In
a fast paced technological world financial innovation is bringing new terms and
more glossary for economics textbooks which were never covered before and to
some extent never anticipated. We have seen the emergence of e-commerce which
has revolutionised service provision for banks and all financial players, mobile
money wallet which has challenged the banks especially those that have failed
to be innovative and stay in the old era of the financial world. Now we are
seeing the emergence of virtual currencies, cryptocurrencies, or Bitcoins which
are having financial regulators debating on whether to change the definition of
money or currency. This new phenomenon is set to boost financial inclusion in
the world and also change the financial landscape. One source defines virtual
currency as unregulated money issued and controlled by its developers used and
accepted by the members of a specific virtual community. The definition alone
shows that this is a market regulated currency where by the market forces
determine the price and movement with no central authorisation.
The
benefits of the virtual currency are abound but also as a new component of the
world virtual currency has many risks associated with it but firstly we will
start off with the benefits it comes with:
·
This is a market based currency which is
owned by those who use it and regulated by those who use it. There is no
central authority which passes transactions, the network of users allows for
interaction and tracing of each transaction with ease. The validity of Bitcoins
is mainly based on whether the market needs it or not but looking at how technology
is being embraced the same will happen to Bitcoins as it becomes clearer and
accessible to everyone.
·
This will be one of the cheapest means
of transferring international funds and will threaten the existence of firms
such as Moneygram and Western Union, unless they also come up with other
innovative cheaper means of rivalling the virtual currency. In 2013 alone for
Sub-Saharan Africa an estimated $32 Billion was sent via international
transfers of which transfer fees are pegged between 10-12 percent meaning that
institutions might have collected between 3.2 to 3.84 Billion dollars in fee
charges. That is too much money for clients to pay comparing to a 3 percent fee
for currency exchange that will be charged if one is using Bitcoins . This will
be a big saving for the clients and will encourage more people to use this
facility thereby integrating more people in the financial circle.
·
Transfers are easy and quick with
transfers being instant at a lower cost possible. With other financial systems
transactions have to go through a lot of check in and verifications which will
take more time and for one to have a faster transfer if using banks they will
have to pay a higher fee with normal transfers being quoted T+ 2 DAYS. An
example is that of Bitpesa which will be used in Kenya for transfers coming
from London to Nairobi whereby one has to purchase Bitcoins and send funds to
whoever they want to in Kenya if they have a mobile money wallet.
·
It’s safe to use especially with the
rate at which the electronic cards are being hacked and defrauded by people
around the world and also how some banking systems are vulnerable to hackers.
Hackers might find it difficult to hack Bitcoins as it is a network of the
users and all the users monitor the use of this virtual currency. Not everyone
can own a Bitcoin and it has a value attached to it which only the users know
how much it is worth so it’s better to carry around rather than hard cash.
·
For Africa to embrace this financial
innovation and use it to its advantage will mean that we are getting closer to
the goal of financial inclusion and also that we are developing our markets to
an international level thereby giving us a chance to add our own ideas to the
world that will not affect the continent if another global crisis arises.
With
financial innovation usually many unknown risks cannot be avoided and solutions
will have to be thought along as the product grows. This can also be said about
Bitcoins especially in an economy like ours in Africa which is susceptible to
many shocks in the global economy and rigid governments. The risks associated
with the virtual currency are as follows:
·
The biggest has been that of international
payments as they are fixed or set exchange rates when one is transacting which
affects payout since rates change with each minute. Clients will be liable
either losses or getting more than was sent at the time due to exchange rate
movements as users will need to lock the position as they trade to avoid
fluctuations or for the users to set daily rates to avoid these mishaps.
·
Bitcoins are not accessible to everyone
and it’s not easy for anyone to own them as they are confined to a certain
community.
·
Governments will need to be proactive
and support these financial initiatives but if you see regulators in America
having headaches in trying to regulate this product then that means it will be
a big ask for African countries but hopefully they will be able liaise with the
providers of the services to better understand the functioning of the product
so as to then regulate correctly and accordingly.
Kudos
should go to Bitpesa the ones who brought to Africa M-Pesa for their continued
innovation and continuing to work towards the integration of every African into
the financial system. Companies in South Africa are also coming up with plans
to introduce the product and we will expect to so see more players coming into
the market in different African countries.
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