic.
For one-off payments of more than $1,000, the $50 or $100 in costs are bearable, though they still gall – and if you do regular work for somebody, those costs compound, as does the gall factor. But for a small job of $50, $100 or $200, the costs of transferring money are such that jobs are not worth doing. Which means the exchange is less likely to take place.
Some use PayPal to get around the problem, and PayPal can work well. But it is not cheap. PayPal also has a habit of freezing accounts; and many people, for various reasons, do not have accounts. You need a credit card to open a PayPal account, but not everybody can get a credit card. Even in the US, almost 30% of the population does not have a credit card.182 In the developing world, the percentage is much higher. In India, for example, 79% of the 1.2 billion people who live there don’t have cards.183 Most of them will have smart phones first.
‘Existing payment systems are often quite expensive’, says University of Chicago Professor of Law Eric Posner, ‘either because somebody effectively has a monopoly, there are a lot of government regulations that are costly to comply with, or the companies that offer these services provide certain protections that people want and are willing to pay for. In the case of Bitcoin as it stands now, these costs are largely avoided, at least to the extent that you can technically send bitcoins from one wallet to another wallet without incurring fees; no middlemen are required to do this.’184
Of course, there are costs involved with using Bitcoin. If you convert bitcoins to your local national currency, there are fees. If you use a Bitcoin service provider (a Bitcoin bank, basically) such as Coinbase or Bitpay, there will be fees there too. There is the risk of having your bitcoins stolen, which is another cost in itself. But these costs can all be avoided, if so desired. And the more people that are buying and selling things with bitcoins, the less need there is to actually leave the network – and take on the expense of doing so.
Warren Buffett, the legendary billionaire, dismisses the idea that a bitcoin has any value. ‘It’s a mirage,’ he says. ‘Stay away. The idea that it has some huge intrinsic value is just a joke.’185 But even he – a notorious techno-sceptic – sees the potential of the technology. ‘It’s a very effective way of transmitting money,’186 he says.
The Bitcoin protocol offers enormous savings for people who wish to do business with each other using it – particularly at the smaller end of the business scale. These savings and efficiencies mean that many exchanges that would not be possible under existing payments systems can now happen. It is by exchange that people prosper and progress. I asked Nick Szabo if Bitcoin can change the world. ‘Yes it can,’ he said. ‘By lowering transaction costs for a wide variety of people that are shut out of the current financial system.’
Goldman Sachs IT analyst Roman Leal has made some rough calculations as to the savings that Bitcoin could have made possible globally in electronic payment in 2013. There’s no proving the block chain could yet manage such levels of volume, and Leal makes the point that regulatory and operating costs for Bitcoin could quite easily rise, while the competition it brings to existing payment services means these costs will probably fall. Even so, the numbers are startling.
Let’s start with a simple money transfer. Consumers end up paying as much as 10% of the total amount transferred if they use a money transfer network such as Western Union. This fee covers agents’ commissions, forex and access to the network. With Bitcoin that fee could of course be zero – or 1% if you use a Bitcoin service provider such as Bitpay or Coinbase. There were $49 billion of transaction fees globally in 2013 on about $550 billion of remittances. With Bitcoin those fees fall by 90% to just $5.5 billion.187 That would mean an extra $43 billion of money actually makes it into people’s pockets.
Looking next at electronic payments in retail, currently retailers pay from about 2.5% to 3% in transaction fees. In 2013, global transaction fees at retail point of sale were $260 billion on over $10 trillion of sales. Had Bitcoin been used (again using a 1% estimated fee) the number would be $104 billion – a saving of almost $150 billion.188 Leal notes that all ‘merchants would realize sizable savings’ by using Bitcoin, but small merchants will benefit most. They ‘can reduce their payment processing fees by at least half’.189 That is a compelling number for a business that runs on low margins.
As long as Bitcoin keeps its costs down, these kinds of savings will become irresistible.
Empowering the great unbanked
In the midst of the boom that China has enjoyed over the last 25 years, something quite extraordinary happened.
When it developed its telecommunications infrastructure, it hardly laid down any cables and wires. Technology was at such a point where China was able to bypass all that and go straight to wireless.
It’s very easy to get all excited and imagine something similar with developing Third World nations by-passing banks and banking infrastructure altogether and going straight to Bitcoin. In fact, something similar is already happening – but it doesn’t involve Bitcoin. It is most apparent in Kenya with the M-Pesa. M stands for mobile. Pesa is Swahili for mon
ey – so you have ‘mobile money’.
It began quite organically in the early 2000s in various parts of Africa. People started transferring their mobile phone minutes – their airtime credits – to friends or family. This airtime, of course, has a definite value. Based on a ‘real thing’ it would become a modern day commodity currency. Safaricom and Vodafone both picked up on the practice and brought in systems to both regulate and facilitate it. You can send airtime, M-Pesas, by text (SMS) message.
As early as 2009, such was the pace at which the M-Pesa was expanding, Kenyan banks actually lobbied the government to audit M-Pesa in an attempt to slow its growth. But it made little difference. Now something like two-thirds of Kenyans now use the M-Pesa and as much as 43% of national GDP flows through it.190
Only 40% of Kenyans have a bank account.191 According to the World Bank, in 2012 over 70% had a mobile phone.192 With the M-Pesa, the ‘unbanked’ now have access to basic financial services. People can deposit and withdraw money, transfer money (even to non-users), pay bills, buy airtime and, in some cases, actually transfer money to a bank account. They can even obtain credit. This is precisely how Szabo envisages Bitcoin changing the world. Mobile phones are replacing banks.
‘Financial inclusion is reported to be at 80% in Kenya’, says Sitoyo Lopokoiyit of Safaricom. ‘When you remove mobile money, it drops to 23%. So you can see what mobile money does for financial inclusion in Kenya.’193
The M-Pesa has been launched in Tanzania, South Africa, India, Afghanistan and Eastern Europe. It has had some success in Afghanistan and Tanzania, rather less in South Africa – but nowhere has it worked as well as in Kenya.
Steps are currently being taken to launch it in India. I’ve spoken to some of the venture capitalists involved. They are extremely bullish about the short-term prospects – much more so than they are of Bitcoin’s, for two simple reasons.
The first is internet connectivity. Most of rural Asia and rural Africa (not to mention rural England) does not yet have extensive internet coverage. It’s coming, but it’s still several years away. Until they do, the possibilities of Bitcoin are extremely limited for day-to-day use.
These regions do, however, have mobile phone coverage. Smart phones may still be prohibitively expensive, but mobile phones are not. More and more people own one and a mobile is enough to transact via M-Pesa.
Second is M-Pesa’s ease of use. Older, technologically naïve, rural folk will find it easier to get to grips with SMS payments than they will with downloading Bitcoin wallets and all the rest of it.
The M-Pesa is a centralized money issued by mobile phone networks, unlike the decentralized open source creation that is Bitcoin. The M-Pesa has more limited use and less potential functionality than Bitcoin. It is not a money without borders. But given the stage of development that much of rural Asia and Africa is at, I’m inclined to agree that the M-Pesa has greater potential in these parts of the world over the next few years. It also has significant first-mover advantage.
But the prospects of the M-Pesa emphasize the point that people the world over need better systems of sending money and that these better systems are coming.
There are some 640,000 villages in India. Seventy-two per cent of India’s 1.2 billion people live in them. The other 28% live in towns or cities.194 Over half of India’s population don’t have bank accounts195 – and the rural population is considerably more than 50% ‘unbanked’. In 2000 the Indian government launched a campaign to get people banking, but now 90% of the 100 million accounts that were opened are dormant.196
It’s typical for men to leave rural villages and head to larger towns or cities to find work. How do they send money home? (The rural Mexican working in the US has a similar problem.)
Even if they do have bank accounts, going to a bank to send money can involve taking time off work – which they might not want or might not be able to do. Their wife in all probability will not have a bank account. If she does, the nearest bank might be more than a day’s travel away – so collecting the money is inconvenient and potentially expensive for her as well.
The post office is the way that some people send money. But, again, most villages don’t have a post office. India has 155,000 post offices in total, many of them in towns and cities, for its 640,000 villages.
Western Union and other similar organizations are another possibility. But we already know about the 10% fees. Venture capitalists tell me you can add another 10% by the time you factor in the collection costs (travel and accommodation) and the working hours lost while the money is being sent.
With the M-Pesa, and, eventually, Bitcoin, they don’t need to leave home.
India, and much of rural Asia, Africa and South America, badly need a simple, cheap way to transfer money. One day Bitcoin or some development of it will meet that need. SMS payment systems are already being developed for Bitcoin, but for now it looks as though the simplicity and investment capital behind the M-Pesa will win that particular battle.
But it is still a battle that is being won by a non-government currency, beyond traditional banking. And, through the M-Pesa and other currencies like it, the third world can bypass traditional banking, just as China bypassed cables and went straight to wireless.
The monopoly on money and payments that banks have held for so long is under threat from cheaper, more efficient systems.
The implications for banking as we know it are considerable.
But so are the implications for people.
Why Bitcoin could have a greater impact than the internet
Governments, generally, keep a tight control on the movements of money throughout the world. This is not by accident. There are terrorist concerns, money-laundering concerns, tax concerns – all sorts of reasons.
Bitcoin has suddenly made it easy to move money around without people knowing about it. There is going to be a lot of friction between know-your-customer, anti-money laundering and other regulations in the traditional money movement system and this new system – especially between the developing world and the developed world.
Take the remittance business between the US and Mexico.
One of the highest contributors to Mexican GDP is actually money sent from economic migrants in the United States to family members back home. Over the last ten years this has averaged almost $25 billion – which is about 10% of Mexican GDP. (China, India and the rest of Latin America combined actually send greater amounts; though Mexicans comprise about 55% of the foreign-born US population.)
At present, 7–10% of money sent home to Mexico is consumed in the remittance process. Bitcoin, of course, has made it possible to do this at zero cost. As more and more people adopt this technology and companies offer this service, it’s going to be more and more difficult for the United States to monitor and control that money exodus.
That is going to present geopolitical problems and create tension between the US and Mexico.
On the other hand, of the seven billion people in the world, only around two billion are banked and participate in ecommerce. Yet about 5.5 billion have at least some access to the internet.
That’s a potential 3.5 billion people who could participate in ecommerce, but don’t because they don’t have access to the necessary financial infrastructure.
With this new decentralized money-movement system, the developed world now has potentially 3.5 billion new people to outsource jobs to, to sell products to and to receive products from. That is a lot of new trade.
It’s very beneficial to the economy as a whole – even if it isn’t for existing systems.
Ethereum’s Charles Hoskinson says to me, ‘I think it’s going to have probably as big of an impact on the world as the internet. The internet made communications super easy, but it showed that our money system doesn’t work very well. And now we have a new money system that’s started to materialize’.
This money system will grow bigger and better. It’s going to improve and increase commerce. It could unleas
h a huge global economic boom, as good for developing nations as it is for the developed.
The Bitcoin technology has laid the foundations for a dramatic increase in exchange. And, of course, exchange is the crucial process by which mankind prospers and progresses.
9
A Billion-Dollar Hedge Fund Manager and a Super-Smart Mathematician Forecast the Future
[Bitcoin] is a techno tour de force.
Bill Gates, computer programmer, founder of Microsoft
It was a breakthrough technology. Everyone agreed about that.
And it worked.
But as the open-source community developed it, a number of discussions, sometimes heated ones, broke out as to which direction Bitcoin should take. Some didn’t like the fact that bitcoin mining consumed so much power, citing ecological reasons. Others didn’t like the deflationary characteristics of the coin. Others felt there could be more usability – it should do more than just be a system of payment.
But as Bitcoin grew in value, more money was at stake. Shifts in direction could have serious financial ramifications. So, while the community discussed ideas, few changes were made.
Instead, coders began to develop alternative cryptocurrencies, aping some aspects of Bitcoin but changing others. These were known as altcoins.
There are now 300 or more kinds of altcoin. Many of them are scams and get-rich-quick schemes. Many of them are simply experiments. Most of them will amount – or already have amounted – to nothing. But some of them are quite legitimate.
At present, they comprise just a few per cent of the entire cryptocurrency market cap. At $500 a coin, the market cap of Bitcoin stands at around $6.5 billion. All the other altcoins combined amount to about $350,000.
Bitcoin Page 15
