Can a Cryptocurrency liberate the ‘unbanked’ and help them join the global commercial community?

Table of Contents

Abstract……………………………………………………………..

Acknowledgments………………………………………………………

Declaration……………………………………………………………

Introduction…………………………………………………………..

Scope of the Thesis………………………………………………………

Research Objectives……………………………………………………

Literature Review……………………………………………………….

Introduction to the Literature Review…………………………………………

Comparison between Fiat and Cryptocurrencies with the emphasis on Bitcoin………………..

Fiat currencies………………………………………………………

Advantages of Fiat currency……………………………………………..

Disadvantages of Fiat currency……………………………………………

Cryptocurrencies………………………………………………………

Advantages of Bitcoin…………………………………………………..

Disadvantages………………………………………………………..

Alternatives to Bitcoin…………………………………………………..

Alternative cryptocurrencies………………………………………………

Comparison between fiat and cryptocurrencies………………………………….

Banked versus Unbanked…………………………………………………

Barriers faced by the unbanked in engaging in financial services………………………

Inflation/ Hyperinflation……………………………………………….

Fraud Prevention and Corruption………………………………………….

Currency Volatility……………………………………………………

Summary of Literature Review……………………………………………..

Methodology………………………………………………………….

Limitations and Constraints of Research……………………………………….

Summary…………………………………………………………..

Findings and Analysis…………………………………………………….

Data collection……………………………………………………….

Inflation………………………………………………………….

Corruption / Fraud……………………………………………………

Bitcoin and the Unbanked………………………………………………

Mobile phone usage………………………………………………….

Currency Volatility……………………………………………………

Summary of findings from the data………………………………………….

Discussion and Conclusions…………………………………………………

Recommendations………………………………………………………

Recommendations and Implications for the Literature……………………………..

Recommendations and Implications for the Future Research………………………….

Research Limitations……………………………………………………

References……………………………………………………………

Appendix……………………………………………………………

Introduction

“2.5 billion adults worldwide do not have access to Formal Financial Services” (World Bank, 2014).

These 2.5 billion adults, are collectively known as the ‘unbanked’ and generally come from areas of high poverty (CGAP, 2017). The countries with the highest levels of unbanked adults are in the Middle East and North Africa with four out of every five adults being unbanked, see figure 1 (CGAP, 2017). In addition to this, there are several developing economies such as Sub-Saharan Africa and South Asia, where there are more than 95 per cent of adults who do not have an account at a formal financial institution. This limits their financial freedoms and restricts them to local commerce only (CGAP, 2017). This can feed the cash economy, fuel the “black market” and restrict commercial growth.

This paper will investigate whether the unbanked in the developing world can be liberated from this financial isolation by using a cryptocurrency such as Bitcoin as their primary banking system. The ultimate ambition of this liberation however, would be to give the unbanked access to a wider (global) commercial marketplace and ultimately liberate them from their local isolation and minimising poverty. The paper will also examine the barriers faced by the unbanked, their current engagement with Bitcoin and how a cryptocurrency may help them in future.

Source: Chaia et al., (2009) Figure 1

Scope of the Thesis

Cryptocurrencies as a technology have always been of interest to the author, ever since he encountered Bitcoin, one of the first cryptocurrencies, at University during his degree course. As leader of his newly created investment syndicate the group’s first opportunity to engage with Bitcoin was to investigate Bitcoin global phenomenon. At that time, the group speculated where the price would finish and what impact it could have on the financial world. The author believes that significant cryptocurrency adoption worldwide will have significant implications for us all and is one of the motivations for carrying out this study

Research Objectives

The author has cited the following objectives in this thesis:

1. Understand the differences between the ‘banked and unbanked’
2. Compare and contrast Fiat vs Cryptocurrencies
3. Understand and discuss the barriers currently encountered by the unbanked to engage in financial services
4. Highlight solutions, which will help promote the unbanked to be able to take advantage of financial services.

Literature Review

Introduction to the Literature Review

This chapter provides a critical review of the current information in the literature surrounding cryptocurrencies relevant to the developing world. Cryptocurrency is a relatively new technology so the review will focus on the oldest cryptocurrency, Bitcoin (BTC) that has the highest volume of data.

Mertens (2014) states ‘Literature reviews have two clear and general goals they are to a) identify, evaluate and use sources for conceptual frameworks, research design, and b) research methods for a specific research problem to identify, evaluate and integrate existing work to assess current knowledge on a specific problem, topic or theme.’ (Mertens, 2014, pg 54)

This kind of framework will provide the necessary foundation to support the research objectives above. This literature review will establish the relevant information that is already in the public domain and identify a platform for further research.

Comparison between Fiat and Cryptocurrencies with the emphasis on Bitcoin

Fiat currencies

The Fiat structure is the monetary system that is used globally where money is a facility to store purchasing power so that barter (trading one service or product for another) is not used (Ljungqvist & Sargent, 2012). Currencies or Gold (example US dollar, euro or yen) enable an individual or organisation to buy goods and services, when needed, which in return makes the barter system obsolete (Champ et al., 2011).

The consequence of this is that money becomes the primary mode for transactions and the economy to specialise and progress into the future (Mitchell, 2007). Another way to describe this is in the past a landowner would only produce what was needed. Any surplus would be traded for other things usually via bartering. Whereas with the introduction of money and its ability to hold purchasing power then citizens could specialise and plan for the future. In other words, a good cereal farmer, who specialised in cereal could then buy equipment, hire workers, and look for neighbours’ land to buy to expand the existing cereal farm. This concept of money drove growth and expansion into wider markets.

Markets and Central banks evaluate the relative value of a currency (which manifests itself as notes and coins in the country of use) based on a judgement of how well the government is running its country and its economy. Based on the performance of these two factors they assess the impact on interest rates. A majority of the world’s currency is fiat currency. This system works because the governments that use it make it legal tender and enshrined in law that they will honour any payment made with it. In other words, the government promises to honour payment to the bearer.

Because of this other countries and citizens alike have confidence in the medium so the currency is able to act as a means of storing for purchasing power for the future.

Fiat money is not the same at commodity money. Commodity money is based on the value of something like gold, grain or oil. Sometimes known as the gold standard governments had to use this metal as collateral for the amount of money they could cover in debt. The fiat system has now superseded that.

Advantages of Fiat currency

It is a common standard worldwide as most countries use it

It is a proven system

Money can be printed as required

Disadvantages of Fiat currency

Can be affected/manipulated by government policy

Subject to corruption in some areas of the world

Needs third parties to administer

Fees charged for exchange

Can be volatile in some countries

Affected by inflation

Non-standard across the globe making exchanges possible but more complex

Cryptocurrencies

A cryptocurrency like Bitcoin, is a peer-to-peer network with no central bank at its core, it is completely independent and decentralised. Whereas, traditional fiat currencies are controlled by central banks, Bitcoin does not have this structure, which effectively means that everyone has their ‘own bank’ (Antonopoulos, 2014). Every Bitcoin that has been issued is/has been stored by the users of the Bitcoin network in their own digital ‘wallet’ (Antonopoulos, 2014), and the downloading of these wallets is publicly available. This peer-to-peer network is called the ‘Blockchain’, “A blockchain is a public ledger that records the proof-of-work necessary to demonstrate that a digital object, such as a currency, is unique and has not been copied or double spent” (Tapscott & Tapscott, 2016). A blockchain process is shown in (Figure 2) below:

Nakamoto the alleged founder of Bitcoin, proposed a peer-to-peer system in which the network took responsibility for publicly doing the work, using specially designed algorithms, to verify that each transaction was unique and proper. This, cryptographic proof of transactional activity was preferred, rather than the use of a trusted third-party financial institution, that verifies payments that are made between buyers and sellers. In this new framework third parties become superfluous to the network and thus transactional costs are minimised (Bashir et al., 2016).

“Users of the blockchain system are motivated to provide the work necessary to verify transactions (called mining) by being compensated for their efforts with newly generated currency and transactional fees. Nakamoto called this system and its currency, Bitcoin” (Bashir et al., 2016).

Advantages of Bitcoin

Freedom in Payment

There is no central institution responsible for transactions so there are no limitations in scope or geography. Therefore, there are no problems in crossing borders or transacting when banks are closed or other limitations that may arise from using a bank to transfer capital at any time of day or night (Narayanan et al., 2016).

Control and Security

Allowing users to be in control of their own transactions helps keep Bitcoin safe and secure for the whole network. Bitcoin can be backed up and encrypted constantly which further ensures the safety and authenticity of a user’s money and the system itself (Szabo, 2016).

Fees

Currently, there are no transactional fees for using Bitcoin. Merchants cannot charge fees without gaining customer approval and because there are no chargebacks this protects the merchants and buyer from unforeseen charges (Armstrong, 2017).

Payments in Bitcoin can be made and finalised without using personal information such as address, or name, furthermore this data is not linked to Bitcoin transactions. This extra layer of “Privacy protection” of personal information by the Bitcoin system protects the users against identity fraud and theft (B.A. Bitcoin, 2016).

Information is Transparent

With the blockchain, all finalised transactions are accessible/available for everyone to access and see, without divulging any personal information. A user’s unique public address in Bitcoin is visible but without personal information (Antonopoulos, 2014). Anyone at any time can verify transactions in the Bitcoin blockchain, more importantly; no one person, organisation, or government can manipulate the Bitcoin protocol, as Bitcoin is cryptographically secure (Antonopoulos, 2014).

Very Low Fees

Currently there are either no fees, or very low fees for Bitcoin transactions. However, fees can be changed with a user’s permission for example if the user wants to accelerate the transaction process. By giving more priority to that user’s transaction within the network, the quicker that transaction gets processed (Tapscott & Tapscott, 2016).

Digital currency exchanges help merchants process their transactions by converting Bitcoin into a fiat currency. These conversion services generally have lower fees than credit cards and PayPal (Antonopoulos, 2014).

Fewer Risks for Merchants

Since Bitcoin transactions cannot be reversed, do not link to personal information and are secure, merchants are protected from potential financial losses that may occur from fraud (Armstrong, 2017).

With Bitcoin, merchants can do business in zones or areas where crime rates and fraud rates may be high. This is because it is very hard to cheat anyone in the Bitcoin system due to the accessibility and transparency of the public ledger, otherwise known as the blockchain (Raval, 2016).

Disadvantages

Lack of Awareness and Understanding

The public does not generally know about digital currencies and Bitcoin. For this reason, people will need to be educated about Bitcoin to be able to apply it to their everyday lives (Skinner, 2016).

Some businesses are beginning to accept Bitcoin as a currency as they begin to understand the advantages for their business over traditional currencies. However, the numbers are low but they are growing (Chokun, 2016).

Companies such as TigerDirect and Overstock are already accepting Bitcoin as payment for their products. This is good news but it was found that the staff in these companies did not yet fully understand how Bitcoin works. This is a problem as early adopters need to be knowledgeable so that they can educate the customers. Without this knowledge, then by inference the mass adoption of Bitcoin as a routine currency will be slow and difficult (Coin Report, 2015). It is imperative that employees be educated in the Bitcoin system so that they can help their customers to use it more easily. This will take some time and effort but this can be done as witnessed when new systems such as PayPal were introduced which are now considered routine (Sharma, 2011).

Risk and Volatility

Bitcoin currency values can suffer from volatility mainly due to the limited number of coins in circulation at any one time and as the demand for them increases by each day (Tasca et al., 2016).

However, it is expected that this volatility will decrease over time as more businesses, the media, and trading centres begin to accept and adopt Bitcoin as a regular stable currency (Miller, 2014).

Criminality and Regulation

Bitcoin already has a poor reputation with the regulators and the Establishment as it has been infamously used by criminals for nefarious purchases such as arms and drug sales via its association with the “silk road” online drug/arms market. Unfortunately, this incident brought Bitcoin to the attention of government regulators in a negative way to such an extent that current regulators may decide to make Bitcoin illegal which would drastically limit its impact and adoption in future. (Volkov, 2013).

Alternatives to Bitcoin

Other digital systems

The author has focused on Bitcoin but it is important that alternatives are also considered to add balance to the discussion. In this section, the author will look at possible alternatives to Bitcoin. The alternatives tend to be services linked to existing currencies/institutions rather than completely new currencies like Bitcoin. These services include M-Pesa, MTN Mobilemoney, EasyPaisa and Mobile Money by Tigo. All these services are all very similar in their mode of operation. They usually include a digital platform where money can be stored i.e. no physical branches “bricks and mortar” which allow money to be accessed via a smart phone or telephone banking (Mas & Radcliffe, 2010). The author will use one example and will explain this in some detail. Of the above alternatives M-Pesa has been the most successful. M-Pesa, is used in Kenya and was developed by Vodafone. M‐PESA has grown rapidly, and reached approximately 65 per cent of all Kenyan households since the end of 2009 (Jack & Suri, 2011). Kenya’s mobile money customers made 40 per cent more transactions in March than they did a year earlier, according to GSMA (Weiner, 2014). M-Pesa allows users to deposit, withdraw, transfer money and pay for goods and services easily with a mobile device (Saylor, 2012). The disadvantage of M-Pesa and the other services cited above, is that it is based on a traditional financial infrastructure and it is localised to a specific country making it difficult for money to be sent or received from anywhere outside of that country (Hughes & Lonie 2007).

Alternative cryptocurrencies

Although the author has cited Bitcoin in this study for its tenure and data availability. For completeness, the author will also cite other crypto currencies that are in use and explain how they differ, are similar to or have advantages over Bitcoin. Ethereum (ETH) is a main competitor for Bitcoin but has only been around since Aug 2015, so data is very scarce. But Ethereum has a more up to date blockchain that allows for the ability to automatically execute the contract terms when situations are met, which in the derivatives market is very useful so has gained much attention from the large financial institutions (Dannen, 2017). This has more commercial use in high finance and so while the Blockchain is impressive its use for the unbanked has not been tested.

Another coin worth mentioning is Ripple as this has the third largest market capitalization after BTC and ETH (coinmarketcap, 2017). Ripple will never be a solution for the unbanked as it relies on powerful computing as no transaction costs take place which would not be valuable to areas of low internet penetration as in developing nations (Moreno-Sanchez et al., 2016).

Comparison between fiat and cryptocurrencies

Table 1 shows a comparison between fiat and cryptocurrencies.  It highlights clearly that cryptocurrencies are “self-sufficient” in use and have more built in security than fiat currencies. It is also less complex to use and substantially cheaper to operate as there are no third parties directly involved in the buyer to seller process.

	Fiat	Cryptocurrencies
Transactions	Electronic controlled by bank	Electronic controlled by user
storage	Centralised	Decentralised
Trust	Relies on people’s honesty	Relies on transparency
Borders	Different currencies for different countries	One global currency
Volatility	Depends on governments, events and markets	Influenced by supply and demand
Fraud	Probable and prevalent	Possible but minimised
Fees	Can be substantial	Minimum
personal security	High Risk of leakage	Minimum risk
methods of transacting	Paper, digital, phone	Digital, phone
usage	High, well known	Low, less known

Table 1 compiled by the author

The benefits highlighted in this comparison should be noted as they will be considered more fully in future sections of this paper, but description on what the banked/unbanked are is needed first.

Banked versus Unbanked

The term banked refers to people who own, subscribe or use a traditional bank, building society or financial institution to keep and manage their money. They have access to their money via a physical branch, a chequebook, via telephone or online banking. As well as access, the bank also provides other services such as savings accounts, ISA’s, loans, mortgages secure and unsecured, overdrafts, tax and wealth management, foreign currency exchange, credit and debit cards money transfer, share dealings and maybe insurance. In other words, the bank provides a one-stop shop to the client for financial services. By providing these accounts and services people will have the ability via a bank to buy and sell goods and services, locally, nationally and internationally, such is the banks reach. Through these services a person’s mobility and flexibility can increase which will enable them freedom to travel, and transact worldwide. Therefore, the banked using this system will have complete freedom and access to a global marketplace.

Those familiar with banks know that they are usually associated with substantial infrastructure and architecture such as global IT systems, stately buildings and organisations with a distinctive management hierarchy. These banks are usually privately owned and as such are answerable to shareholders first and customers second. The consequences of substantial infrastructure are that they carry large overheads and thus need to charge substantial fees for their services.

In contrast, the term unbanked refers to those people who do not have access to or benefit from the services of a financial institution such as that outlined above. For example, they have no savings or current account; credit cards and money transfer facilities (Antonopoulos, 2014). A vast proportion of them live in developing countries where there may not be a local bank or an institution for holding their money. They usually transact in cash and confine their commercial activities to local commerce. Consequently, they are not able to access the freedoms enjoyed by the banked or participate in national or global markets.

Barriers faced by the unbanked in engaging in financial services

Unbanked individuals have many financial challenges in trying to manage their money and financial affairs; these include issues such as corruption, inflation, hyperinflation, government intervention, poor infrastructure and large transactional fees for micro transactions (Vigna & Casey, 2015).  Currencies in developing countries’ can be highly inflated, volatile, with commerce being carried out locally. With no infrastructure, it makes little sense for individuals to transfer money inside or outside their local environment i.e. either internally or across borders, as the cost alone for these transactions can be high. The consequence of this is that cash becomes the primary mode for transactions and the economy stays polarised with national sales and growth reduced (Mitchell, 2007). Small vendors in the developing world would like to operate outside their local area but with no cost effective, safe or risk-free means of doing this they can’t and the economy stagnates. In the following paragraphs, the author will discuss the effects of inflation, corruption and currency volatility in the developing world and its impact on the unbanked.

Inflation/ Hyperinflation

Schmitt (2003) summarised inflation as ‘an increase in the average level of prices in an economy’, which in developing countries can quickly turn into hyperinflation as countries devalue their currency and citizens lose confidence in the currency as seen in Venezuela (Schipani, 2016).

To understand inflation let’s first look at money supply theory. A government prints money and pumps it into the economy through bonds and direct spending on governmental programs. The quantity theory of money states that MV = PY, with M being the monetary supply, V being the velocity of money, P being the price of goods, and Y being output (Montier, 2013). Therefore, when M increases and velocity and output stay constant, then prices must rise i.e. giving rise to inflation (Montier, 2013).

Professor John Harvey of Forbes Magazine (“What Actually Causes Inflation”, 2011) proposes a second theory, which is that, the intentional increase in price of a certain influential good causes inflation. Prices rise because of one of four factors. Firstly, market influencers that are immune or resistant to competitive pressures can raise prices. For instance, the OPEC oil cartel cut the US supply of petroleum during the Yom Kippur War in the 1970s, causing not only oil prices to rise, but prices of anything that relied on petroleum in its production to rise too. This led to high inflation.

Secondly, a rise in demand for core goods relative to supply also hikes prices. For instance, a housing boom can lead for a demand in timber, causing the price of wood to increase. This increase trickles through the economy in the form of higher prices for all related goods e.g. kitchens. Thirdly, the asset market can contribute to inflation too. When certain commodity futures are trading at high prices, it incentivises those who produce those commodities to withhold the supply to increase the price of those commodities. Creating an artificial supply and demand cycle.

Finally, supply shock can cause inflation, such as when hurricane Katrina devastated the southern US and interrupted the supply of oil (Harvey, 2011).

Inflation is a major cause of variation and market movement and so can affect the unbanked through higher prices which can reduce disposable income or erode the value of money especially in fiat currencies. Bitcoin can also suffer from inflation too but this is due to the supply vs demand cycle of the Bitcoin not external pressures. An increase in supply of Bitcoins (Bitcoins are mined constantly and new Bitcoins are created all the time) results in a decrease in price (Huhtinen, 2014). However, unlike fiat currencies bit coin inflations tail’s off after each bi-weekly difficulty adjustment (where by the blockchain needs more complex and higher computing power to mine what was previously a Bitcoin) and the longer-term increases in supply are seen to represent the steady inflationary effects of the increasing supply. Bitcoin is disconnected from events and only subject to its own network changes (Huhtinen, 2014). Thus, it is free from manmade manipulations such as quantitative easing, created by governments and the examples stated above that can drive changes in inflation (Huhtinen, 2014).

Fiat currencies rely on governments to honour payments but also citizens to use this currency. Events cited above can lead to Hyperinflation, which as a macro-economic event which causes a steep devaluation of a country’s currency and causes a lack of confidence in that currency both by its citizens and the international community. When a currency has lost confidence people begin to hoard commodities and goods that have intrinsic value. As prices begin to rise, basic goods, such as food and fuel, become scarce, which sends prices spiralling upward. In response, the government is forced to print more money to try to stabilise prices and provide liquidity, which only exacerbates the problem.

The relationship between Hyperinflation and Bitcoins usefulness can be seen by Hanke and Kwok (2009) – “Hyperinflations have never occurred when a commodity served as money or when paper money was convertible into a commodity. The curse of hyperinflation has only reared its ugly head when the supply of money had no natural constraints and was governed by a discretionary paper money standard” (Hanke & Kwok, 2009, p. 353). As Bitcoin is considered a commodity currency, new coins can be mined but as there are still only a finite number of Bitcoins available then this causes Bitcoin to appreciate (Darlington, 2014).

During Hyperinflation governments at this point usually act and reduce or stop exchange of currency from local currency to another currency as allowing it would deplete the government’s reserves of foreign currency and cause an international crisis (governments usually exchange reserves in USD). This sale of local currency has the effect of driving the price down.

On the other hand, Bitcoin does not have this problem as although the currency is “volatile” it does not have to rely on a third party to exchange money so it cannot be impacted by direct government actions (Huhtinen, 2014). Bitcoin volatility is an issue to consider but is small in real terms. For example, Bitcoin price volatility was less than that for the Venezuelan Bolivar (Rands, 2017). Graham, 2014, states however, “Fluidity and increased uptake (usage) of electronic currencies promises that this (volatility) will be a negligible issue in the future”.

Fraud Prevention and Corruption

Another barrier for the unbanked is fraud and corruption. Fiat banking systems depend on trust to make them work. If individuals suspect corruption then the system won’t work through lack of confidence and the cash economy will continue.

“Transparency International Inc” (TI inc.) (2017) have created an index to track the level of corruption across the world. This index also includes the most recognised corrupt countries seen in the developing world. Table 2 shows an extract of the most corupt countries.

Table 2 Source: Transparency International (2016)

The TI index (Transparency International index) defines corruption as “the misuse of public power for private benefit” (Transparency International, 2012) and the index is based on their perceived levels of corruption, as determined by expert assessments and opinion surveys, which results in an aggregated score. TI inc. currently ranks 176 countries “on a scale from 100 (very clean) to 0 (highly corrupt)” (Transparency International, 2012). In Table 2 above the trend in corruption can be seen. For Venezuela, it can be seen that the corruption levels have increased suggesting that it has become more corrupt as defined by the index from 2012 to 2016.

Transparency International under took a study into corruption for the third world and found that humanitarian operations are most vulnerable to corruption especially in procurement transactions, distributing and transporting of food, medicine, construction materials and many consumables, particularly in widespread, rapid-onset emergencies (Maxwell et al., 2008).

Fraud and counterfeit currency is one of the biggest issues for many countries. After the Somalian state collapse in 1991, the country descended into a nightmare of fiscal unrest and anarchy from which it has yet to recover. It eventually became so bad that in 2007, the World Bank estimated “that as much as 80 per cent of the currency in circulation was forged, reprinted, or new currencies” (Adams, 2007).

Currency Volatility

Another barrier for the unbanked and the bank generally is currency volatility. In fact, many countries have unstable currencies. This problem is like hyperinflation, but instead of the inflation rate going up, these currencies’ exchange rates fluctuate wildly up and down and are often called ‘junk currencies’ (Cohen, 2007). Countries in war-torn areas or in tumultuous regions of the world and developing countries exhibit this phenomenon (Harris, 2001). Again, similarly to inflation and corruption the unbanked need to have confidence in the system before they will sign up otherwise they stick with cash as its tangible and traceable.

Summary of Literature Review

This literary review has revealed the following:

1. 25% of the individuals in the world are unbanked this represents a great opportunity for future country specific GDP and financial services growth

2. 80% of these unbanked live in the Middle East and Africa. This is a challenge for traditional western institutions due to the geography and the impact of Political and religious regimes who inhabiting these areas.

3. Inflation, Currency volatility, Corruption and Government intervention can affect fiat currencies markedly and erode citizen’s confidence.

4. Traditional banking methods are based on trust systems and usually involve a high cost for transactions.

5. Local electronic systems have been tried in developing countries but they tend to be based on traditional banking systems and do not give global or national access.

6. Use of cryptocurrencies is growing worldwide

7. Cryptocurrencies other than Bitcoin have been developed which are more efficient to use.

8. Bitcoin has a poor reputation with regulatory bodies

As seen from the literature review the unbanked have many barriers to overcome before they can successfully transition from the local financial arrangement they have today to systems that will elevate them to a position where they can transact globally.

In developing countries traditional banking systems did not exist and until recently there was no desire from banks or customers to introduce them. People were quite content to carry out commerce in their local geographical area and transact on a barter or cash in hand basis. However, the impact of globalisation, the internet and higher education has increased the need for developing countries and individuals within those countries to widen their personal and commercial ambitions. This has fueled a desire to upgrade financial arrangements and look outwards rather than inwards.

We know that carrying out transactions within developing countries outside the cash economy can be difficult. The literature review mentions some of the barriers for example inflation/hyperinflation, currency volatility, corruption, lack of infrastructure and education. However, the desire to explore new solutions despite the difficulties has already started.

Methodology

To explore the extent in which developing countries are using cryptocurrencies to overcome the barriers discussed above the author will use quantitative data to determine to answer the research questions posed. The author will use a positivist approach as, the positivism approach is working with an observable social reality in which the end product of such research can be law-like generalisations similar to those produced by the physical and natural scientists’ (Remenyi et al., 1998; Gill & Johnson, 2010). In other words, a philosophical system recognising only that, which can be scientifically verified, or which is capable of logical or mathematical proof. Using correlation analysis of Bitcoin data this will help develop the scientific verification needed to create a valid conclusion. Therefore, the positivism approach suits this research, as it would be the most useful through quantitative research and statistical analysis (Saunders et al., (2012).

The other two approaches the author looked at to try to gain best insight into data used was the interpretivist and pragmatism approach. Yin (1994) proposes that the interpretivism approach is most useful with qualitative research under the subjective approach. This is confirmed by Kaplan and Maxwell (1994) who state that interpretivism promotes the value of qualitative data in the pursuit of knowledge. As the author will be using quantitative data and not qualitative data then this has less relevance. The other research philosophy is pragmatism. Tashakkori and Teddlie (1998) argue pragmatism is the concept of truth and reality and are of no use and that it should be down to the researcher on what is of value to them. Furthermore, they say that a research problem should not just fit into Positivism or Interpretivism. It should be the research question that drives the approach ‘whatever philosophical and/or methodological approach works for the particular research problem under study’ (Tashakkori & Teddlie, 1998, p. 5). Even with the cited problems from merging the philosophies, the author’s research question is driving the approach and will use quantitative data to gain a deeper understanding of the subject to gain insights into how/why Bitcoin is being used, so pragmatism approach would not be the best approach.

Security and privacy rules of Bitcoin and the blockchain make it impossible to use raw Bitcoin data directly in the analysis. However, activity and/or transactional data can be collected. Whilst this data shows quantity/volume of activity or transactions it does not show where the Bitcoin transactions had taken place geographically. One way round this is to use “Bitcoin wallet downloads”. This is a good proxy in lieu of the above raw data and can be taken as “Bitcoin usage” in that country for the purposes of this study. One caveat in using this assumption is that it is only using Bitcoin software downloads (wallet) not the thin client, cloud or third party based wallets. This download will not show the amount of money that is being transferred into and out of these wallets.

The author’s research strategy, which is how the researcher intends to carry out the work (Saunders et al., 2007), used will be experimental research which refers to the strategy of creating a research process that examines the results of an experiment against the expected results (Saunders et al., 2007). It can be used in all areas of research, and usually involves the consideration of a relatively limited number of factors (Saunders et al., 2007). The relationship between the factors are examined and judged against the expectation of the research outcomes. The areas of expectation found from the literature review, are that the level of inflation, corruption and currency volatility will influence Bitcoin usage.

The author will try to make the method as reliable as possible by using only Bitcoin data using a longitudinal time horizon. This time horizon is referred as the collection of data repeatedly over an extended period and is used where an important factor for the research is examining change over time (Goddard & Melville, 2004). Furthermore, it allows the establishment of some control over the variables being studied (Flick, 2011).

Limitations and Constraints of Research

Saunders et al., (2000) suggests that the choice of the research design and approach can have knock on effects on subsequent areas:

1. Reliability (probability of producing same results if repeated)

2. Validity (extent to which research accurately measures what it claims to be measuring)

3. Representativeness (the extent to which the research portrays companies/situations/ populations as a whole)

As the data was taken from one Bitcoin exchange then if the same exchange data is used again the reliability will not be impacted and the probability of producing the same results are 100%.

Validity is another factor to consider. ‘Has the research actively measured what it claims to measure?’ (Saunders et al., 2006). The author has tried to find the most valid way to use the data available to answer the research questions with appropriate assumptions. Although the Bitcoin blockchain is public the sender and receiver of those Bitcoins are hidden. Therefore, the author has tried to mitigate this impact by using Bitcoin wallet downloads and small sized transactions under the assumption that a wallet download is equivalent to   a Bitcoin trade and small transactions are micro transactions (Vigna & Casey, 2015) referred in the literature review.

Representativeness could be called into question as the author only uses one exchange for the data – ‘Localbitcoins.com’. There are many exchanges and although localbitcoins is not the largest in traffic it makes a good exchange for analysis as it operates most of the developing countries (Localbitcoin.com, 2017). It works by creating a buy and sell market like e-bay but using cryptocurrency. The exchange is operational in almost every country in the world and while it represents only .22% of total Bitcoin traffic, it makes up a large portion of the Bitcoin usage for thus study. The purpose of this analysis is to examine the reasons for Bitcoin is being used in developing nations and therefore Localbitcoins.

In pursuit of that goal, data from Localbitcoins shows a greater relevant percentage of the Bitcoin usage to assist in the authors’ analysis. Using wallet downloads, as a proxy for Bitcoin usage is another example of questionable representativeness. An assumption is made that downloading a “wallet” represents a Bitcoin transaction. In practice, the download could just be what it is a just a download and could be dormant, However, this assumption can be verified in that very few wallet downloads result in no transactions.

Summary

This chapter has identified the research approaches that were used in this study and has justified why these were chosen. Figure 3 provides an overview of these choices made:

Research Process Stage	Chosen Method
Research Philosophy	Positivist
Research Approach	Deductive
Research Strategy	Experimental Research
Time Horizon	Longitudinal
Data Collection Method	Quantitative

Figure 3 Summary of research methodologies chosen by the author

Findings and Analysis

Data collection

Table 5 shows a range of data that was collected for 14 developing countries. These data were used for analysis.

Country	Bitcoin Wallet Downloads	Unbanked %	Inflation 2016	CPI 2016	Mobile Subscriptions / 100 people
Russian Federation	320,896	32.6	7.2	29.0	148.8
Brazil	91,817	31.9	6.7	40.0	108.4
Ukraine	91,296	47.3	13.5	29.0	128.0
India	53,248	46.9	5.2	40.0	58.1
Taiwan	41,803	8.6	1.4	32.0	84.8
Argentina	40,573	49.8	42.8	36.0	139.3
Romania	38,039	39.2	-1.1	48.0	106.8
Mexico	29,701	60.9	2.8	30.0	77.1
Bulgaria	24,777	37.0	-0.8	41.0	138.5
Turkey	21,623	43.3	8.0	41.0	91.2
Indonesia	21,237	63.9	3.8	37.0	95.6
South Korea	21,188	5.6	0.8	53.0	106.1
Vietnam	14,102	69.0	2.8	33.0	119.3
Philippines	13,111	68.7	1.7	35.0	94.1

Table 5 source – Appendix 1

Inflation

% Inflation was plotted against Bitcoin usage. The hypothesis being to see if the unbanked turn to Bitcoin when inflation is high to conserve value. The plot below Diagram 1 shows a trend; higher inflation is proportional to higher Bitcoin adoption. This infers that people maybe using Bitcoin to mitigate the negative effect of inflation.

Diagram 1

However, the quality of this regression is not optimal by any means. Firstly, the correlation coefficient is 0.516 (middle), this throws into doubt whether there is a positive linear dependence between the two variables anyway, although it can be said that they are moderately correlated. A coefficient nearer 1 indicates a more solid, certain relationship.

In this data, there are two country outliers (see diagram 1) these are Russia and Argentina. This data alone reduces the quality of the regression and takes the R-Square down to 0.267. If these outliers are removed, then the correlation coefficient increases to 0.652 and the R-Square up to 0.367. This is not conclusive but does tend to suggest a relationship but more data would be required to be more certain. It can tentatively be said that as inflation increases then this may influence individuals to increase the use of Bitcoin.

Corruption / Fraud

Bitcoin usage was plotted against a corruption index. The higher the index the higher the perceived level of corruption.

Diagram 2 shows that the higher the corruption level in a country the higher the Bitcoin adoption and vice versa. Countries with less corruption see Bitcoin usage drop. The results this time are much more significant. With a correlation coefficient of 0.912, it can be said that they are very highly correlated and the R-Square is 0.817 confirms this.  This time, the outlier, Russia, is drastically influencing the system. If it is removed from the dataset, the correlation coefficient becomes negative (-0.199) showing there’s basically no linear dependence. The R-Square would become very poor too (0.039).

Bitcoin and the Unbanked

Diagram 3 shows Bitcoin usage plotted against the % unbanked for each country. The suggestion being that the unbanked are using Bitcoin as an alternative banking system.

Diagram 3 created by author

The result shows that that as the percentage of unbanked increases, Bitcoin adoption decreases. Whilst this was an unexpected result, as it suggests that there was no correlation between these sets of data. More data would add certainty to this premise. Is this negative correlation due to poor understanding or poor promotion of Bitcoin in that country? Is it down to lack of access to the internet or poor education generally. There are many factors which could be brought into play here so any statement would be pure speculation which is not in line with this study’s methodology.

Mobile phone usage

As mentioned in the last paragraph, Bitcoin usage will depend on awareness and access to the system. It could be postulated that increasing mobile adoption could lead to increased access to networks and therefore an increase in Bitcoin adoption.

In diagram 4 below countries with the highest mobile phone subscriptions equate to lower Bitcoin adoption rates indicating that the link is opposite to a logical view. Increasing mobile subscriptions (subs) take up (mobile phones subs per 100 people) led to decreased uptake of Bitcoin wallets. Therefore, there is a negative correlation (-0.479) between mobile phone take up (the infrastructure needed) and Bitcoin usage. However, the significance of this is low based on the correlation coefficient of -0.220. Technically, there is a negative linear dependence which is confirmed by the R-Square value of (0.048). The outlier again is Russia, but this cannot be attributed to the poor correlation this time as removing it barely changes anything. The relationship between Bitcoin adoption and mobile uptake is not proven and shows that there may be more factors involved than the author is aware of. For example, mobile may have been given as part of a “mobile banking promotion” that being the case then Bitcoin adoption would be negatively affected. More detailed data would be needed to assess this phenomenon.

Diagram 4 created by author

Currency Volatility

It was hypothesised that increasing currency volatility may lead to increase Bitcoin usage. However, due to Bitcoin being in its infancy Bitcoin’s own volatility is greater than that of all the developing world’s currencies used in this analysis. This makes it impossible to remove any “noise” from the Bitcoin data volatility to then make this comparison. Consequently, it does not provide any further insight for this study. If Bitcoin adoption increased over time and its volatility was more stable in future then this correlation may hold. Miller, 2014 and other theorists however, are not convinced that there will sufficient stability and that there will be a continued trend of instability due to inherent nature of Bitcoin as a supply and demand currency. Bitcoins are finite and therefore supply will not always match demand (Tasca et al., 2016). The author’s data did not provide any many more insights to those already proposed by academics. This will be discussed further in the limitations of the study.

Summary of findings from the data

Due to the quantity of data available, any inferences made are made on face value, with the proviso that more detailed data would have helped increase the certainty of the inferences. However, to aid discussion the author will use the data that has been presented.

In summary

• The fact that Bitcoin downloads have been executed in the developing countries cited (table 3) shows that there is growing awareness of Bitcoin.
• Increase in inflation tends to increase Bitcoin adoption
• High corruption index countries tend to have high Bitcoin adoption
• It is hard to say whether currency volatility has any effect on Bitcoin uptake
• Mobile uptake based on subscriptions has a negative impact on Bitcoin uptake.
• The greater the number of unbanked in a country the lower the Bitcoin adoption
• Are ‘Bitcoin wallet downloads’ a true reflection of Bitcoin adoption based on the surprising results of some of the correlations

Discussion and Conclusions

“Can a cryptocurrency liberate the ‘unbanked’ and help them join the global commercial community?”

Throughout this research the author has focused on this question. With 2.5 billion people designated as ‘unbanked’ this represents a massive opportunity to give them access to some level of financial services and free them from localism. The findings have shown that Bitcoin would make a viable solution because people are using Bitcoin to overcome challenges faced in the developing world (inflation and corruption being the main ones). But just because people are using Bitcoin does not mean it is the best solution, it is more likely to be the best solution of a bad situation right now. The main challenges and competition faced by Bitcoin at the moment is the rapid and ever advancing mobile payment technology industry, with large companies like Visa for example trying to create solutions to match Bitcoin usability in the developing world. This race could see Bitcoin pushed out of the perspective solutions as Bitcoin needs to rid itself of its volatility, but this can only be done with increased uptake and attainment of critical usage (Graham, 2014).

The data shows Bitcoin is a superior system than straight payment systems but that does not count for much if people adopt other mobile payment systems. This is seen in  the developed world where by Bitcoin has been supplanted  by credit card companies who have made things so convenient to use, systems such as pay with phone, touch tap your card, that Bitcoin has lagged behind relatively,  in that respect. To acquire Bitcoin the user still has to go through an exchange via the internet and not all recipients /companies/organisations will accept Bitcoin as yet. So even though Bitcoin is able to mitigate the effects of corruption and hyperinflation for example, credit card companies’ advancement may prevent the complete adoption of Bitcoin because they are able to minimise transaction costs and make application easier to use even though in most aspects Bitcoin is superior. Having acknowledged the convenience of other systems above, the opportunity to expand Bitcoin in the developing world is still viable as most people do not have access to financial services, products, bank accounts anyway. The race itself to incorporate the unbanked into some form of financial regime is the most important.

Bitcoin is the main cryptocurrency in the world but due to technological advancements by others it is has lagged behind other cryptocurrencies in speed and ease of use. Has Bitcoin’s success due to it being the first? Ethereum coins have been compared with Bitcoin in the following way – “If bitcoin is a pocket calculator then Ethereum is a brand-new iPhone” (Behrens, 2017) due to its quick payment system and scalability potential. Will this be the same for the unbanked, if a mobile phone company or Credit Card Company can solve the unbanked payment problem much like M-Pesa has in the developed world, then even with Bitcoins superior features then rapid adoption/revolution will not be realised.

That being said the data above is promising, as shown in diagram 2, where countries where corruption is seen as high then Bitcoin uptake is high, where corruption is seen as low, then Bitcoin uptake is low. Clearly this shows that people are looking for ways to mitigate the problems with fiat currency issues.

The data also shows that Bitcoin adoption increased when inflation increased as seen in diagram 1. The most recent example of this, which aligns with the authors own findings is that of Venezuela. According to the Bitcoin brokerage website Surbitcoin.com, the number of Venezuelan users skyrocketed, from 450 in August 2014 to more than 85,000 in November 2016 (Rands, 2017) due to inflation problems. This further demonstrates that Bitcoin is being used as an alternative currency to prevent problems of corruption and inflation.

The conclusions for Bitcoin uptake are not completely convincing in relation to sign up of the unbanked to Bitcoin. As the data in diagram 3 shows, when mobile adoption is increased (the infrastructure needed for Bitcoin) then it might be expected that Bitcoin usage may increase. In practise, the opposite occurs, Bitcoin usage decreases with increase in mobile uptake. Does this reflect that the mobile phone is being used to uptake the other systems that were discussed above? Maybe, it could be down to simple awareness, whereby mobile phone companies when selling their phones make customers aware of M-Pesa the localised payment system which would win the race to bank the unbanked on a local basis even though it is known that Bitcoin is flexible and can make payment locally and globally. Do the unbanked actually need a gloablised system? If people using M-Pesa are happy with it then will Bitcoin adoption be even harder because there is now inertia to change from the perceived easier system of M-Pesa to Bitcoin. This comparison is similar to battle between the ease of use of credit card in the developed world vs Bitcoin. This is where the author would like to expand the research and actually visit and conduct surveys in the developing world to try to understand more about the needs and the mind-sets of the unbanked.

Is regulation of Bitcoin a barrier to Bitcon adoption? Will countries become deterred by the regulators initial stance on Bitcoin i.e. where they associated it with drug and arms sales. Will the regulators block the adoption of Bitcoin? Whilst they can’t prevent individuals from acquiring Bitcoins, they may prevent companies from accepting them thus limiting their use and thus stall widespread adoption.

One of the biggest areas where Bitcoin adoption (as a routine currency) could be a major issue is that of lending. Individuals and countries grow by borrowing money to invest and expand. At present Bitcoin as a commodity currency does not have the facility for lending.

Bitcoin features are superior to other systems as discussed above, for example mitigating the effects of corruption, inflation and volatility. However, because Bitcoin is decentralised then no one owns it nor promotes it, or makes money out of it like say M-Pesa. Bitcoins decentralisation whilst a massive advantage is also its “Achilles heel” and therefore the final conclusion from this discussion is that it would not, could not be used for the unbanked in answering the question posed by the author.

Recommendations

Recommendations and Implications for the Literature

The literature is more theortical there are not many actually data significant areas. Most says this is what Bitcoin can be used for but does not actually have data to back it up.

Recommendations and Implications for the Future Research

Get into the mindset of the unbanked with surveys etc

Research Limitations

1 Do Bitcoin wallet downloads equate to Bitcoin transaction volume – was this a valid assumption. How can it be improved?

2 Sample sizes, was too small.

• The model is highly limited by the small size of the sample and indeed, two of the countries are highly disturbing the model: Russia and Argentina. The issue is it’s 2 countries particularly interesting in terms of their economy and their level of corruption. Also, it’s right, Bitcoins are highly nontransparent and the accuracy of the data can be questioned.

3 Developing countries – Is Russia a developing country. Was country selection valid maybe include Sub Sharan Africa? Should we just use one country

4 Add other cryptocurrencies when data allows

5 Are using the unbanked a valid segmentation. Can the study be done with all countries and all users as inflation, corruption and volatility affects them all?