Does bitcoin have a future in development?

Bitcoin is a buzz-generating digital currency that will either revolutionize finance, fizzle out or fall somewhere in between. What future role does it have in development? Photo by: Antana / CC BY-SA

Bitcoin is the future of global commerce that will revolutionize the way payments and transactions are carried out. Or, it’s a total sham. Bitcoin is the Internet before the advent of Web browsers. Or it’s the aerial hoverboard that Hollywood predicted would hit stores in 2015, but never did. Most likely, it’s somewhere in between.

The “cryptocurrency” that first surfaced in a white paper in 2008 has generated a gradual buzz over its possible uses and disruptive potential. As the proliferation of mobile payment systems has boosted productivity, living standards and financial inclusion among many of the world’s poor, it draws the question — what role can bitcoin play in development?

As with anything about bitcoin, it’s complicated. In the words of seasoned financial industry experts themselves, bitcoin is complex, not intuitive and unfamiliar to many. “Bitcoin is a lot like gluten,” the founder of a bitcoin technology startup recently mused. “It’s such a fad, but no one really knows what it actually is.” Even just describing bitcoin is an arduous task.

In theory, bitcoin is three things — a currency to store value, a financial rail to move money and a ledger to record and store ownership information. At the surface for a consumer, bitcoin will appear to be nothing more than a mobile application or computer program for a personal bitcoin wallet, allowing users to send and receive bitcoins and conduct financial transactions.

Behind that, however, it is a peer-to-peer network that enable users to transact directly with each other without the need of an intermediary such as a bank. The system functions as a massive public ledger referred to as a “block chain,” which keeps open records of all historical transactions and is open to all users. This eliminates the need for a central database and ensures that no single user is able to manipulate the system. Transactions are settled instantaneously, compared to the typical multiday clearing periods with banks. And no two users are able to claim the same digital dollar, as in the case of fraud.

A growing mass of investors and entrepreneurs are enamored by the ease, openness and technical elegance of Bitcoin. To date, roughly $1 billion have been invested in block chain technologies, according to Barry Silbert, chief executive and founder of Digital Currency Group, an investor in bitcoin platforms.

Setting aside the still grandiose notions that bitcoin will replace the U.S. dollar as the world’s reserve currency, there are many practical upsides to its speed and transparency, particularly for the unbanked or the poor.

The instant bookkeeping feature of the system can reduce general transaction costs and increase the efficiency of sending money.

“If you can drive down the costs and improve an immediacy of payment, you can improve access for low and moderate income people,” Michael Barr, a law professor at the University of Michigan, told a recent gathering at the Brookings Institute in Washington, D.C. “You can help bank the unbanked with lower cost services.”

For diaspora communities who provide critical aid flows to developing countries, the technology of a distributed ledger can drastically reduce the time and costs to send money overseas.

From a personal financial management aspect, experts say, bitcoin technologies can better match an individual’s incomes and expenses. When a worker gets paid, their money is immediately available. The risks of costly overdrafts go away. From a corporate governance perspective, bitcoin can boost transparency by allowing investors to more openly see company balance sheets, for example, or reduce fraud through a public ledger that records a precise sequence of financial transactions.

The technology, of course, is fraught with numerous potential downsides, stemming in large part from its still enigmatic functionality. Fears of the unknown can trigger regulatory burdens and hamper the development of innovations that need to take hold for the technology to flourish.

Regulators compare the advent of policy toward bitcoin to similar dilemmas they faced at the onset of the Internet. “Can we create a framework for positive innovation that still has the flexibility to protect the consumer?” they ask.

In the U.S., the multidimensional nature of Bitcoin makes for an array of federal entities who can regulate it. The Commodity Futures Trading Commission treats bitcoin as a commodity, the Securities and Exchange Commission as a tradeable security, the Treasury Department as a currency and the Internal Revenue Service as property.

The system itself can be vulnerable to cyber attacks. The cryptic platform that falls outside the purview of currently regulated institutions, meanwhile, draws suspicion as a possible vehicle for terrorist finance.

The value of a bitcoin itself has experienced volatile peaks and troughs which can undermine its role as a reliable medium of exchange. In the past three years its value has gone from $100 a unit to as high as $1,200. More recently it has settled at around $400 per unit.

“You should not be viewing it as a functional currency,” said Silbert. “But if you live in places like Venezuela, Brazil, Argentina, Russia, Ukraine or Zimbabwe … you may not love the volatility of bitcoin, but at least you know it’s not just going in one direction.”

Bitcoin must contend with all of those regulatory and volatility issues if it is to reach a critical mass as a digital currency. In developing countries themselves, a platform such as a bitcoin will also inevitably go head-to-head with other digital currencies. Most notably in Kenya, the widely popular M-pesa mobile currency has become virtually a mainstream second national currency. Digital currencies, of course, require connectivity to the Internet or digital services. So in countries where mobile payments have yet to take off because of insufficient infrastructure, bitcoin developers must also overcome a host of necessary connectivity issues.

The still nascent stage of bitcoin in industrialized markets means that it is too early to expect a substantial uptake in developing countries anytime soon. But its potential to disrupt finance and make an impact on development are huge.

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About the author

  • Naki B. Mendoza

    Naki is a former reporter, he covered the intersection of business and international development. Prior to Devex he was a Latin America reporter for Energy Intelligence covering corporate investments and political risks in the region’s energy sector. His previous assignments abroad have posted him throughout Europe, South America, and Australia.