'Digital Money Will Save the World's Poor' and Other Delusions

Last November several people spoke at a Senate hearing to defend bitcoin. I already got a little cranky about them, but looking back over their testimony, there’s another small thing that they all believe that is unsupported by real-world experience: Bitcoin will help people who don’t currently use a bank.

According to the World Bank, about 2.5 billion people worldwide don’t have a bank account, which makes it hard for them to save money and build credit. Not to worry.

“The combination of ubiquitous Internet-connected mobile devices and digital currency presents a tremendous opportunity to radically expand access to financial services on a worldwide basis,” testified Jeremy Allaire, chief executive officer of Circle Internet Financial, which specializes in money transfer using digital currency. Jerry Brito of the Mercatus Center, a libertarian think tank, said bitcoin could improve mobile money services already operating in the developing world. Bitcoin can exist wherever there’s a mobile phone, said Patrick Murck of the Bitcoin Foundation, and “… we believe Bitcoin has tremendous potential to improve the capacity of people around the world to build and store wealth.”

Bitcoin does dramatically lower the transaction costs of moving money from one place to another, but that alone won’t help. The mobile money services that have sprung up throughout the developing world have the same advantage. Recently, mobile-money researchers have begun scratching their heads over a phenomenon they never anticipated: Rather than opening an account on a mobile phone and using it for transactions, a surprisingly large number of people take their cash, ask someone with a digital account to transfer it to someone else with an account, who in turn switches the transfer back into cash for a fourth person—the intended target.

Researchers call these over-the-counter, or OTC, transactions. Half the mobile money transactions in Bangladesh are conducted OTC. Almost two thirds of the transactions for EasyPaisa, a mobile money service in Pakistan, run OTC. In Kenya, which serves as a worldwide model for the possibilities of mobile money, about two-thirds of all transactions are conducted this way.

In theory, mobile money, like bitcoin, offers an ideal advantage over cash: It radically reduces the transaction cost of saving and transferring money. A bank customer no longer has to get to a bank or an ATM, in some cases a day’s bus ride away. But transportation isn’t the only barrier. As Greg Chen of the World Bank’s Consultative Group to Assist the Poor describes it, many of the unbanked may be illiterate, exhausted by their daily work, and put off by new technologies. Under these circumstances, paying an agent to process mobile payments does not seem unreasonable.

Bitcoin could further lower the cost of a mobile money service by making transaction confirmations cheaper. That’s good. But it can’t do anything about the transaction costs that Chen describes: illiteracy, exhaustion, and suspicion of new technology. Bitcoin can’t teach people how to read. And that doesn’t even explore the social barriers to using mobile money that researchers are already finding.

It is incredibly tempting to believe that bad technology is all that stands in the way of helping everyone. Alienation from technology is not a problem in San Francisco or, to be fair, in most of the developed world. But it is for the 2.5 million unbanked. There are still huge barriers before they can even get to the point where bitcoin can help them.

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