Proponents of the leapfrog theory of development often say the developing world’s lack of old technological infrastructure leaves the market wide open for new technologies. This appears to be true for the financial industry. In the continent as a whole, there is a huge pent-up demand for banking services with only 66% of the Africans having access to financial services. Banks have a hard time reaching people in rural areas and people without a lot of capital. One can see the potential for digital financial services to take off in Africa and reach these customers by looking at the success of mobile money on the continent.
Mobile money is a technology that has taken off in Africa and but not in the developed world. Mobile money is a technology that allows users to deposit or receive money in kiosks and use their phone account as a bank account. It has done well in Africa because there was a demand and all the new technology (mobile phones) were in place. This method lowers startup costs for banks to reach rural people and takes advantage of telecoms existing infrastructure to reach out to new customers. Mobile money is also used for people to have a safe place to store their money and for sending remittances. Several of these reasons for using mobile money apply to Bitcoin so why wouldn’t Africa just leapfrog again and move from mobile money to bitcoin?
Some of the reasons for adopting mobile money are similar to those for adopting bitcoin but there are several major disadvantages to using bitcoin: lack of political capital, high fluctuation in price, and general trust issues. It took years of political negotiation in countries to get create the mobile money policy structure to allow mobile money businesses to flourish. Regulators created new policies around Know Your Customer (KYC) and Anti Money Laundering (AML) laws in order for the technology to take off. This kind of steady policy environment was what businesses needed to feel secure to make a large investment in countries. Considering the amount of energy it took to secure this political capital, it seems unlikely that Bitcoin will be able to do so in a few years, especially with the entrenched interests in mobile money and banking putting their weight against keeping them out of the market. Also many of the anonymity features of Bitcoin don’t lend themselves well to KYC and AML regulations.
Secondly, companies that have gained the trust of poor and rural customers had to educate them on how mobile money technology works and the barriers to teaching people about bitcoin technology are much higher. I have a hard time understanding how it works and can imagine how hard it would be to explain to an uneducated rural farmer. In markets that rely on trust and can be reticent to change their saving strategy, Bitcoin can seem like a risky bet. Poor people are unlikely to make risky financial decisions. The fluctuation of Bitcoin prices makes the decision an even riskier bet for poor, rural people. There is a theory that if more people use Bitcoin, then there will be more people in the market and so the fluctuations will be smoothed out. There are more people buying into the currency every day and so this theory might just turn out to be true.
All of this is not to say that there aren’t benefits to adopting Bitcoin in some countries in Africa. There are benefits to decentralized systems that don’t have corporate control. This is a problem as the upstart mobile money companies that changed the financial systems in many of these countries, have now moved to keep other new comers, such as Bitcoin startups, out of the market. Bitcoin could be an alternative that would allow for more open, and less corporate controlled financial markets. These options are appealing, but are all many years off. For now, let’s make do with some of the technologies that Africa is testing out and wait on Bitcoin until the technology is more stable and the continent is more ready. Africa just leapfrogged ahead of much of the world on mobile money, so there is no rush to leap further ahead into Bitcoin. They can wait for the rest of the world to catch up first.
Caleb Rudow is a Graduate Research Fellow and Task Team Leader for IPD’s GIS and Analytics team. He is a second-year master's student seeking a dual degree in Global Policy Studies.