Immense hype surrounds virtual currencies and distributed ledgers these days. Maybe this is inevitable if you combine an inscrutable, cutting-edge technology, its enigmatic origins, and a flow of $1 billion in venture funding thus far. But will these technologies create pathways for people in emerging economies to access and use financial services that meet their needs?
Definitions vary, but for our purposes, a “virtual currency” is a non-government-backed digital representation of value. Many virtual currencies rely on cryptography and distributed computing to facilitate transactions.
These transactions are documented on a “distributed ledger,” a database shared among network participants who collectively validate transactions accordingly to an established protocol. Bitcoinand Stellar are two examples of virtual currency systems, and the blockchain that underpins Bitcoin is one type of distributed ledger.
We often hear how these technologies boast capabilities we care about in financial inclusion: efficiency, transparency, security and cost-effectiveness. Yet few applications of these technologies have demonstrated as much in scaled, real-world contexts, especially in communities without high-speed Internet, widely available smartphones, reliable energy access or stable incomes.
This is the reality in many countries, after all, and for applications of these technologies to scale there, the lessons learned by the digital revolution thus far are highly relevant. In Tanzania, millions of Tanzanians did not start using mobile money to save, transfer or borrow funds just because the technology was available. Providers first had to refine prices, improve user interfaces and match product attributes with consumer needs. The collective impact of those adjustments was made clear when access to formal financial products nearly doubled over just four years.
Applications that harness virtual currencies and distributed ledgers, on the other hand, are still at an early stage of development. BitPesa, for example, allows people in the U.K. to send money to East Africa using Bitcoin. To use the service, a sender must open a Bitcoin wallet, exchange British pounds for bitcoins and initiate a transfer, which BitPesa’s platform sends through a gateway to deposit Kenyan shillings into a recipient’s bank or (until recently) M-Pesa account.
From a functional standpoint, BitPesa demonstrated the workability of this model. But it is still a niche service, and it is not clear yet whether similar products will ultimately offer the mass market a better option than the status quo (including newer digital-only remittance providers) on security, speed, cost and ease-of-use.
Even if product aspects are figured out over time, broader barriers to scale must also be overcome, including a lack of connectivity because of rugged geography, regulatory concerns and cultural norms that can inhibit a woman’s access to mobile technology.
The sector today seems to have a sharper sense of what these technologies can do.;