The new technology for financial transactions is a boon for people who lack access to traditional banks and financial systems.
The historic surge of global Internet access and usage underlines the tremendous potential of the technology known as Bitcoin.* In two decades, the number of Internet users worldwide grew from approximately 25 million in 1994 (0.4 percent of world population) to around 3 billion in 2014 (40 percent of world population).1 With 8 million Bitcoin users in 2014 (0.1 percent of world population), we may very well be in the “1994” of Bitcoin.2
By Bitcoin’s 10th birthday in 2019, over half the world will have access to Bitcoin via Internet-connected smartphones.3
Bitcoin comprises a decentralized, distributed public record of transactions and balances; a publically reviewable set of rules by which this network operates and is maintained; and the native unit transacted on this network, known as bitcoin or BTC. The Bitcoin open-source protocol was implemented and released in January 2009, making bitcoin the world’s first decentralized digital currency.4
The early impact of Bitcoin will be greatest in markets where it enables opportunities not possible within the framework of existing alternatives. In developing economies, Bitcoin provides the necessary infrastructure to enable more efficient remittances, a hedge against inflationary economies and a low-cost way to boost financial inclusion. Of Latin America’s 600 million inhabitants, over 70 percent own mobile phones,5 but less than 40 percent have access to formal banking services.6 With such a large, connected, yet under-banked population, Latin America is the perfect candidate for Bitcoin to gain a foothold over alternative financial systems.
Why Bitcoin?
Six years after its release, it has become difficult to discuss financial technology without considering the place and role of Bitcoin. Virtually nonexistent a few years ago, bitcoin transaction volume has averaged more than 100,000 transactions per day in the first three months of 2015.7
Bitcoin is best thought of as a system consisting of three distinct components: the network, the protocol, and the digital currency.
The Bitcoin network is commonly expressed as a dynamic ledger of transactions and balances. Unlike existing bank networks, Bitcoin is not affected by geographic boundaries, so there are no crossborder transaction fees or delays; and unlike existing card-based networks and processors, each Bitcoin transaction is publically verified and recorded, so there is no costly private ledger needed to track payments.
The Bitcoin protocol—the open-source (i.e. publicly reviewable) code base that guides network operations and maintenance—has been vetted carefully by thousands of the world’s foremost security researchers, and has proven to be robust and reliable.
Considered an important advancement in computer science, the protocol enables individual actors to transact with one another remotely on a “trustless” basis—meaning without the need for a third-party intermediary.
Bitcoin—or “BTC”—is commonly referred to as a digital currency and is not controlled or issued by any bank or government. Because of this, its value is not tied to the health of any individual economy.
The value of Bitcoin
As a global payment system, Bitcoin enables the secure storage and global transmission of money without a bank account or credit card. Furthermore, Bitcoin enables the frictionless transmission of value between individuals, much in the same way that e-mail facilitates low-cost, instantaneous transmission of information over the Internet. As described by Metcalfe’s law, the inherent value of the Bitcoin network grows exponentially as more users participate in it.
Using bitcoin as a currency carries some distinct advantages. Since Bitcoin is decentralized, there is no risk of policy-induced hyperinflation. There are approximately 14 million bitcoin in circulation today,8 and there will only ever be 21 million bitcoin in circulation.9 Furthermore, since its composition is digital, bitcoin are divisible into much smaller units than any currency that has ever existed—enabling new types of commerce such as real-time pricing of low-cost utilities.
The present value, or “price,” of a unit of bitcoin is determined on a real-time basis by individuals buying and selling in a global, open marketplace. For example, if someone is willing to trade $600 for two BTC, and another individual in the open market is willing to trade two BTC for $600, the price of one BTC can be said to be $300 at that moment.
What does Bitcoin mean for Latin America?
In Latin America, Bitcoin represents a technological breakthrough in the efficiency of crossborder remittances. It is also an alternative to domestic currencies in inflationary economies and a mechanism to catalyze financial inclusion of the historically unbanked.
Bitcoin bypasses the frictions traditionally associated with sending money from one country to another. This is especially beneficial for entrepreneurship and remittance payments.
Bitcoin empowers Latin American entrepreneurs to tap into a truly global market by permitting them to accept payments from customers anywhere in the world without facing exorbitant crossborder transaction fees.
Bitcoin is also faster and cheaper than conventional international remittance mechanisms. In 2013, inbound remittances to Latin America totaled $60 billion,10 nearly all of which entailed significant fees, unfavorable foreign exchange rates and costly settlement times. Bitcoin would free up hundreds of millions of incremental dollars annually in Latin American economies.
In countries with tight currency controls or hyperinflation, Bitcoin can provide economic independence and a medium of international exchange. Venezuela provides an example. In 2014, when the rate of inflation was more than 60 percent11 and citizens were permitted to buy no more than $300 annually, bitcoin became uniquely valuable as a way of accessing the global economy.12 As some international airlines ceased accepting Venezuelan bolívares as a form of payment, bitcoin became a key alternative currency for Venezuelans traveling abroad.13
Sixteen Latin American countries are considered to be emerging markets by the World Bank; all except Brazil have larger unbanked than banked populations. Despite the painfully obvious socio-economic need, most financial institutions are not adequately incentivized to serve the unbanked population.
Bitcoin offers an immediate, low-barrier solution. Anyone with Internet access can receive wages and maintain savings in a secure, digital Bitcoin account at a very low cost to the user, and with no additional resources required from local operators.
What’s next?
We are in the very early days of Bitcoin, with countless new uses to be discovered and pioneered in the coming years. Today, we are already aware of interesting ideas, such as bitcoin being used to automate the foreign exchange process between financial institutions.
While the first years of Bitcoin were marked by negative occurrences—the bankruptcy of Mt. Gox14 and so-called “Deep Web” marketplaces using bitcoin for illicit purchases—Bitcoin has evolved from an early concentration among fringe users to a more mainstream user base.15 In 2015, Bitcoin has gained a widespread reputation of legitimacy, as major financial institutions like the New York Stock Exchange began investing in the future of Bitcoin.
Along with reputational gains, increased external infrastructure will be an important catalyst for Bitcoin in emerging markets. While it is still quite difficult for many people in Latin America to buy and sell bitcoin, companies like Coinbase hope to provide increased access to bitcoin liquidity worldwide.
As with any new technology, Bitcoin will face early challenges in emerging markets. Well-meaning actors might fail to deliver on honest intentions, and malicious actors might attempt to take advantage of misinformed consumers. However, these obstacles will fade as Bitcoin literacy becomes commonplace. In 2015, organizations such as the Washington-based Coin Center are working to support this process.
Perhaps the single greatest challenge will be ensuring that regulators have a proper understanding of Bitcoin technology. Similar to the hampering effect that premature regulation of the early web browser would have had on subsequent developments in browser-based e-commerce, regulating Bitcoin in its current form would likely hinder key future developments.
Financial regulators in the U.S. and U.K. are early examples of positive, proactive development of Bitcoin legislation.
On the other hand, many countries have opted to take a wait-and-see approach as uses of the technology unfold. However, Bitcoin has also proven durable in adverse regulatory landscapes. China, well known for its tight controls over the Internet and commerce, actually leads all other countries in Bitcoin activity.
As we navigate the early successes and challenges of Bitcoin, our current situation resembles that of the Internet pioneers of the mid-1990s. While we cannot foresee all the exciting uses that will be developed in the future, Bitcoin’s value as a global payments system will have significant impact on those who have been historically excluded from the global economy. We view this as a great place to start.
*Editor’s note: In this article, Bitcoin, spelled with a capital B, is used to denote the network; while bitcoin (with a lowercase b) refers to the unit of currency.
