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CGAP: Bitcoin Not Helping the Poor

Published on February 2nd, 2014 by bcohen

World Bank and Gates Foundation Sponsored CGAP Gives Bitcoin Thumbs Down


By Brian Cohen

On January 23rd, CGAP or "The Consultative Group to Assist the Poor" issued a report on Bitcoin entitled Bitcoin vs. Electronic Money: Digital But Different. Concurrent to the report's issuance, Chief Executive Officer of CGAP Tilman Ehrbeck Blogged on Huffington Post: "Bitcoins and Financial Inclusion: Not Much of a Link for Now." CGAP describes itself on its website as

"work{ing} toward a world in which everyone has access to the financial services they need to improve their lives...

CGAP develops innovative solutions for financial inclusion through practical research and active engagement with financial service providers, policy makers, and funders. Established in 1995 and housed at the World Bank, CGAP combines a pragmatic approach to market development with an evidence-based advocacy platform to advance poor people's access to finance..."

According to the Independent Evaluation Group (IEG), "an independent, three-part unit within the World Bank Group" report on CGAP,

"CGAP was established in 1995 as a consortium of public and private agencies with the mission of expanding access to financial services for the poor. The World Bank provided funding of $30 million from its Special Grants Program for a three-year period and also agreed to act as the overall administrator and to host the CGAP secretariat inside the World Bank..."

The World Bank appears to have been the largest donor until the most recent fiscal year when the Bill and Melinda Gates Foundation became its largest funder by far (and the World Bank was also eclipsed by the United Kingdom). CGAP's Annual Report does mention a "planned scale-down of the World Bank's contribution."


File under /Sarcasm https://twitter.com/aantonop/statuses/426459750058819585

In contrast to Let's Talk Bitcoin co-host Andreas M. Antonopolis' "The Other 6 Billion" mantra and general Bitcoin evangelism that Bitcoin is (or will be) ideal for international remittances, the unbanked and underbanked, the report states:

"Some media reports have confused Bitcoin with more popular electronic money (e-money) schemes used in many low-income countries to reach the unbanked. But the two are markedly different and should not be conflated... Many developing countries lack the regulatory framework or the capacity to track this new type of financial innovation..."

and further

"...The current realities of Bitcoin mean it is still a long way off from reaching the unbanked. Only the financially included can access the Bitcoin system through the necessary digital connections to the Internet...."

I am a bit perplexed by this statement since the only barrier to sending and receiving Bitcoin appears to be a text enabled phone. A Time Magazine Headline from last year read "More People Have Cell Phones Than Toilets, U.N. Study Shows Out of the world's estimated 7 billion people, 6 billion have access to mobile phones. Only 4.5 billion have access to working toilets." And according to Tomi T. Ahonen and Alan Moore's "Communities Dominate Brands" "Latest Mobile Numbers for End of Year 2012 - This is getting humongous," 5.6 billion used SMS Texting in 2012. And further according to Txtnation "Over 90% of the global GSM network infrastructure and almost all of the mobile phones available today support transportation of USSD messages" {more on USSD later}. Moreover, mobiThinking reported in "Mobile payments will surpass $235 Billion in 2013 (Gartner); NFC still disappointingly small, despite the hype" that:

"...Africa (led by Kenya) and Asia account for the lion's share of mobile payments. Many countries in Africa and Asia are developing countries where smartphone penetration remains minimal (emphasis LTB), which goes to show that people don't need smartphones, fancy apps or NFC to make mobile payments, they just need companies to provide useful services via technologies that work on everyday handsets..."

And finally in Africa and the developing world there are novel ways to charge cell phones when the standard energy infrastructure is absent. Inventor Pascal Katana's "Smart Charger" for Bicycles is one such example:

Spark Africa - Kenyan solution for charging mobile phones - Episode 2 (YouTube). This has brought about entrepreneurial spirit such as pay per use charging stations and kiosks (YouTube) and even mobile franchising opportunities (YouTube) such as ARED:

"ARED's Mobile Charging Kiosk (MCK) provides a one-stop shop destination for mobile users. The solar-powered charging station offers low-cost mobile phone charging and mobile money transfers, as well as mobile phone, electronic airtime sales and in a near future WIFI hotspot location. Mobile phone users no longer need to make several stops to buy a phone, charge it, load it with airtime, or transfer money to friends or family..."

Although i'm not sure how easy it is for the unbanked to open an account with Coinbase (Link: "Send Bitcoin via SMS Works with any phone or network, enabling bitcoin for everyone.") or Blockchain (Link: "SMS Phone Deposits Instantly deposit into any bitcoin address using phone / SMS.") , both of which support Bitcoin over SMS. And then there is Kipochi, "Bringing Bitcoin to Kenya and the World. Kipochi which is swahili for wallet" is

"...a bitcoin wallet where your mobile number is your account number. Bitcoins can be sent and received across the borders."

In "Can Bitcoin transform Africa?" wamda's Jonathan Kalan recently spoke with Kipochi founder Pelle Braendgaard who said that

"The main reason people are unbanked [in Africa] is the gatekeepers...By using Bitcoin, Kipochi can reduce these barriers by cutting the cost of cross-boarder transactions from 12% (a typical rate at firms like Western Union) to between 1% and 3% in Africa..."

CGAP's Bitcoin report notes inaccuracies in reporting by CoinDesk's Emily Spaven in her article "Kipochi launches M-Pesa integrated bitcoin wallet in Africa." M-PESA has been well researched by CGAP with 125 articles on the topic in its website. M-PESA according to the Economist article "Why does Kenya lead the world in mobile money?" is used by 17 million Kenyans or more than 65% of the population and 25% of the country's Gross National Product moves through it.

There are different numbers being floated out there in regards to M-PESA's market penetration but CGAP's reference in the report appears to be inaccurate. According to Safaricom's homepage "43% of Kenya's GDP flows through M-PESA" (markedly different than the the above Economist stat) and indeed according to M-PESA's Historical timeline as of March 1st, 2013 there were 17,000,000 Million active M-PESA users (CS Monitor just reported 18 MIllion or 2/3rd the population of kenya). According to the CGAP Report, the CoinDesk article was

"...a news story that inaccurately associated Bitcoin with M-PESA, the mobile payments service used by over 11 million customers in Kenya popular for its potential to provide financial services to the financially excluded."

and then included a reference to "Footnote 4":

"The article claimed that Kipochi (a Kenya-based Bitcoin wallet accessible via mobile phones) launched a product that allowed people in Africa to send and receive Bitcoins. Several statements in the article were misleading. It referred to Kipochi as being able to 'convert [Bitcoins] to and from the Kenya currency M-PESA' (Spaven 2013). M-PESA is not a Kenyan currency, but simply a service that allows users to send e-money through an e-money account accessed through the mobile phone. M-PESA is not affiliated with Bitcoin, and there is no integration of the systems. Safaricom does not permit the sale and purchase of Bitcoins using M-PESA."

While its is true the M-PESA is not a currency, it is also true that "M" is short for mobile, and "pesa" is Swahili for money (hence the confusion?). Moreover, Kipochi was integrated with M-PESA... apparently to the dismay of Safaricom.

Adam B. Levine, co-host of Let's Talk Bitcoin interviewed Mr. Braendgaard at the Inside Bitcoins event on December 10th 2013 for the New Ideas in Bitcoin panel. The interview was released on Episode 74, January 10th Let's Talk Bitcoin Podcast.

The beginning of the interview is queued up on SoundCloud for your convenience here (29:39). Braendgaard explains that Kipochi can work with Mobile Web and USSD phones (recall the reference from the top of this article) as well as a SIM toolkit version. Braendgaard also explains that two weeks after launching his integrated service, M-PESA "shut down" Kipochi's services (SoundCloud: 33:27).

Further, according to Radio Netherlands Worldwide Africa in the December 22, 2013 article "Hello Bitcoin, goodbye Western Union? The future of remittance could be digital:"

"...While Kipochi is not directly linked to M-PESA yet, the company has developed the technology to exchange Bitcoin to M-PESA, and is currently under negotiation with Safaricom, the telcom provider that runs M-PESA, to integrate this function in their app..."

Why CGAP did not further explore Kipochi and simply dismissed it because of erroneous reporting by CoinDesk doesn't make any sense considering CGAP's objective of "practical research and active engagement with financial service providers" and "developing innovative solutions for financial inclusion."

Somalia and Bitcoin: A Match?


Hawala or Hewala (Arabic: ???????, for money transfer)


CGAP could have used its influence to forge the relationship between Kipochi and M-PESA (which is owned by Safaricom which is partly owned by the Government of Kenya). I contacted Mr. Braendgaard to comment on this article but I was unable to get comment by press time. I would have liked to have known if CGAP actually contacted Kipochi prior to publishing their report (I suspect a representative of CGAP or Mr. Braendgaard will provide a comment that will be updated for inclusion). Although this might bring a groan from some in the Bitcoin community, one such solution could be to block Kipochi integration into M-PESA (specifically) in the Kenya region but enable it in other regions such as Somalia...

An example where CGAP lends its expertise and influence is in the Somalia crises. Edward Paice in AllAfrica recently reported in Somalia: Somali Money Matters - an Update On the Remittances Saga that Money Transfer Operators (MTO) are a "financial lifeline" in Somalia where there are no banks&and MTOs are being shut down as well:

"Since the announcement by Barclays in May 2013 that it intended to close the bank accounts of all but 19 of its 165 clients in the remittance transfer business, following the earlier withdrawal by other banks from the sector, there has been significant "behind the scenes" political wrangling and negotiation."

There is a plan to secure remittances in the Somali region and the implementation group tasked with this comprise the World Bank, Financial Sector Deepening Africa (FSDA), and the Consultative Group to Assist the Poor (CGAP). Somalia doesn't have a central government and Bitcoin is e-money (cough) without a central issuing authority... perhaps a match made in heaven.

Somalia seems to me to be an example where Kipochi, "Bitcoin" (The Foundation perhaps?) and CGAP should sit down over some milk and cookies (or maybe some samosas?). There is Zaad but it is not without controversy that would enable wider adoption (See Economic Insights: Trends and Challenges Vol. II 3/2013: Attitude of Somali Customers towards Mobile Banking Services: The Case of Zaad and Sahal Services by Osman Sayid and Abdelghani Echchabi) which is why a neutral supranational currency like Bitcoin is needed in a region like Somalia:

"...Al-Shabab rejected Zaad or Sahal financial services, arguing that this will lead the economy to be controlled by international corporations and bankers, and to the elimination of local currency (So.Sh) in circulation. Therefore, the Zaad or Sahal financial service was suspended in South Somalia, in the area where Hormuud Telecom is operating, while Zaad and Sahal financial service is operating effectively in Puntiland and Somalil and states because these two states are not under the control of Al-Shabab which banned Zaad and Sahal service..."

CGAP Leap of Logic

"Proponents argue that Bitcoin provides a much cheaper and quicker payment system than what is currently available, especially for international transfers. That may be so, but it is also possible that five years from now Bitcoin will have disappeared or been replaced by other types of virtual or cryptocurrencies"

I'm not exactly sure that I follow the leap of logic here. There is five years of Bitcoin behind us and all the incentives in the world to manipulate the Bitcoin network and Bitcoin has persevered. The network effect is effectively a barrier to entry. Anyone can issue their own currency but how can it be as robust as Bitcoin, the most powerful network the world has ever seen?

As the New York Times article by Nathaniel Popper explains in "Into the Bitcoin Mines:"

"Today, all of the machines dedicated to mining Bitcoin have a computing power about 4,500 times the capacity of the United States government's mightiest supercomputer, the IBM Sequoia, according to calculations done by Michael B. Taylor, a professor at the University of California, San Diego..."

Bitcoin is not e-money

I've played the money semantics game before and not sure I was very good with it, maybe Bernard von Nothaus is a little better (C-Span Video), but let's give it a try& From CGAP CEO's Blog Post:

"...Electronic money is a very different concept. It's the extension of a national currency like U.S. dollars or Kenyan shillings for use on a digital channel to lower the costs of handling physical cash estimated to easily exceed 1 percent of GDP. It's essentially the 1-to-1 electronically recorded value issued against the cash receipt of the equivalent amount. E-money issuers are typically overseen by the same central banks as the underlying national currency. To mitigate against systemic and consumer protection risks, the cash against which e-money is issued typically has to be deposited with fully prudentially-regulated financial institutions..."

I'm a bit confused as to CGAP's differentiation between e-money and the unit of currency bitcoin the moves across the Bitcoin network.

In my October article for Let's Talk Bitcoin "OIG Hands Virtual-Currency Reins to FinCEN," the U.S. Treasury defines e-money and the definition has not changed for at least two years:: "Electronic money is also known as e-money, e-currency, electronic cash, electronic currency, digital money, digital cash, digital currency, or cyber currency. Typically, e-money involves the use of computer networks, the internet and digital stored value systems. Electronic funds transfer, direct deposit, digital gold currency, and virtual currency are all examples of electronic money."

Wikipedia describes e-money as follows:

"Electronic money is a new expression the meaning of which is not stable. It can refer to different realities depending on the context (legal or not, historical or actual, monetary theory...). However, the underlying principle of electronic money involves the use of computer networks, the Internet and digital stored value systems. Examples of electronic money are bank deposits, electronic funds transfer (EFT), direct deposit, payment processors, and digital currencies such as Bitcoin.

But if you want to speak the Queen's English (PDF), according to the European Commission: "electronic money" means electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions as defined in point 5 of Article 4 of Directive 2007/64/EC, and which is accepted by a natural or legal person other than the electronic money issuer."

To quote the Nobel Laureate F. A. Hayek:

"Money does not have to be created legal tender by government: like law, language and morals it can emerge spontaneously. Such private money has often been preferred to government money, but government has usually soon suppressed it."

World Bank and the Gates Foundation

First I should note that the GGAP report doesn't necessarily reflect the views or opinions of the Bill and Melinda Gates Foundation or the World Bank.

I previously wrote about the World Bank coverage of Bitcoin in an article for Bitcoin Magazine in October called "Western Union Says Bitcoin Not Ready For Primetime." For the sake of not making this article any longer than it already is you can reference this article for my previous round-up of news on CGAP and The World Bank. For his part, Bill Gates has called Bitcoin a "a techno tour de force..." (May 6th Fox Business Video) and there was additional speculation on Reddit: "Bill Gates hat-tips bitcoin? 'Someone who's interested in finance can help drive innovations such as digital currency that reduce transaction costs"

Discouraging but dealing with groups like these requires patience -> CGAP: Bitcoin Not Helping the Poor http://t.co/RtWtoEMbjq #bitcoin

— Pelle Braendgaard (@PelleB) February 2, 2014


The Gates Foundation does not have any discussion on Bitcoin but on the "About the Gates Foundation's Financial Services for the Poor program" (PDF) it mentions the following:

"The Gates Foundation's Financial Services for the Poor program aims to play a catalytic role in broadening the reach of digital payment systems, particularly in poor and rural areas, and expanding the range of services available on these systems. Until the infrastructure and customer base are well established, this might involve a combination of mobile money services that are accessible via cell phones and brick-and-mortar stores, where subscribers can convert cash they earn into digital money (and vice-versa)."

Bitcoin, the Mercatus Center, The Cato Institute, Tor and the Gates Foundation (among others) joined a task force to prevent child exploitation "Task Force Created to Address Issues Surrounding the Internet-Based Digital Financial System Thomson Reuters, International Centre for Missing & Exploited Children lead effort to educate, provide solutions" The Cato Institute has been actively covering Bitcoin while the Mercatus Center published Jerry Brito and Andrea Castillo's well received Bitcoin Report Bitcoin: A Primer for Policymakers.

I am making these connections to illustrate how it would not be unusual for some these thought leaders to be in the same room together (e.g. at a Fundraising Event or gala etc.). In Bloomberg Businessweek's article "Bill Gates Hates Cash. Here's Why " leads us to "The Better Than Cash Alliance which was founded last September and is partially financed by the Bill & Melinda Gates Foundation." Here we find Is Cash the Enemy of the Poor? Better Than Cash Alliance Blog post by Rodger Voorhies, Director of the Financial Services for the Poor initiative Bill and Melinda Gates:

"The best way to reduce the costs of reaching poor people with financial services is to help shift the majority of their cash-based transactions into digital form which will strip the majority of costs out of the system and enable robust commercial efforts."

Did CGAP Reach out to the Bitcoin Community?

I've never travelled to any third world country so I have no first hand or direct observer knowledge about the needs of the people of Kenya or any third world nation for that matter. According to the literature (PDF) Kenyans like fees:

"the {M-PESA} survey found that commitment mechanisms, in the form of withdrawal fees, are oftentimes a welcome product feature because they aid money management and help consumers avoid temptation to spend their money freely."

Bitcoin in comparison has virtually no fees. According to the Bill and Melinda Gates Foundation, as noted in my footnote statistics regarding third world nations and mobile money is extremely limited. If CGAP hasn't initiated a dialogue with the Bitcoin community including the Bitcoin Foundation I hope this article helps bring together some of the diverse thought leaders on this subject.

Footnote: The numbers being thrown around out there are really confusing.

A recent Bill and Melinda Gates Foundation Report (PDF) notes

"data available to evaluate individual payment systems is limited. Even in highly advanced economies, complete and comparable information is difficult to obtain. In the developing world, much of this data simply does not exist..."

According to a quick Google search there were 43.18 Million Kenyans in 2012. If we multiply ? reported user base by the number of Kenyans there would be more than 28 Million Kenyan users. Put further into perspective (and adding to the confusion) using XE's exchange rate of 0.0116144100 Kenyan Shillings per U.S. Dollar in and Safaricom's reported 725,944,000,000 worth (Kenyan Shillings? M-PESA "units?" ---i'm not really sure) of deposits that would convert to 8.4 Billion U.S. Dollars on deposit with M-PESA. Though i'm a bit unsure what this number represents because on October 1st on the M-PESA Timeline it was reported "Deposit Value of Kshs. 93,273,000,000 BILLION." which is about 1.1 Billion U.S. Dollars.

Looking at this Chart of Kenya's Gross Domestic Savings could put things in perspective and also add to the confusion (at least i'm confused!) The chart shows surprising sharp decline in savings which contrasts the exponential adoption rate of M-PESA. The literature out there states the those using M-PESA save more than non-users. "The results showed that 65 percent of M-PESA users reported saving compared to 31 percent of non-users. The median amount saved per month was KSh 1,000 (US $11.63) for M-PESA users, doubling that of non-users." (see "Mobile Money's Impact on Savings" in the "Savings for the Poor in Kenya" (PDF) report.

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