Kenyan operator Safaricom is being sued by Bitcoin remittance and payments company BitPesa because they were denied access to Safaricom’s M-Pesa mobile money service. Whilst Safaricom says that BitPesa does not satisfy their anti money laundering (AML) requirements, BitPesa contests this, arguing that the Central Bank of Kenya has already agreed that BitPesa’s business model does not require a banking licence, reports the International Business Times.
The Kenyan High Court will consider the case on December 14th. In the meantime, all transactions between the businesses have been suspended.
It is well worth reading the full article in the International Business Times. Two simultaneous revolutions are transforming how people transfer money – mobile payments and cryptocurrencies. Most of us have yet to fully comprehend the consequences of these disruptive technologies. Kenya is ahead of the rest of the world when it comes to dealing with the implications because the Kenyan people have leapfrogged the rest of the world and adopted disruptive business models that remain marginal in most countries. With so many Kenyans using non-traditional methods to move money and make payments, the decision process followed by Kenyan courts, legislators and regulators should be informative for every other nation.
It is only in countries like Kenya that we see a rapid take-up of the two disruptive models that threaten not only the banking system, but also how governments maintain control. The first revolution has been the widespread roll-out and acceptance of mobile money, which has allowed the unbanked to use their phones to engage in financial transactions previously only available to those with traditional bank accounts. Safaricom’s groundbreaking M-Pesa service is the most famous example of mobile money, having garnered over 20 million accounts to date. M-Pesa grew so dominant that Kenya’s competition authority forced the service to be opened up to competitors in 2014.
The second revolution is the rise of cryptocurrencies, a means of value exchange that uses cryptography and the distributed internet technology of blockchains to validate and create a secure audit trail for every transaction without needing the involvement of any banks. Cryptocurrencies have a questionable reputation because they can be used for illicit activities, and also because their value has bounced up and down relative to traditional government-backed currencies. However, the most popular cryptocurrency, Bitcoin, is increasingly used as a building block for innovative commercial services. One key facet of Bitcoin is that the currency can be moved from one place to another at near-zero cost, encouraging businesses like BitPesa to undercut traditional suppliers of money transfer services.
Combine these two revolutions, and you have an almighty headache for people who want to place restrictions on the flow of money. Perhaps they are concerned about money laundering and the ease with which criminals can move and hide their ill-gotten gains. Maybe they are worried about the risks to ordinary people created by the volatility in the exchange rate between cryptocurrencies, which are not backed by any state, and the national currencies we mostly use, and whose value will be supported and stabilized by a central bank. Or they might be worried about the devastation that could be caused to businesses whose profits depend on charging a significant margin on every financial transaction. In the latter respect, telcos may find themselves in the uncomfortable position of being both pro- and anti-disruption at the same time. They will be happy to break into markets previously dominated by banks, but less keen on immediately seeing their nascent payment and transfer services being consumed by the near-zero-margin model of cryptocurrencies. This situation inevitably raises many questions about the boundaries of the state, and the legitimate extent of its role in safeguarding consumers and businesses.
Ignore the skewed hype you might hear elsewhere, which says telcos can ride the disruptive wave, without any downsides. The technological disruption in payments and transfers is a perfect example of how telcos will face unpredictable and significant upside and downside risk at the same time. Perhaps your telco has made a strategic decision to enter the mobile money market, or is keeping an eye on developments. But whatever your telco decides to do, watch how the Kenyans develop their framework of rules. They are the leaders at adopting these disruptive models for communicating money. That means Kenya is also the hothouse which will witness the most rapid development of the legal, security, and economic aspects of these new services. We should all learn from their example.
Mobile Money in Kenya and in most of the countries in Africa is regulated, both bank led models and non-bank led models require license from the central bank of the respective countries to operate. Mobile Money Operators also have to meet various regulatory requirements for the Central Bank such as KYC and AML. I doubt Mobile Money is a threat to the Monetary System since it has seen wider acceptance and is successful since M-Pesa’s launch in 2007 and is regulated. Every e-money that’s generated has an equivalent monetary value in stored value account. But cryptocurrencies could become a very big treat unless regulated.
I think it is the combination of mobile phones and cryptocurrencies that are the threat. Most telcos seem to think they will offer mobile money whilst not dealing with cryptocurrencies, and hence take a slice of the established banking pie. In that respect, they are making the same mistake they always do – waiting for more aggressive OTT disruptors to eat into the pie before they take the threat seriously. Cryptocurrency is OTT for the banking sector in the same way that Whatsapp is OTT for comms.
Phones are just an enabler for cryptocurrencies, which require users to have devices that are connected to the internet. However, key to the competitive threat is the fact that banking relies on trust. The mistake being made here is to assume that you can get customers to switch their thinking so they trust their phone to do mobile money transactions, but they won’t be tempted to trust a more exotic (and much cheaper) cryptocurrency based service if it was offered just as elegantly via their phone.
Most customers don’t think about regulation or how a service works, so they don’t care if their money is transferred via a cryptocurrency using a public blockchain or via the established banking system, especially if the portal to both methods is on their phone and looks much the same. They will care more about cost – and that is where cryptocurrencies have the advantage, because they don’t need to employ the army of bankers and regulators needed by the regular banking system.
The major downside for cryptocurrencies is that they have to ‘interface’ with the existing banking system, because of the need to move value between the two. But that is because of market dynamics, with traditional currencies having most market share. Few of us can buy a car, meal or clothes with bitcoins, so an exchange must take place, leading to issues with volatile exchange rates. However, similar interfaces also occur in comms – between VoIP and traditional voice lines etc. What we see is that network effects are key to customer take-up: people send emails when other people can receive them, people Skype each other when their friends have Skype accounts too etc. The same principle applies to cryptocurrencies
In a way, the only thing preventing cryptocurrency-based services being a lot more popular is the fact that they are not, currently, a lot more popular. But if their popularity grows, with more businesses accepting payment in cryptocurrencies, then we would witness an accelerating take-up and hence a serious threat to established banking models. Like other disruptive internet-based models, the take-up of cryptocurrencies would be fueled by having lots of people having a convenient low-cost internet-connected computer (i.e. a phone). However, whilst past experience shows disruptive trends begin in rich countries and then spread elsewhere, I believe that is flawed and confuses the motives for adopting the model with the availability of the tech. The popularity of mobile phones in poor countries has shown that tech take-up can be faster in poor countries than rich countries. It is for this reason that I see more likelihood of countries that have the right conditions for rapid rise in popularity of mobile money to also be the ones where cryptocurrencies – with their near-zero transaction costs for moving money anywhere on the planet – could gain share most quickly.