Cryptocurrency – the next hotbed for deal activity?
August 05, 2015
Cryptocurrencies have a fascinating history. They have become increasingly well-known since the release of the Bitcoin whitepaper in 2009 and can challenge you to question your understanding of value and how we transfer it between each other. The question here is whether cryptocurrencies provide a better means for cross border remittances? I think they do…but just not yet.
In my last blog, Messenger Money - sending a shock to global remittance companies, I outlined the potential for new technology-led entrants to steal some market share from the larger incumbents. My bet would be that whoever can best harness the power and potential of cryptocurrencies and apply it to the remittance market will be the winner(s).
Advocates of cryptocurrencies tend to point to two major benefits when it comes to remittances: speed and cost. For the purposes of this article I’ve focussed on Bitcoin. There are hundreds of other so called “altcoins” but I largely overlook them due to the fact that they lack scale and are, in most part, just slightly tweaked versions of the Bitcoin source code.
So what is it about Bitcoin that makes it quicker and cheaper than traditional means of remitting value across borders? Bitcoin is a decentralised, peer-to-peer network. You can join that network by downloading a free piece of open source software. This means that there are no middle men or intermediaries to slow down transfers or charge fees. For example, in November 2013 a bitcoin to bitcoin transaction occurred that was valued at US$147m and it is widely held that the fee for processing that transaction was under US$1.
Blocks of transactions are confirmed approximately every ten minutes and, whilst a transaction is not guaranteed to be included in the next block, it is likely to be picked up and confirmed in minutes or hours as opposed to days or weeks.
Bitcoin is also a global currency. Anyone with access to the internet can use it wherever they are in the world and it is completely digital so you can store and transfer bitcoins using a smartphone. One bitcoin is divisible up to eight decimal places so, coupled with low transaction fees, it means there is great potential for micropayments – something of great importance when it comes to remittances.
Figure 1 – Cumulative Venture Capital Funding 2012-215 (YTD)
There are already a handful of companies attacking the remittance market using Bitcoin. BitPesa allows people to send money to Kenya and Tanzania from anywhere in the world and boasts an ‘all in’ fee of 3% or less. This is quite a considerable improvement when compared to an average cost of UK to Kenya transfers at 6%, US to Kenya transfers at 10% and Kenya to Tanzania transfers of 24%. Crucially the money arrives in the form of local currency on the recipient’s mobile phone or directly into their bank account (Kenya only).
Another company, Bitreserve, allows members to deposit bitcoin and either hold it as bitcoin or convert it into eight major currencies, including pesos and rupees. Members can then send or receive value to or from other members for free using the Bitcoin blockchain as the transfer medium. However, if you are going to make transfers outside of Bitreserve platform then it must be in bitcoin. In other words Bitreserve is bitcoin in / bitcoin out – something which might limit its usefulness for remittances in the short term.
Both BitPesa and Bitreserve have attracted investment over the past 12 months and there has also been substantial investment in other Bitcoin-related companies; in 2015 alone there has been c. US$350m of venture capital funding. Along with this investment comes some big name advocates from the world of technology and venture capital that are hard to ignore; Mark Andreesen, Barry Silbert, Tim Draper and Halsey Minor (founder of Bitreserve) to name but a few.
Venture Scanner's sector map illustrates just how much activity is taking place in the Bitcoin ecosystem, see figure 2. below.
Amongst all of this positive sentiment, investment and entrepreneurship, I think it is still important to remember how early stage Bitcoin is. It has been around for less than six years and there are still a lot of unknowns. I am an advocate of Bitcoin but I also recognise that there are a number of potential pitfalls, some more relevant than others for remittances.
Things are certainly improving quickly but consumer awareness / education is still relatively low, buying and spending bitcoins is not as easy as it could be and the risk of losing access to your bitcoins is still too high. Lack of regulation and price volatility are well covered topics that need no further discussion here.
Figure 2 – Bitcoin sector map
Fiat to bitcoin exchanges are also still mostly denominated in the major global currencies (GBP, USD, EUR, CNY). Bucking this trend, Bitcoin exchange MonetaGo recently launched across 40 countries and I think we are likely to see more of the same from other companies, but it will take time. Also, whilst bitcoin is a global currency, until everyday items are priced in bitcoin people are going to be reliant on converting back into fiat and if you can’t do that easily, quickly and cheaply then where is the benefit?
Scalability is another issue. The global remittance market is expected to reach US$608bn in 2015; in comparison the total value of all bitcoins in circulation is approximately US$3bn. At present transaction volume is theoretically limited to seven transactions per second (compared to, say, Visa’s network that can handle over 50,000 transactions per second). There is much discussion at present around increasing Bitcoin’s block size and the results of those discussions, one way or another, will have a big impact on the suitability of Bitcoin for remittances. Something to keep an eye on.
There are a number of Bitcoin 2.0 projects (Ripple, Ethereum, Stellar) looking to address these issues and more. There are also a number of initiatives looking to separate Bitcoin from its underlying technology – the blockchain – in an attempt to take all of the benefits of a decentralised, distributed, public ledger without bitcoins as the incentive to partake in and maintain said ledger. I will be exploring these more in my next article but at this stage I can’t see past the Bitcoin blockchain.
What is for sure is that we will see more and more cryptocurrency and blockchain-related deal activity, venture capital (VC) money will continue to pile in to the sector and I think larger, more-established financial institutions will start to flex their muscles. UBS already has a blockchain lab at Level 39 in Canary Wharf, BBVA Ventures and NYSE took part in the $75m Series C round in Coinbase and RBS recently announced it is undertaking a proof-of-concept with Ripple’s technology. My hope is that a good chunk of these investments will be backing remittance related solutions.
What do you see happening in the world of cryptocurrency? To what extent will it become the next hotbed for deal activity? Share your thoughts below or schedule a meeting to discuss your situation in confidence.