Can Bitcoin Bring Developing Nations Into the Global Economy?
By Ella Huzenis

Could Bitcoin be an ideal currency for developing nations? Could it help democratize finance and elevate their position in the global capitalist economy? Five sources reflect on these questions:

1) "Bitcoin: A Primer for Policymakers" By Jerry Brito and Andrea Castillo


“Bitcoin : A Primer for Policymakers” encourages policymakers to carefully consider the potential of Bitcoins as they move to regulate virtual currencies. In developing his argument, Brito and Castillo explain the mechanics of Bitcoin transactions and production, the advantages and shortcomings of decentralized virtual currency, and the obstacles that such currencies face as they enter the economic mainstream.

Many of the advantages of Bitcoins that the authors describe are based in the technological mechanics of Bitcoin and bitcoin transactions. Thus, he begins the essay by answering the questions, “What is Bitcoin?” and “How do it work?” He defines Bitcoin as “an open-source, peer-to-peer digital currency,” distinguished from previous digital currencies by the fact “that it is the world’s first completely decentralized digital-payment system.” To explain Bitcoin in simple terms, he compares it to PayPal, which maintains “a ledger of account holders’ balances,” and facilitates transactions by ensuring that, if one user pays another, the payment is deducted from the original user’s balance and added to the receiving user’s account to prevent “double spending” of digital currency. The concept of Bitcoin is similar, except that, instead of relying on a central institution or “intermediary” (like PayPal or a credit card company), a diffuse network of computers, known as “miners,” maintain the Bitcoin transaction ledger, called the “block chain” and “[distribute it] among all users of the system via a peer-to-peer network.”

Essentially, mining computers work to verify transactions by competing to solve complex mathematical puzzles that confirm that the Bitcoin transfer is authentic and money is not double-spent. The computer that successfully does so is “awarded newly created bitcoins,” along with the small fee that users pay during transaction. Creators of Bitcoin engineered the system, “to mimic the extraction of gold” in the sense that “only a limited, known number of bitcoins,” 21 million, to be exact, “can ever be mined.” To prevent Bitcoin production from reaching this limit too quickly and to “[ensure] that bitcoins are always mined at predictable and limited rate,” the system “will increase the difficulty of the mathematical problem” as the mining network grows. Once produced, “the dollar value of a bitcoin is determined on an open market, just as is the exchange rate between different world currencies.”

Investment in the bitcoin market and bitcoin industry has both enormous potential and enormous risk. Outlining possible disadvantages of bitcoin, Britto first addresses its “pseudonymity” and link to criminal activity. Given that transactions on the block chain are recorded by users’ “public keys” (identifying codes issued to all users, not linked to their identities) and, occasionally (depending on users’ browsers and the platform used for exchange), IP addresses, it is difficult, but not impossible, to confirm who exactly is participating in each transaction. Naturally, the near-anonymous nature of bitcoin makes it ideal for use in illicit activities online, including drug-trafficking on virtual black-markets like the former “Silk Road,” money laundering, and funding of terrorist organizations. Another concern of Bitcoin-skeptics is its “volatility.” In its short-existence, the currency has endured multiple bubbles and crashes, as the result of speculation, causing the price of a bitcoin (in USD) to fluctuate between the single and triple digits and making returns on investments in bitcoins unpredictable. A final criticism of bitcoins, is the threat of “security breaches” of bitcoin exchange platforms and digital wallet services, which are vulnerable to cyber-attacks and “malware” designed to target these platforms and remove bitcoins from their accounts in what is, essentially, the virtual equivalent of a bank robbery, aside from the fact that organizations like the FDIC that protect account-holders in the conventional banking system are absent from the world of Bitcoin, making lost funds generally irretrievable.

In challenging critics of Bitcoin, Britto suggests that people consider Bitcoins, not necessarily as a replacement for legal tender, but as a “payment system,” accessible to anyone with an internet connection. In this capacity, the potential advantages of Bitcoin are clear: speed, efficiency, accessibility ,and novelty. With nominal transaction costs, bitcoin inevitably limits numerous barriers to economic participation and success. Freedom from the costs of intermediaries in bitcoin transactions opens the door for greater vendor profits, which could eventually translate into economic expansion for businesses or even lowered costs for goods. Developing nations that rely heavily on international remittances especially stand to gain from bitcoins, as it would make it less expensive for expats to send money home and allow humanitarian-NGOs in these nations to accept greater international support. The instantaneous nature of bitcoin transactions, the fact that it is accessible to anyone with an internet connection, and its independence from national banks and governments also make it ideal for nations without the stability or infrastructure to maintain an efficient, uncorrupt banking system. But perhaps the most advantageous aspect of Bitcoin is its innovative nature, which has the potential to expand the vastly tech sector of the global marketplace. Developing and developed nations throughout the world have already seen the rise of startups, focused on facilitating and mitigating some of the risks of bitcoin transactions and storage, including new fraud-protection programs, bitcoin exchanges with greater security, and faster, more-advanced mining computers.

Despite Bitcoins potential and associated risks, Britto concludes by making clear that, ultimately, the future of Bitcoin is in the hands of world governments and how choose to respond to the proliferation of decentralized virtual currencies in the global economy. While limited regulation on Bitcoin might establish a dangerous precedent by allowing governments to lose hold of their monopoly on currencies and increasing opportunity for illicit online exchanges, money-laundering, and other financial crimes, over-regulation might crush the rise of a promising new economic development and prevent those using it for legitimate purposes from realizing its benefits, which Britto suggest might prove more detrimental to the global economy. He ends the essay with a final plea to government officials to educate themselves on Bitcoin, “its workings and its potential,” and carefully consider the long-term implications of their decision: “We are ultimately advocating not for Bitcoin, but for innovation. It is important that policymakers allow this experimentation to continue. Policymakers should work to clarify how Bitcoin is regulated and to normalize its regulation so that we have the opportunity to learn just how innovative Bitcoin can be.”  

2) "The Democratization of Finance?: Promises, Outcomes, and Conditions” By Ismail Erturk, Julie Froud, Sukhev Johal, Adam Leaver, and Karel Williams (JSTOR)


Although “The democratization of finance? Promises, outcomes, and conditions” does not reference digital currency, it provides context for the debate regarding Bitcoin’s potential in developing countries by exploring the topic of financial democratization, which the authors define as “the broadening and deepening of access to the capital market for ordinary, moderate income individuals and households.” Primarily, it analyzes the common “discrepancy between promise and outcome in a financialized world,” by suggesting that the success of initiatives to promote financial democratization is dependent on three “preconditions”: “predictable life cycle and wealth effects,” “financial literacy and calculative competence in and by the middle class,” and “calculability of risk and reward.”

The first precondition the authors describe is “predictable life cycle earnings and wealth effects,” which is, in part, the basis for “any kind of rational financial planning.” The authors argue that even in developed nations like the US and Britain this precondition does not exist because the highly-evolved, globalized nature of the marketplace makes “returns from complex savings products, the future age of retirement or long-term trajectory of the economy,” increasingly variable, and thus difficult to foresee. The second precondition the authors argue is necessary to foster “financial inclusion” is “financial literacy and calculative competence,” an understanding of arithmetic and economic fundamentals necessary for active economic engagement, “in and by the middle class,” which according to survey results appears to be limited in “in all Anglo Saxon countries.” Finally, the third precondition the authors describe is the “calculability of risk and reward,” defined as the “limited but real choice of different financial products whose risk and reward characteristics are ascertained by the financially literate ‘sophisticated consumer.’” The authors go on to explain that the complicated nature of advanced capitalist economies undermines this condition by driving financial service providers to diversify their offerings, rely on “confusion pricing” to lure customers into risky investments, and expand at a rate much faster than that of government oversight and regulation.

The authors conclude by acknowledging that it would be unrealistic to expect a nation to fully achieve these preconditions. It adds, however, that “If we think cynically about the practical effects of the promise of democratized finance, it is not really about how many more at some future date will be provided for through individual saving and investment; rather it is about changing the agenda so that individual provision becomes more attractive as a substitute to state or giant firm based,” an ambitious goal, but not an inconceivable one. The paper closes by suggesting a final “implication” of the authors’ argument: “if state and giant firm cannot or will not play their traditional roles, then it may be necessary to invent another, collective actor which could deliver equivalent benefits.”

Although Brito and Castillo, in their essay demonstrate that individuals and small business entities in developing countries could potentially benefit from Bitcoin, this article adds uncertainty to whether Bitcoin could actually change the economic character of such countries and elevate their status in the global economy. The preconditions of an economically-inclusive society that the authors claim to be lacking in the advanced economies of the UK and US are certainly lacking in developing nations, suffering from greater income disparity, market volatility and inaccessibility, in addition to other social and political problems that further hinder economic growth. At the same time, however, lack of confidence in government, banks, and other financial service providers means consumers in these economies already favor “individual provision” over reliance on large institutions, a valuable step toward financial democratization, according to the authors. Considering that Bitcoin, by design, is independent of corporations and governments, and represents an alternative to traditional banking and investment, it could just emerge as the “collective actor” needed to bring about financial democratization.

3) "Banking in the Developing World: The Poor Are Different" By J.P (Economist)


The Economist’s article, “Banking in the Developing World: The Poor are Different,” sheds light on the actual status of finance in developing countries, summarizing the findings of surveys of research carried out by the Gates Foundation, the World Bank, and Gallup World Poll in 2012, “the biggest survey yet of how people escape, borrow, make payments, and manage risk.” The findings indicate not only that there is a wide disparity in banking between developed and developing nations, but also, that banks play a different role in developing countries in developing countries than they do in the developed world.

The least surprising statistics, the article suggests, are those regarding bank-account and credit card ownership in developing in and developed nations: “As one would expect, there is a big difference between banking the West (where 89% of adults have accounts) and the developing world (41%). The difference is wider still when it comes to credit cards; half of adults have them in West, just 7% in developing countries.” Within developing nations, disparities in finance are present between populations of different income brackets, gender, and levels of education, with higher-earners, men, and those “with tertiary education” being more likely to possess accounts.

“The bigger surprises” the article states “concern how people use banks and other financial institutions,” namely, the fact that “the vast majority of people in developing countries—88%—use banks solely for personal use,” rather than business. Popular uses including seeking loans “to pay for family emergencies” (“the most common reason” for doing so) or “receiving remittances from family members abroad” (a reason cited by “38%” of account-holders surveyed in Africa). Relying on banks purely for saving is less popular; “only a fifth [of those surveyed in developing nations] (22%) said they used a bank or other formal financial institution” for this purpose in 2011, while “29% saved, but not at a bank.”

Although income certainly plays role in influencing banks’ popularity and uses in developing nations, it “does not seem to be the sole determinant,” as evidenced by West African nations like Ghana, which has a “level of income” “similar” to nearby Benin but “three times as many banks per head of the adult population as Benin.” Government regulation of banks, how convenient banks make the process of opening an account to consumers, and technology, like the availability of mobile banking, also influence the status of banking in developing countries.

4) "Poor People Using Mobile Financial Services: Observations on Customer Usage and Impact from M-PESA" By World Bank


The World Bank’s brief, “Poor People Using Mobile Financial Services: Observations on Customer Usage and Impact from M-Pesa,” explains the findings of a “14-month ethnographic study that concluded in November 2008 and that was conducted in two communities” in Kenya: “Kibera,” “a slum” near Nairobi with a population over 1 million, primarily comprised of “migrants from rural villages,” “and Bukura,” “a farming village,” where many “urban migrants” maintained “rural homes.” M-Pesa, the focus of the study is “a mobile phone-based service” on which customers can “check their balance, send money to other people, pay bills, and purchase mobile phone air time,” funds for which “are held in a special trust account at the Commercial Bank of Africa.”

In its analysis of M-Pesa users, the study found that users are largely “urban senders, who are mostly men, and rural recipients, who are mostly women.” Users relied on the service primarily to provide regular “income support” in the form of small or “to address lump sum needs, such as the purpose of farm inputs,” or “school fees,” or as an account for, typically, short-term savings, that they could access by visiting a company agent, considered more convenient than traveling to a bank.

In addition to pinpointing the demographics and uses of M-Pesa, the study also found that M-Pesa had distinct, mostly beneficial effects on the users and villages observed. These included a shift towards “smaller, more frequent transfers,” and presumably related increases in income among “rural recipients” (cited by 77% of rural users surveyed) and a perceived levels of “financial autonomy” for remittance-reliant rural female users, who previously had to endure sometimes week-long trips “to the city or post-office” to transport funds.

5) "Bitcoin Momentum Grows in Emerging Markets" By Min-Si Wang (Forbes)


Min-Si Wang’s article, “Bitcoin Momentum Grows in Emerging Markets” offers multiple real-world examples of Bitcoin-related startups in developing economies, and explains their success. Wang addresses startups in Vietnam, China, Kenya, and Argentina. Although each of these nations have distinct economies, in different stages of development, with unique economic regulations, Wang attributes the progress of Bitcoin in each of these nations to many of the same factors. In describing “Vietnam’s VBTC,” “the first live bitcoin exchange in the world,” Wang explains that the country’s “high inflation rate makes bitcoin an attractive alternative to the national currency.” “Hyperinflation” and “currency volatility” also prompted the development of Argentinian “bitcoin payment start-up,” BitPago. BTC China, “one of the world’s largest exchanges for digital currency,” sees the speed and ease of bitcoin transfers as Bitcoin’s most desirable characteristics. Kenya startup BitPesa has capitalized on both Bitcoin’s technological and economic efficiency, in creating a platform that allows Kenyan expats in the UK to send remittances back home at a 3% (between 6% an 17% lower than fees charged by Western Union or banks).

Around the world, Wang explains, Bitcoin proliferation and use is growing at an escalating rate: “There are now around 65,000 bitcoin transactions a day currently, and 13 million bitcoins are in circulation globally. (That converts to about $8 billion at a recent USD/BTC exchange rate…).” Although Bitcoin remains most popular in the West, with “the U.S. dollar [accounting for] approximately 80 percent of bitcoin trading volume” at present, Wang predicts that Bitcoin will be a global phenomenon: “In Latin America, Asia, and Africa bitcoin use will just keep going up.”

Comment Stream

2 years ago

Excellent! With the exception of a few typo's, this research is of high-quality, erudite, and a near-perfect product. It is complimentary to your presentation and the articles were helpful in that they added analysis of very technical technological info on the level a layperson like myself could understand. Ella, your writing, intelligence, and confidence have been a true pleasure to experience this year. I can't wait to find out what you end up studying and pursuing in college and beyond as I'm certain there are no limits to your success. Cheers!