Cryptocurrency’s obsession with the unbanked

The next generation of microfinance wants to read your texts and build their own currencies

Yesterday, Coinbase CEO Brian Armstrong wrote a post about developing a trillion-dollar fund for cryptocurrency use around the world:

The unrealized goal of financial independence shows up in cryptocurrency often, such as this rant from Ethereum founder’s Vitalk Buterin’s Twitter:

And a post today on /r/ethereum about an ICO for charities:

The narrative around these types of projects, and the raising of cryptocurrency as the ideal solution, is a bit shortsighted. Here are a few points I wanted to make about the current state of microfinance and why cryptocurrency has to be careful.

First, understand what goes wrong in the developing world

The Economist recently wrote on “How to run a bank in Afghanistan”

In this case, one bank in Afghanistan collapsed (and destroyed depositors’ confidence in other banks) because they would make huge, risky loans out to shareholders and end up losing the original funds.

In Argentina, it was only two years ago that the government stopped controlling exchange rate and import/export of currencies:

While the middle class is being blocked by their banks and governments from merely holding and transferring money, for people at the bottom of the pyramid, it’s often impossible to get a business loan from a traditional bank. They might pay a banker to hold valuables (such as jewelry) which can then be withdrawn and sold in a crisis. Everyone makes use of mobile money solutions, which grew out of airtime.

In the United States, people are reluctant to move money out of a comparatively stable currency and banking system. This inspires many entrepreneurs in the cryptocurrency community, frustrated by American skepticism, to turn their attention to the Rest Of The World. Surely they will want this alternative. Does the average Silicon Valley coder or MBA, deep in a technology info-tainment bubble, really understand what those problems are, and how to build an alternative?

The good news: there are already cryptocurrency startups worldwide.

Cryptocurrency startups and research projects have already formed in many countries across Africa, the Middle East, and Asia. You might think that there is an unsurmountable advantage for countries with the most money. But in US, Japan, China, India, and South Korea, despite many potential users and entrepreneurs, government intervention and uncertainty (even contradictory statements from different parts of the Korean government) have reduced confidence.

As Bitcoin gets more profitable, I see more interest in spreading these projects to other countries, sometimes through interesting partnerships:

The best cryptocurrency solutions for developing world problems will appear organically, in those countries and neighboring countries, by people with an interesting mix of experiences and information sources. Why did none of these Western idealists suggest investing in them first?

Second, understand what microfinance companies want to be the next generation

Microcredit/microfinance projects, particularly programs which lend to women and hold regular community meetings, have made empowered many unbanked people and allowed them to build up an inventory or use additional equipment. In 2006, Muhammad Yunus won a Nobel Peace Prize for developing Grameen Bank’s program.

What do microfinance companies think is going to change the world? Not cryptocurrency.

Last year, I interviewed with a startup which is creating a ‘credit score replacement’ for banks in the developing world. The app is a set of EPUB quizzes which applicants fill out: word association games, pictures, etc, similar to a ‘personality test’ you might have filled out when you applied to a retail job in the US (example of US tests). Avoiding the risky process of being a lender in a new space, by selling the app to those lenders, will likely be lucrative. They’re not the only people in the Boston area working on this, as spinoffs exist from research at MIT and Harvard. The success of these companies will inspire more to form and make it a standard practice across the industry.

Last November the founder of Kiva, Matt Flannery, spoke about the foundation of that platform and a new startup, Branch. Around 8:05 in he starts talking about “a proper bank in Sub-Saharan Africa” via a smartphone app. At 12:55 he describes “Artificial Intelligence to make instant credit decisions”, and to inform that AI, looks at SMS, call history, contacts and other data on that phone (I screenshotted a slide below if you are lazy).

Both practices sound potentially creepy or disrespectful to me.

I understand that you don’t have a lot of information about a potential bank customer when he or she walks in the door.

  • If you are trying to prevent lending to lazy entrepreneurs, why not provide a small starter fund and monitor their progress?
  • If they need money to buy equipment or inventory, why not build a camera / barcode app which allows them to go to stores and pay directly?
  • If you are worried about fraud, why not find more obvious indicators (for example: identity check, NLP and plagiarism check) on a non-intrusive loan application? Could you run a Kaggle-like competition to find positive and negative fraud indicators, without making every customer follow a word association test?
  • If you need a friends network, why not build some type of BitTorrent/friends network where friends lend and receive small amounts throughout their network?

The answer is that making a quiz or reading the contents of the phone are much easier, more scalable, and less risky for a US-based startup to make their money over dozens or hundreds of local banks.
Are cryptocurrency entrepreneurs so different in their proposals?

Third, understand non-profits’ needs

The crux of Brian Armstrong’s post is that the crypto organization would build a billion-dollar quasi-endowment, and make small payouts around the world, increasing global demand for cryptocurrency and ultimately ending up with a trillion-dollar value.

I’ve seen other posts asking which non-profits accept cryptocurrency and which hold on to it and use it, rather than converting it immediately. Maybe WikiLeaks does this… but for a traditional non-profit, you have accountants and your biggest donors also have accountants. When I was working with some folks who wanted to start their own education organization, they were interested in non-profit status before anything else so that (a) people would donate to them for the tax benefit, and (b) companies such as Google would match their employees’ donations. If you are an organization that intends to operate in the crypto space, you would need to recruit a lot of unusual, maybe first-time donors, and advise them on whether it’s tax-deductible to donate. On your own end, you will need your accountants to process that donation and other funds, not just in the US, but in any other country where you are lending money. Considering how Bitcoin is in an uncertain legal space, you can choose to work only in countries with existing regulations, or take serious risks.

If I met someone who was building this bank, I would ask them:

  • How would you protect your customers if the government and banking system (which you already know is corrupt), used its power to close all of your accounts and offices in the country?
  • Are you using Bitcoin (with high transaction fees), future versions of Bitcoin which have that resolved (Segwit? Lightning network?), or a crypto-token pegged to an existing currency?
  • Is storing money in your chosen cryptocurrency a potential 10x investment, a safe holding space, or both? How do you explain that in your marketing?
  • How does your wallet improve on mobile money systems and remittances already existing in the country?

Of course these aren’t outlined in everyone’s plans yet, and that’s OK! I just think it’s surprising how much cryptocurrency entrepreneurs talk about the developing world and how little they talk about the actual situation there.



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