If currency is the means by which we store the value created through our independent business activity, then theoretically, cross border remittances should be our means to bridge the value one human creates in one part of the world with another in an entirely separate geography. Although unfortunately, the high exchange costs and lengthy processing times so characteristic of African remittance markets serve more as a barrier to financial inclusion in global markets than a bridge to them.
Essentially, the Blockchain will do to remittances what Amazon web-services did to online advertising. The replacement of traditional peer to peer transactions across SSA borders with a digital distributed ledger system will create scope for seamless, instant and inexpensive cross-border transactions, increasing access for SME’s to start-up funding and expansion capital from abroad. The average cost of remittances in SSA stands at around 9.4%, while the Sustainable Development Goal target set by the UNDP is 3%. Reportedly, some Blockchain based remittance companies meet the target set by the UNDP in as quickly as one hour! In 2017, SSA economic growth supported a $38 billion boost in remittances, a rise of 11.4% in one year. The growth in remittances and the growth of SSA economies is reciprocal and how technological innovation can serve to maximise this reciprocal relationship bears closer scrutiny.
How do Blockchain based remittances compare to traditional ones?
In the past, remittance companies would have to prefund cross-border capital transfers and rely on a partner in the receiving country to draw down from the prefund absorbing any FOREX losses. This model made it difficult for small businesses to gain access to the remittance market as you would need a large amount of capital to warrant the prefunding costs placed on the transaction by the remittance company.
Alternatively, Blockchain based remittance companies receive hard currency and convert it into bitcoin, the bitcoin is then converted back into the fiat currency applicable to the recipient market. Instead of paying for the remittance in bulk before it happens, the remittance company pays in real time reducing the transaction costs that are passed onto the sender. Critically, also, the use of bitcoin as a middle currency to triangulate the transaction significantly reduces the risk of potential losses from FOREX fluctuations.
Who is operating in this space?
Of the prominent Blockchain remittance companies currently operating in SSA like CentBee, Bankymoon and NoahCoin – BitPesa has proven the most disruptive. While the others have seen notable successes in facilitating cross-border peer to peer lending for individuals and SMEs alike, the Kenyan headquartered BitPesa have widened their scope to encompass larger blockchain based financial transactions, services and supply flows. Together with the Japanese Insurer Sompo Holdings, BitPesa will create a digital platform that will enable the easy movement of goods and value in and out of Africa on a scale not yet seen anywhere in the world.
BitPesa’s partnership with Sompo Holdings recognises that the problem with the African remittance market is not solely financial, but that it is also a market constrained by poor administration and a lack of transparency. A decentralised and trust-less blockchain based remittance platform reduces administrative costs and eliminates the scope for corruption in one fell swoop. It will also help build direct digital infrastructure connecting African businesses (both large and small) with capital pools in developed economies.
What are the barriers to widespread uptake of Blockchain for remittance purposes in Africa?
There are of course numerous structural obstacles to the growth of this industry in SSA, but the most pressing impediment is surely the apprehension with which Blockchain is viewed by African legislators. Blockchain and bitcoin are too often misunderstood as undistinguishable from one another, resulting in the logical conclusion that a technological upheaval where fiat currencies are simply substituted for unregulated digital currencies could create serious fiscal difficulties and wider scope for corrupt practices from the outside.
But as a technology, the Blockchain is a trust-less system that is fundamentally neutral. It’s the task of African legislators to ensure that exchanges of capital that occur on the Blockchain in either digital or fiat currency protect the economic interests of African businesses. Kenya (where BitPesa is based) held Blockchain technology with deep suspicion, government officials even drew comparisons with “pyramid schemes” only to soften their stance by setting up a task-force to study the benefits the technology could bring to the Kenyan economy.
This regulatory uncertainty surrounding Blockchain stifles investment into R&D because start-up firms fear they could be penalised retroactively having already committed significant financial resources into developing their products. Start-up remittance companies working in this space must work closely with regulators from their very inception, offering up their platforms as litmus tests for the development of effective regulation.
Another significant barrier is the unavailability of internet access in Sub Saharan African economies. Blockchain relies on networks supported by nodes (electronic devices connected to the internet) capable of maintaining copies of the Blockchain. The lack of digital and satellite infrastructure means it’s more expensive to run nodes autonomously in SSA than in more developed economies. To unleash the economic potential of Blockchain based remittances, the companies depending on the Blockchain need to also commit to investing in the development of the infrastructure upon which the distributed ledger relies.
Perhaps the most structural of the structural issues is the human capital resources needed for the development of Blockchain based remittance platforms. Sophisticated digital ecosystems require cryptographers and engineers adept in the development of vast databases. Given that the demand for Blockchain developers in the global North is already immense, the challenge for SSA leaders is to make an attractive proposition to Blockchain developers to re-orient their skill-sets to serve the needs of African infrastructural development and the education of Africa’s youth.