Mobile money and virtual currencies for cross border remittances: opportunity or risk?

In July 2013, Kipochi Ltd, a Kenyan bitcoin wallet, released a press statement announcing the launch of “a groundbreaking solution that allows people to send/receive bitcoins and convert it to and from an M-PESA balance.” According to Pelle Braendgaard, the company’s CTO, “this enables Kenyans to receive money transfers from the diaspora in an easier, faster and cheaper way, compared to using banks and money transferring services such as Western Union and MoneyGram.” Little has been heard from Safaricom since this announcement was made. Last week I reached out to Nzioka Waita, Safaricom’s Director of Corporate Affairs, to get a better understanding of the situation. When asked about this partnership, Mr. Waita declared that “the statement by Kipochi was a complete fabrication and a misrepresentation of the facts. We [Safaricom] have absolutely no commercial relationship with them or otherwise, and we have no intentions of integrating to Bitcoin.” This declaration doesn’t leave room to interpretations: M-PESA does not integrate with Bitcoin and provides no business proposition by which an M-PESA customer can transact in the sale or purchase of a Bitcoin.

Bitcoin is a decentralized digital currency that uses peer-to-peer technology to facilitate instant payments, mostly to purchase goods and services. In November 2013 there were 93,000 Bitcoin transactions per day, and the average transaction size was US$2,000 (the average mobile money transaction was only US$35 in June 2012). To date, approximately 800.000 bitcoins have been stolen. The first regulatory challenge to regulate Bitcoin is that there is no issuer to regulate. Bitcoin is starting to gain some traction as a remittance payment method as bitcoins are becoming fairly easy to acquire in many countries where much of the remittance flows originate. However, for the recipients, bitcoins aren’t (yet) quite easy to cash out. What makes Bitcoin attractive to some is the promise of frictionless transactions within or across borders, and the fact that these transactions can be verified, settled and signed off by the network for free within an hour or so. One of the most expensive financial transactions today is often international remittances, and different companies are looking at the use of bitcoins and mobile wallets to take on this market.

Bitcoins are somewhat controversial with some regulators and governments reacting to them with suspicion, as did the New York Banking Commission which recently opened investigations aimed at establishing whether bitcoins were being used for money laundering and tax evasion. Early this year the US Senate Committee on Homeland Security & Governmental Affairs had already opened an inquiry on virtual currencies like bitcoins, requesting the Department of Homeland Security for any information on the nature and scale of the threats and risk posed by virtual currency, and the promise held in some areas. Other governments have been more accommodating, e.g. Germany’s Ministry of Finance labelled bitcoins as ‘units of account’, but was cautious not to acknowledge them as e-money or as currency.  The US Treasury’s Financial Crime Enforcement Network (FinCen) recently released interpretive guidelines pointing to the regulation of persons creating, administrating or exchanging virtual currencies as if they were ‘money transmission services’ thereby bringing them under stringent AML/CFT regulation. Early in December, Chinese authorities instructed the country’s financial institutions not to accept bitcoins, warning that the use of the currency is risky and that it opened up opportunities for money laundering. Bitcoins are banned in Thailand.

BitPesa Ltd., another Kenyan start-up, promises to cut the price of overseas transfers dramatically, bringing down the cost of a US$200 wire to Kenya from the US from US$10 (Western Union) or US$17 (MoneyGram International Inc.) to US$6. The current process can take an hour to five days, according to the World Bank’s Send Money Africa price database, but with BitPesa, the money will arrive the same day. Under the model developed by BitPesa, the sender will use an internet-based service to make payments and the funds will be traded into bitcoins. BitPesa will then convert the virtual money back into a conventional currency at a competitive exchange rate for withdrawal by recipients through either their mobile phones or a bank account.

It looks like Bitcoins could have a big impact on the global remittances market by bringing down costs and increasing healthy competition for traditional remittances service providers (who are expected to process $550 billion in transactions this year), in particular now that the number of remittance channels could decline sharply because AML/CFT regulators are exerting pressure on traditional remittance providers [1]. There is no doubt that financial institutions must comply with AML/CFT regulation, but the vast majority of funds sent as remittances are entirely legitimate transfers that support families and communities in some of the poorest parts of the world. This makes it critical that policymakers increase the number of safe, convenient, and AML/CFT-compliant remittance services and that new providers offer these services in innovative ways. Is there an opportunity for mobile money providers to use new digital currencies like Bitcoin to create lasting innovation in the remittances market? And if so, what are the main policy and regulatory risks to consider?

If I think of the integration between mobile money wallets and virtual currencies such as Bitcoin from the point of view of the compliance with AML/CFT requirements, what are the challenges that the conversion of bitcoins to/from mobile money presents on the verification of customer identity and the source of the funds?

Also, the chart below plots the price of bitcoins over the past two months, which has changed by almost 1,000%. Even though the trend is upward sloping, there are quite a few times it has dropped. By design, there is no central monetary authority charged with ensuring the stability of the value of bitcoins. Should the price volatility of the bitcoins be a major concern for regulators when thinking of the integration between virtual currencies and mobile money wallets?

Finally, should regulators in developing markets take a ‘wait and see’ or ‘test and learn’ approach to bitcoins/virtual currency as many have done with mobile money or should regulators take a firmer view requiring their regulation ab initio, bearing in mind the practical challenges of regulating a purely digital phenomenon?

The debate is open.


[1] In the United Kingdom, recently Barclays has announced its decision to shut down its services to hundreds of money transfer businesses as a consequence of increasing pressure coming from anti-money laundering and counter-terrorist financing (AML/CFT) authorities. Barclays is gradually implementing this decision (Dahabshiil, the biggest remittance company in the Horn of Africa, is the only money-transfer organisation whose account is still open). While the government is looking at alternatives, the concern is real for the dramatic impact this would have on the life of millions. HSBC and Standard Chartered have been also fined last year over allegations that they had acted as bankers for rogue states, terrorists and drug lords, channelling billions of dollars through the US financial system.