Asress Adimi Gikay (PhD), For Addis Standard
The Poor and Mark Zuckerberg
Addis Abeba, November 07/2019 – Libra, which is Mark Zuckerberg’s foray into the burgeoning cryptocurrency market, seeks to empower the so-called ‘unbanked’, identifying over a billion of them around the world (14 Million only in the US). Libra is supposed to be a global digital currency (cryptocurrency) that facilitates peer-to-peer payment operated on Facebook created blockchain (a distributed digital ledger) and owned by the Libra Association, a group of companies including Facebook . Judging by the fierce reactions of both EU and US regulators that are concerned about, among others, its the monetary policy and privacy implications, it is fair to say that Libra is being viewed as a most alarming cryptocurrency.
Libra is not the first, and in all likelihood not the last, cryptocurrency the issuers will attempt to promote with reference to the empowerment of the unbanked around the globe including in Africa. The protagonists of Blockchain technology and cryptocurrency-based payment systems have been making the same claim over the past ten years, the accuracy of which has largely escaped unquestioned by governments, lawmakers, and even scholars, otherwise circumspect about emerging technologies.
Back in 2014, when Bitcoin was on its way to being the most sensational of assets, former Greek Finance Minister Varoufakis called out the campaign strategy of advocates stating, “There is a Bitcoin aristocracy, the Bitcoin early adopters, who accumulated very cheaply Bitcoins from the beginning. They have every reason to talk this thing up and lure people into like a Tulip-like mania or a pyramid, making extravagant claims […]. This was all just hype.”
While the news media is understandably under pressure to cover stories about emerging technologies, they seem to have largely jumped on the Bitcoin bandwagon. In 2015, Forbes magazine published a piece titled “How Bitcoin Will End World Poverty”, an idea that was also echoed by CNBC in its report asking “Can Bitcoin Help the World’s Unbanked? By way of clarification, the so-called ‘unbanked’ are seen as members of society without access to financial services such as bank accounts, loans, or credit or debit cards.
In December 2017, the Financial Times published a report titled “Bitcoin, blockchain and the fight against poverty,” highlighting Hernardo De Sotos’ initiative to use blockchain to register informal property rights. Who is to believe that the complex problem of poverty is miraculously going to be solved by an experimental digital technology whose real use is dictated by self-interested industry experts; who plot to squeeze money from gullible consumers by all means possible?
The Reality Ten Years Later
Today, a decade after bitcoin was launched, many have made fortunes from investments in cryptocurrencies. Blockchain technology helped numerous startup companies raise funds from the public, sometimes resorting to questionable advertising practices. A report published in 2018 shows that 80% of the Initial Coin Offerings (ICOs) (a method of crowdfunding for blockchain-based projects) were fraudulent. The basic question is whether there is any evidence of the world’s poor – euphemistically referred to as “the unbanked” – benefiting from the technology. This is particularly relevant to the developing world today as Blockchain technology is being widely touted in Africa partly as a panacea to the poor.
In April 2019, Forbes magazine published the story: “Cardano Founder Launches Enterprise Blockchain Framework in Collaboration with Ethiopian Government” where the residents of Addis Abeba would pay their utility bills using a cryptocurrency. However, not even in developed countries, where any financial digital technology that works is adopted immediately, are payments in cryptocurrencies widely used by their citizens. Why the Ethiopian government would prioritize or even start to experiment with blockchain without having meaningfully solved the issues of financial inclusion and access to finance for its citizens is a mystery.
The Unbanked as Bargaining Token
Unfortunately, neither Libra nor any other cryptocurrency alone can give the poor access to a bank account or a financial service. Access to money itself would seem to be a fundamental precursor to any financial transaction and this is obviously something lacking amongst the poor. Cryptocurrency cannot replace banking services either. In fact, having a bank account is generally a prerequisite to accessing cryptocurrencies.
More precisely, there are three major ways to obtaining cryptocurrencies. First, a user acquires the cryptocurrency of her choice from an exchange platform using traditional currencies. In this case, the user must have a bank account. Second, the user, an expert in cryptography who possesses a powerful computer or special mining devices, engages in solving complex cryptographic problems on the relevant Blockchain and receives the cryptocurrency in question as a reward. However, the unbanked are unlikely to have expertise in cryptography, nor likely to possess a state of the art computer and pay for the electricity required by mining. Moreover, by definition, the unbanked do not have access to a bank account to be able to purchase cryptocurrencies.
A third way of acquiring cryptocurrencies is through a direct transfer to a cryptocurrency address (digital wallet) of the transferee made by a counterparty in an exchange for cash or other asset of value. This is a risky process as it could involve illegitimate methods and objectives. One could place drug dealers, tax evaders, paedophiles, money launderers and other criminals who go to great lengths to acquire cryptocurrencies from unregulated markets and over the dark web into this category.
It is no surprise that during the US congressional hearing on Libra, a lawmaker responded to Zuckerberg’s claim of helping the poor by stating, “You’re trying to help those for whom the dollar is not a good currency – drug dealers and tax evaders.”Although it is possible to build a system of peer-to-peer blockchain based-payment system with honest intentions, so far, there is no evidence that there is a single cryptocurrency that is not championed primarily by select members of society looking to achieve selfish or illicit goals.
Respectable scholars have their fair share of the culpability of advancing the rhetoric of banking the unbanked. Michèle Finck, a self-proclaimed technologist and the author of a widely praised book on blockchain regulation and governance in Europe claimed: “In Africa, blockchain has brought banking services to the unbanked, most famously through BitPesa, which provides blockchain-based mobile banking. Companies such as BitPesa and BitSpark moreover allow for the fast and cheap transfer of remittances.” In support of her assertion, she cites the website of BitPesa, the company that alleges to make money transfer in Africa cheaper.
The reality is that Bitpesa cannot transfer money to a customer that does not have access to a bank account and a mobile payment infrastructure. To assert otherwise is simply false. According to Bitpesa’s own terms and conditions, the following steps are necessary to conduct payment-using Bitcoin in Africa.
- Sender opens Bitpesa Account and purchases Bitcoin;
- Sender authorizes transfer by Bitpesa of a given amount of Bitcoin to the designated payee’s bank account;
- Bitpesa debits the sender’s account; and lastly,
- Bitpesa transfers the money to the receiver’s bank account with mobile payment services.
In other words, an unbanked person cannot access Bitpesa’s payment system because a local currency account and a mobile payment infrastructure are prerequisites for the payment system to work. Neither theory, nor practice, supports the idea that blockchain or cryptocurrency provides access to banking to the unbanked. Libra is not an exception.
Zuckerberg, his Wall Street friends and some Silicon Valley tech companies have absolutely no intention of helping the poor. They are simply using them as a bargaining chip with regulators.
A First World Solution for a Third World Country
Most third world countries have placed two levels of obstacles to the use of cryptocurrencies as a payment method. First, they do not recognize cryptocurrencies as money and second they put in place capital control laws that make it nearly impossible to acquire foreign currencies that can be exchanged for cryptocurrencies.
In 2015, Bitpesa filed a petition against Safaricom for the latter’s refusal to allow the former to use a mobile payment infrastructure because it engages in Bitcoin-based transactions, without having a license from the Central Bank of Kenya. The Central Bank did not grant authorization to Bitpesa because it did not recognize Bitcoin transfer as money transfer. Bitpesa lost the case before the Appellate Court. The case clearly demonstrates that blockchain-based banking piggybacks on traditional banking, but is falsely portrayed as an independent system of banking created to liberate the poor from the oppressive traditional financial institutions.
Secondly, in countries where the financial system is not open to foreign banking, citizens have no access even to foreign currency accounts. When citizens receive remittances from abroad via Western Union or MoneyGram, the banks automatically convert the remittance into local currency and give the receiver the equivalent amount in the local currency. In these countries, citizens cannot purchase cryptocurrencies as they simply do not have any internationally accepted currency with which to acquire cryptocurrencies.
Another reality of third world countries is that the majority of the poor do not have access to credit for personal financing and small businesses. This is true even in countries where the financial system is sufficiently liberalized, such as in Kenya and Nigeria where mobile payment is at a relatively advanced stage. Many factors contribute to the lack of access to credit to the poor but none can be fixed by cryptocurrencies.
Even if it were to be assumed that an African government succeeds in creating a cryptocurrency-based payment system, is it worth investing in the technology at this point which may require high electricity consumption? Does it address the key priorities of the majority of the people? And are there no existing technologies that can do the exact same thing at a fraction of the cost?
Libra or any cryptocurrency, if it succeeds, might solve the first world problem of transferring money in a minute as opposed to several minutes or hours. However, they are never going to fix the chronic problem of lack access to financial services that affects primarily third world citizens. The latter should be on the agenda of governments, international organizations and companies who genuinely want to lift the poor out of poverty.
In a world that has an alarming wealth gap between the poor and the rich, and where third world countries are at a conspicuous disadvantage, it is cynical in the extreme to use the plight of the poor as a pretext to accumulate wealth in the hands of a select few.
African countries should focus their efforts on including the poor in the financial system through various programs that are already working, such as microfinancing. Whether blockchain fits in the broader picture is not clear even to the most industrialized Western countries. Where there is capital control, the choice of liberalizing the financial sector and allowing foreign banking and adopting market approach to foreign currency exchange is certainly a difficult once. The governments having capital control should be directing the time and energy to designing a system that allows foreign banking, without exposing the financial system to a collapse. Furthermore, banks should adopt online payment systems. In a country where one has to appear before a travel agency to purchase a flight ticket, it would make more sense to implement access to internet banking services before jumping to blockchain-based payments for electricity bills. AS
Editor’s Note: Asress Adimi Gikay (PhD), is an Ethiopian scholar with a PhD in Commercial Law. Currently, he is Lecturer in Artificial Intelligence, Disruptive Innovation and Law at Brunel University London, Kingston Lane Uxbridge, Middlesex, UB8 3PH. He can be reached at: email@example.com.
Please click here to access the writer’s previously published articles on blockchain and cryptocurrency regulation in peer-reviewed journals.