Why is Bitcoin the first to prosper in the developing world?

It's not easy to explain the appeal of Bitcoin to Americans. In the United States, saving, spending and transferring money are not difficult. Many people have bank accounts and credit cards, and when they need to transfer money to friends, relatives and acquaintances, they can choose from a variety of online services, such as Paypal, SnapChat and Facebook. Most people think that Bitcoin and other electronic currencies are a paradoxical solution, a technological roundabout tactic between big banks and governments, which is only of interest to eccentrics, drug dealers and mentally ill writers.

Indeed, compared to investments, the number of people who view Bitcoin as a currency and believe it will increase in value in the future is still relatively small. Overstock.com, a well-known online retailer, began accepting Bitcoin payments in early 2014, and two years later Bitcoin accounted for no more than 0.1% of sales.

But looking beyond the U.S., bitcoin and other digital currencies like litecoin and dogecoin offer a cheap alternative to mainstream money transfers like Western Union. Perhaps more importantly, they offer a way to withdraw and store money if you don’t have a bank account or credit card, which is common in developing countries. Nigeria is a prime example. According to a 2014 report by the Initiative for Financial Innovation and Access, a nonprofit backed by the Bill & Melinda Gates Foundation that promotes financial freedom in Nigeria, only 36% of local residents use traditional banking services.

That’s why Stellar is using its technology to create a money-transfer network across Nigeria and beyond. Stellar uses electronic money to move almost any form of money over the internet. It’s working with a company called Oradian, which provides software to small banks like the Nigerian institution. Stellar aims to provide a cheap way to send money to friends and family, which is more difficult in West Africa than in the United States.

“The money business is already well established in the U.S. and Europe,” said Jed McCaleb, founder of Stellar, an early bitcoin thinker who also founded the influential digital currency service Ripple. “Today, most of these digital currencies are found in developing countries.”

The true power of electronic money

Nigerian consumers won’t be using the network in the future, at least not yet. It connects about 20 microfinance institutions. Essentially, these companies offer bank-like services, including lending to people who don’t qualify for bank loans. The network allows money to flow among these microfinance institutions, which was not possible before, and it provides a way for people to send and receive money. The two startups say that about 300,000 people now use the network, and they already have connections with these microfinance institutions.

There is no need for these people to hold electronic money. Stellar simply provides the infrastructure to transfer money. Using computers around the world, the system allows anyone to transfer money to any currency, and convert it into any currency. You can transfer money in dollars and exchange it for bitcoins. Pay with litecoin and someone can receive it in yen. Send money in euros and someone can receive it in yuan. Using this distribution service, Stellar and Oradian are connecting all the microfinance institutions in Nigeria in a cheap way.

For Antonio Separovic, founder of Oradian, the project reveals the true power of digital money, which is not consumer technology but underlying infrastructure. “When people start using the bitcoin blockchain to send money, it’s a success,” said Separovic, who was born in South Africa. “When we tell people they can use Stellar, we’re telling them they can use it to send money.”

Stephen Pai, CEO of Bitcoin, has not yet entered the African market. His company Bitpay allows merchants in North America, Europe and Latin America to accept Bitcoin payments. But he also believes that Bitcoin has a huge short-term opportunity on the African continent. "There is a huge opportunity to make Bitcoin more mainstream and common in places like Africa before developing countries," he said.

Anyone in the world

Stellar’s ​​network is still just a first step. To send and receive money, customers must visit a local microfinance institution. But it’s a notable step in a country where money transfers are still a pain. More than half of the 17.5 million Nigerians who transferred money in the six months of 2014 used informal channels, such as sending money to prepaid debit cards or to traveling relatives, according to the Institute for Financial Innovation and Access.

"Today, if people living in the capital want to send money to their rural families, they have to put the money on the bus in a bag," McCaleb said.

“This situation can’t last long.” In the future, Separovic said, Oradian might develop an app that lets people transfer money among themselves.

The new network, which serves only as a link between MFIs, shows how powerful electronic money can be in Nigeria, a country of more than 180 million people, whose population is roughly the size of the United States. But the new network also provides a way to reach MFIs across the country. Because local MFI networks connect to Stellar's servers, its network is much wider, allowing Nigerians to transfer money to potentially anyone in the world. "The hope is to include other financial institutions and MFIs to expand the network this year," McCaleb said.

Rebuild the system

This has long been a strength of Bitcoin and other electronic money services. Transferring money across borders doesn’t require the high fees of traditional institutions like Western Union. But it’s even more attractive in Africa. According to the World Bank, the average fee for sending money to Africa is as high as 12%. It’s even more expensive to send money between African countries.

Pair believes that in the long run, electronic money could help usher in financial services not only in Nigeria, but also in the rest of the world. “These signs are emerging that it may be in the near to medium term where it starts to become mainstream,” he says, “but in the long term, this is a catalyst for it to become mainstream in more developed places.” At any given time, it provides a means of efficiently tracking where money is and who owns it. He thinks it could simplify costs. “It’s hard to imagine things working any other way than with Bitcoin.”

This doesn't necessarily mean that ordinary people will buy things with Bitcoin. "They think they're paying in other currencies," Pair said, "but Bitcoin supports the technology behind the scenes that works." In his view, Bitcoin will provide the infrastructure that makes our financial system work. There is still a long way to go, but in places like Nigeria, that will change soon.

JPM compiled from

Wired, Why Bitcoin Will Thrive First in the Developing World.