Africa May Be a Tougher Market than Expected for Bitcoin to Crack

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International Bitcoin businesses have been sizing up the African market for some time, but they face massive regulatory hurdles throughout much of the continent.

Bitcoin, a cryptocurrency designed to operate outside the infrastructure of the mainstream financial services industry, seems poised for the same success as initiatives like M-Pesa, which uses the mobile phone network to deliver financial services. But the digital currency's technological advantages may not help it against African regulators who are guarded with which businesses they allow to operate within their jurisdictions.

Africa's money services regulations are generally similar to those instituted in North America, but African regulators are highly concerned about money laundering and terrorist financing, says Mark McKenzie, a financial sector expert with his own consulting practice, Mark McKenzie Consulting.

"Bitcoin is new and Bitcoin has its own challenges. If you release it in Africa and haven't worked out all the kinks you are exposing Africa to additional vulnerabilities," says McKenzie.

Alternative financial services such as M-Pesa are "the best thing that's happened to Africa," he says. "Especially in deep rural areas (prevalent in Africa) as long as people have a cell phone they can have access to money transfer."

But even the telecommunications infrastructure has its issues, including power outages, that may be just as problematic for the digital network Bitcoin businesses use, he says.

Businesses such as BitPesa Ltd. and ZipZap, which provides a Bitcoin-to-cash service in the U.K., are interested in Africa to address the lack of financial services options in the market and to cut the fees associated with traditional remittance companies.

But Kipochi, an African Bitcoin payment service launched last year, tried to connect to M-Pesa and was blocked after just two weeks, according to Kipochi founder Pelle Braendgaard.

Bitcoin was created in 2009 as a payment system that is not reliant on traditional payments infrastructure for the movement of funds and authenticating those transactions. It allows for near real-time transactions that cost only fractions of a penny to process.

Many people have speculated that Bitcoin could save the parties involved in remittance billions of dollars. In a March research report, Goldman Sachs said that Bitcoin could save $43.4 billion on remittances. This would especially help migrant workers and the underbanked.

But even if the cost of executing a bitcoin transfer is low, companies face regulatory and compliance costs associated with being an international money transmitter. These costs might lead Bitcoin businesses to charge higher fees in the future than they do today for domestic transfers.

South Africa usually follows in the footsteps of the U.S. in terms of regulatory procedure, but it may still be a tough market, says Rex McKenzie,  PhD, a senior researcher at the University of Witwatersrand in Johannesburg, South Africa. (Mark McKenzie and Dr. Rex McKenzie are not related).

"South Africa has a very highly evolved and sophisticated banking system. In many ways it's like a banking center for the rest of Africa…and so there is concern about keeping the South African name and reputation clean," says Dr. McKenzie.  "South Africa goes to pains and great lengths to make sure that the outside world, particularly Washington, gets a good impression of banking and the regulatory system…and monetary policy as well."

Payments companies that work in South Africa must go through a lot of due diligence, Dr. McKenzie says. Even traditional companies such as Western Union and MoneyGram perform extensive documentation and reporting on customers in Africa, he says.

Standard Bank in South Africa announced a Bitcoin account pilot in February, but ended the pilot a few days after the announcement with no plans to launch a full product. The internal Bitcoin pilot project had been ongoing for several months, limited to eight selected members of the bank staff.

"The pilot formed part of Standard Bank's research into activities around internet-based financial services and solutions offerings with the objective to assess Bitcoin, its systems, offerings, challenges and risks," says Ross Linstrom, a spokesman for the bank. "Standard Bank runs such pilots to constantly improve the way it does banking in order to remain relevant to its customers and cater for their ever-changing needs."

There might be more opportunities in Nigeria, which has a large population and is open to outside players, than in a country like Kenya, where M-Pesa is entrenched, Dr. McKenzie says.

Western Union has been expanding its services internationally in recent months. In Nigeria, Western Union partnered with Paga, a mobile payment provider, and eTranzact, a payment processor to offer Nigerian residents a funds transfer service via their mobile device.

But Bitcoin businesses "can't be cowboys here," says Dr. McKenzie, noting the Bitcoin community's reputation as the Wild West of financial services.

The World Bank, an international financial institution developed by the United Nations, and other organizations have worked closely with local regulators in Africa to create appropriate legal and regulatory frameworks for financial services and products. 

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