SEATTLE — Bitcoin has been more of a curiosity than a legitimate financial tool for much of its short history. Lately, a number of economists and entrepreneurs have come to see the digital currency as a means to promote financial inclusion in parts of the world where traditional banks are scarce and markets underdeveloped.
Financial inclusion is critical for reducing poverty in the developing world. According to the Center for Financial Inclusion, a Washington, DC-based think tank, people who have access to a range of financial services at affordable prices are better able to accumulate savings, obtain credit and build for the future
The World Bank estimates that the number of people with access to a bank account has grown steadily over the last few years, from 51 percent of the world’s population in 2011 to 62 percent in 2013. Although this trend represents significant progress, it falls far short of the organization’s stated goal of universal financial access by 2020.
One way Bitcoin can help is by serving as a nontraditional bank account. As Brett Scott observed in a recent working paper for the United Nations, any person with a personal computer or mobile phone can download a Bitcoin wallet and gain access to the global market, without having to go through a bank or other intermediary.
This makes Bitcoin an ideal way to process international money transfers, also known as remittances. It may also help small businesses in the developing world that want to expand their overseas trade. Scott uses the example of a rural crafts cooperative from Zimbabwe, which might struggle to sell its goods through traditional e-commerce systems, but gain quick access to potential customers through a Bitcoin account.
He also notes that in cash-heavy economies, Bitcoin offers a safer place for people to stick their earnings, since currency is more likely to be lost or stolen. Africa seems the place where Bitcoin is most likely to have an impact, given the growth of mobile banking on the continent over the last few years. Indeed, a number of Bitcoin-related startups have already emerged there, including the Kenya-based BitPesa.
But as Scott points out, the African example also points to Bitcoin’s limitations. One reason the digital currency is succeeding in Kenya, for example, and not in other places is that Kenya already has consistent internet availability, an efficient electrical grid and an extensive network of agents and vendors already in place. Few other developing countries can claim this advantage.
Moreover, having a Bitcoin account does not deeply address the problem of financial exclusion. Most financially “excluded” people lack access to credit, which means they also probably have no stable income or formal property title to act as collateral for a loan. At best, Bitcoin can supplement these things; it cannot replace them.
When it comes to helping the world’s poor, Scott argues the part of Bitcoin which holds the most potential is not the currency itself but the technology that supports it: blockchain.
Blockchain is essentially a decentralized public ledger with a network of participants whose transactions it digitally records. Because these transactions are transparent, some observers have proposed using blockchain to register property deeds in countries with weak governance and/or poor record-keeping systems.
Honduras, for example, is currently trying to develop a blockchain-based land registry system with the American company Factum. Ideally, such a system would give more people official property titles, which they could then use as collateral to access cheaper loans.
Bitcoin is not a fix-all to the problem of financial inclusion. But if applied in the right contexts, it has the potential to help many people trying to lift themselves out of poverty.
– Matthew Housiaux