Can bitcoin build remittance systems that will lift the unbanked out of poverty in developing countries? Will the blockchain deliver the infrastructure to provide property rights and financial inclusion to the disenfranchised?
These questions draw diverse opinions among cryptocurrency observers and economic development experts worldwide. The answers are not immediate, given the youth of bitcoin and blockchain technology, but the journey to finding them promises to be exciting.
Brett Scott, an independent researcher and consultant on alternative finance and financial reform, has authored an analysis of these topics in a paper released this month for the United Nations Research Institute for Social Development (UNRISD), an autonomous, Geneva-based U.N. research institute. The paper is titled, “How Can Cryptocurrency and Blockchain Technology Play a Role in Building Social and Solidarity Finance”?
Scott, a senior fellow of the Finance Innovation Lab in London, summarizes efforts to use bitcoin and the blockchain in improving some of the world’s most pressing economic problems. He also examines the challenges of financial inclusion within the context of techno-libertarian evangelism and techno-colonial solutionism ideologies.
The potential for bitcoin and the blockchain to empower social and solidarity-based finance has yet to be truly tested, Scott notes at the outset. His 25-page paper is intended as a primer on the basics of bitcoin and the current narratives about its potential to facilitate financial inclusion, remittances, cooperative structures and micro-insurance systems.
Scott notes that while the community around crypto technology is enthusiastic and experimental, it remains prone to an elitist, tech-centric outlook. An important role for social and solidarity finance practitioners is to consider how blockchain technology can evolve within today’s diverse political and cultural contexts.
At the conclusion of the paper, Scott offers suggestions for further research in bitcoin and blockchain technologies.
Part 1: Bitcoin And The Unbanked
A discursive bitcoin theme is whether it can apply within the context of international development, financial inclusion and bottom-of-the-pyramid business efforts. Narratives on why it may be empowering populations in less developed nations have emerged, including:
- As a means to facilitate low-cost remittances for those seeking to transfer small amounts of money internationally.
- As a means for an otherwise excluded individual to have a decentralized global bank account, accessible by downloading an open source wallet from the Internet, versus having to set up an account with a financial institution.
- Providing the basis for a richer set of financial services.
Bitcoin has served as an intermediary between more dominant currencies, making it useful for remittances. A Filipino worker in New York can use a remittance service to transfer U.S. dollars into bitcoins and allow a family member in the Philippines to “withdraw” pesos on the other side. For this model to work, a liquid market for both dollars-to-bitcoins, and bitcoins-to-pesos is necessary. Startups like Rebit in the Philippines and BitPesa in Kenya offer existing examples.
Bitcoin has also shown potential to facilitate small-scale global commerce. A producer of sustainable cocoa butter can sell his products to U.S. clients in exchange for bitcoin tokens, and then redeem them for local—or foreign—currency on a bitcoin exchange.
Bitcoin can serve as a banking service. A mobile phone can download a bitcoin wallet, providing access to the global market. In a country with a poor a banking infrastructure, such a technology could be a safer way to hold money, and a convenient way to use it in everyday transactions.
However, there appears to be little more than anecdotal evidence on the extent to which such uses of bitcoin is occurring.
M-PESA has established itself as a leading mobile banking service in Kenya, enabling nearly a quarter of the working population to use mobile phones to transfer currency by using text messages. The politics of mobile banking are problematic, however, involving struggles among regulators, banks and telecoms companies.
Why Some Are Skeptical
While these possibilities generate enthusiasm among cryptocurrency observers, there are skeptics, many of whom are well-intended. Skeptics come from different ideologies.
Traditional conservatives argue that bitcoin-based systems will be used for money laundering and financing terrorists. In July 2015, Hacking Team — producers of government surveillance spyware — were reportedly working on cracking bitcoin systems on behalf of government clients. Hence, there is a geopolitics of bitcoin that can prevent it from being used freely for financial inclusion.
Others point out practical considerations that would undermine bitcoin’s use in facilitating remittances. Remittances depend on a liquid market between bitcoin and the recipient country’s currency. Liquid currency markets tend to develop in countries with strong market institutions and well-established local intermediaries. Countries that depend on remittances tend not to have such institutions for their normal currency, not to mention an entirely new Internet currency.
Kenya’s M-PESA succeeded because it leveraged an existing network of agents and vendors. Bitcoin does not escape the need for extensive networks of agents in remote locations who can provide physical cash to those seeking remittances in a local currency. There are also questions about the viability of bitcoin in countries with poor technology infrastructure.
Financial exclusion generally refers to not having access to credit, which reflects a lack of stable income streams or access to recognized property titles to act as collateral.
Hence, financial inclusion operates on multiple fronts. Bitcoin has yet to prove itself on any of these fronts. It offers a potential alternative payments system, but it has yet to show how it will deliver financial inclusion more broadly.
The Political Critique
There is also a more political critique of bitcoin's role in developing economies.
Those viewing bitcoin as a "life-raft" currency imply that it is desirable to “escape to the Internet” rather than find more fundamental solutions to a country’s underlying problems. Advocating that a vulnerable country adopt bitcoin could be merely a short-term solution and one that distracts from strengthening already fragile institutions.
In a country like Zimbabwe, the real need may be to strengthen the integrity of the banking system, which can only be achieved by long-term political battles.
Escaping weak local institutions might help certain individuals, but it does little to empower the majority who continue to rely on the existing systems. Those most likely to seek escape are social elites with access to technology, high education and capital to protect.
Bitcoin's Neocolonial Tinge
The rhetoric of cryptocurrency superiority even carries neocolonial tinges. Does “forget your local systems, rely on our technology” encourage local elites within fragile countries? Such is the narrative of many Western tech gurus.
Such technologists view technology as a market-driven force for problem-solving. Such a “solutionist” lens views the world in apolitical terms as a series of things that have been solved and things that remain to be solved with technology. This narrative is top-down in nature—it postulates the problems of people in poorer countries can be solved by Stanford graduates.
On the contrary, technology does not operate in a vacuum. Solution are sold by particular people and accepted by particular people within particular contexts.
The financial inclusion, microcredit and “the unbanked” narratives often have the same solutionist ethos. Is financial exclusion an avoidable problem in need of a profitable technological solution, or is it an inherent part of an unequal economic system?
Should the real goal be bringing the marginalized into the normal financial markets, or should it be on creating alternative institutions based on principles of social solidarity?
Much of the bitcoin community is ambivalent on this question. Bitcoin is an alternative, but is it merely an alternative to business-as-usual?
Cryptocurrencies, in general, have been associated with the hyper-individualism of conservative libertarianism. Some adherents of this philosophy see cryptocurrency as a more efficient means of supporting trade within a pure capitalist model.
Some such champions of cryptocurrency argue that the financial sector exploits customers. Rather than viewing this as a normal feature of profit-driven business within a naturally political marketplace, they see the problem as an infringement of the political into an imagined apolitical realm of the market.
The banks abuse because they are intertwined with the political system, which undermines what would otherwise be a neutral free market. They see cryptocurrency technology as a way to disintermediate them.
Those with a more left-wing libertarian impulse find cryptocurrency interesting since it allows for peer-to-peer collaboration and non-hierarchal, self-organization within a communitarian structure. Hence, there are attempts to build cryptocurrencies as a means of exchange for cooperative enterprises existing outside the logic of normal market processes.
Faircoin, spearheaded by Fair.Coop and started by Spanish activist Enric Duran, is such an example. It is an attempt to create a global cryptocurrency for transfers among a global cooperative network. It could conceivably back more local mutual credit systems.
This approach runs contrary to financial inclusion narratives claiming that economic inequality is due to external factors undermining the efficient workings of markets. Faircoin’s vision is to build networks of solidarity-based collaboration using technology. It is in allowing such “collaboration at scale” that cryptocurrency becomes a force for radical economic alternatives.
Par 2: Blockchain 2.0
The blockchain stands at the cutting edge of much innovation involving bitcoin.
“Smart contracts,” which are small bundles of code that record on a blockchain, allow participants to interact and undertake simple tasks.
A coded blockchain-based script can activate when two parties send bitcoins to an escrow account controlled by the script and release the bitcoins to whoever wins a bet on the average level of rainfall over a certain period. This arrangement describes a blockchain-based weather derivatives contract.
Such simple building-block contracts can form the basis of more complex, multi-stage or multi-function entities, referred to as decentralized autonomous organizations.
Blockchain Land Registries
One aspect of blockchain systems that has captured the attention of those with a free-market economics orientation is the way they can record property rights.
Countries with weak governance and record-keeping systems have a problem of double-registry of land, land title fraud or uncertain title to land. The blockchain could potentially address such issues with a system that records land title in a public manner.
In 2015, Honduras announced a contract with American company Factom to develop a blockchain-based land registry.
By providing titles to property, property title can serve as collateral, enabling cheaper bank lending to informal entrepreneurs.
But it will only work if both the property and contract are well protected, capitalization and market processes will lift people out of poverty and yield the hidden value of informal economies.
It is not clear that such registries solve underlying problems. Areas with uncertain land title tend to have weak institutions that give rise to the uncertainty in the first place. Merely presenting a technology that can record claims accomplishes little unless there are strong legal institutions that recognize the recorded blockchain claims, and strong procedures for those who make the claims.
Techno-libertarian evangelism — blockchain “missionaries” — have emerged in developing countries articulating a markets-as-savior and technology-as-savior gospel with an anti-state message. A group in Ghana called Africa Youth Peace Call organized a 2015 Blockchain Land Title Summer Liberty and Entrepreneurship Camp to address how the land registry can move from state institutions to blockchain ledgers.
Bitnation, a group offering a techno-libertarian message, has presented a vision of hosting completely alternative state institutions (such as security and legal institutions) on blockchain systems. The vision describes states as governance service providers that might be outcompeted by technological platforms.
Bitnation foresees a world where one could “opt out” of states and “buy into” new governance institutions. But this vision of a “market in governance services” only works if markets can exist prior to political governance systems. Others argue that markets themselves are underpinned by political governance systems that uphold the property rights enabling them to exist in the first place.
While the technological novelty of blockchain is exciting, the more extreme rhetoric has hinged on “fixing” human imperfection, rather than accommodating it.
Blockchain As Trust-Enabling
Another trend — found in groups like Ethereum, Swarm, and Blockstream — characterizes blockchain technology as trust-enabling. Blockstream claims to “transform global systems of value exchange that, by design, make it possible to trust anyone.” In removing the need to trust central authorities, blockchains could be platforms on which build new forms of non-hierarchal cooperation between strangers.
While one can characterize modern money as either atomizing and alienating or as trust-enabling between two strangers, the strangers need to trust in the state institutions. It is this latter point that blockchain proponents initially focus on.
The original libertarian blockchain evangelists focused on blockchain systems eliminating the need for trusted central intermediaries.
The conservative libertarian vision, however, goes further to imply that the reason centralized institutional systems are flawed is that they are controlled by untrustworthy and self-interested humans.
In this context, the blockchain’s cryptographic apolitical purity emerges not just as a way to stop abusive people who control institutions, but as a way to resolve the problem of how to establish contractual relationships among untrustworthy human beings.
The Anarchist Reading
It is possible to create a communitarian anarchist reading of the same technology. Social anarchist (or libertarian socialist) conceptions do not position human nature as fundamentally self-interested, but rather assert that people become alienated and corrupted within the hierarchies and power dynamics of capitalist system institutions.
Anarchist traditions have advocated the need for smaller-scale, non-hierarchical systems where people can experience their social and interdependent nature, and thereby achieve emancipation.
Blockchain systems can offer a vision of large-scale, egalitarian self-organization beyond the scale of ordinary anarchist attempts of cooperative communes.
The goal is to replace hierarchal, centralized institutions with decentralized ones.
How such organizations will end up looking remains to be seen, but they may deliver a new form to explore in the quest to build social and solidarity-based finance.
Can a network of street vendors run a collective mutual insurance pool using only their smartphones to interact with a distributed ledger system, with no central financial institution? Can a regional mutual credit system — effectively a ledger of credits and debits — exist in a decentralized blockchain form?
The technology is new, but it offers empowering uses in certain contexts.
Where To Go From Here
A good starting point would be to build new research into the following areas:
- The ongoing development and deepening of global bitcoin markets, tracing to what extent those in developing countries are adopting it.
- The challenges and potentials for the bitcoin system’s usage from a financial inclusion perspective. This includes its use as a remittance system and as an alternative bank account.
- The extent to which bitcoin as a currency system could interact with blockchain 2.0, smart-contract technology to create collectively-run (and solidarity-based) financial schemes that do not rely on normal financial institutions.
Featured image from Shutterstock.