The vitual currency Bitcoin is reportedly becoming popular in several countries among migrant workers seeking lower transaction fees when sending money back home.
However, it is still to catch on in the UAE or the wider Gulf region. And a recent spate of scandals and exchange disruptions for the digital currency this year may put Bitcoin on the back burner for a little while longer here.
About US$500 billion is transferred by workers back home each year around the world, providing the businesses that make money out of transfers, such as Western Union, some $37bn in revenues, according to the World Bank.
That has prompted a spate of recent Bitcoin start-ups, such as Nairobi-based BitPesa, seeking to lure remitters with lower fees, although there are no reliable figures for how widespread its use has become for that purpose.
In the UAE, though, migrant workers remain firmly wedded to exchange houses that trade in currencies with official seals of approvals, according to these businesses.
“[Bitcoin] is not something that keeps me up at night,” says Avijit Nanda, the chief executive of Times of Money, a Mumbai-based foreign exchange house based that was purchased in 2012 by Network International, a card payment processor owned by Dubai-based Abraaj Capital and Emirates NBD.
“We are monitoring digital currencies but so far it’s had a negligible effect on our business.”
Other exchange house dealers in the UAE country concur. Promoth Manghat, the vice president of global operations at UAE Exchange, said the majority of remitters in this country are from blue collar workers from the Indian sub-continent who still prefer to send money physically at exchange houses rather than online. He does not envisage a change to that trend any time soon , saying those who do not earn large salaries feel more comfortable with physical transactions rather than online ones.
Digital currencies have their roots in cyber-libertarian movements seeking to supplant government-managed fiat currencies – those that governments have declared to be legal tender but which are not backed by a physical commodity – such as the ubiquitous US dollar.
Bitcoin was conceived in early 2009, by Satoshi Nakamoto (it is not clear if that is one person or a group of people) and has become viable because its creators have figured out a way using a public ledger to prevent bitcoins from being spent more than once. That a cap on bitcoins, which are electronically “mined” by computers that have to solve complex mathematical problems, has been set at 21 million units lends itself to the traditional economic supply and demand mechanisms. There are about 12.4 million bitcoins in circulation, according to the latest figures from Blockchain, an online provider of data on the digital currency.
The main benefit of Bitcoin is that it allows vendors and those who transfer money a much cheaper alternative than the likes of Visa and Western Union, for instance.
Retailers are charged up to 3 per cent by the issuers of debit and credit cards while money transferers can levy fees as high as 9 per cent. It is for this reason that some online retailers, such as Tigerdirect and Overstock.com, have included Bitcoin as a form of payment to save money and boost their bottom lines. There are now more than 2,000 retailers that will accept Bitcoin, according to Coinmap, a website that shows where the digital currency can be accepted.
However, the fact that Bitcoin is not regulated by any central bank has limited its widespread use. Governments such as those of China, India and Russia are trying to curtail or outlaw its use altogether while the central bank of Estonia has claimed it may be no more than a Ponzi scheme, something Bitcoin supporters vehemently deny. A Ponzi scheme is a fraudulent investment operation, such as that operated by the disgraced and now jailed Bernard Madoff, that pays returns to its investors from existing capital or new capital paid by new investors, rather than from profit earned by the individual or organisation running the operation.
Finland has said it does not consider Bitcoin a currency or form of electronic payment transfer while the European Union has warned users of Bitcoin could be susceptible to theft and fraud.
Following an enormous surge in value towars the end of last year, things only seem to have been getting worse for Bitcoin in the past two months. First there was a series of high-profile scandals, including the arrest last month of the Bitcoin Foundation vice chairman Charlie Shrem on charges of laundering $1 million. Then month two major Bitcoin exchanges Mt. Gox and Bitstamp suspended trading in the digital currency because of attacks by hackers. All this has not helped Bitcoin’s reputation or fanned the desire of big financial services firms to embrace it.
Well, not yet.
“We are not currently accepting Bitcoin but may do so when the currency is more established,” says Lars Seier Christensen, the chief executive of Copenhagen-based Saxo Bank, a lender that has made its name thorugh online trading and which has an office in Dubai.
“I think the elevated price and huge volatility will make it more difficult to gain acceptance among serious businesses,” he says.
“I think Bitcoin will face serious challenges in the long run, although I believe such currencies could have a place in the economy in more well thought through structures with values better linked to real assets.”
And volatile Bitcoin has been. Last year, the value of Bitcoin jumped to $1,200 from $13 and was trading at about $645 yesterday afternoon. It is not uncommon for its value to go up or down 25 per cent in a single day. That makes it a risky proposition for migrant workers transferring money although the speed of transactions, which typically take no longer than 50 minutes, reduces some of that risk, says Mr Christensen. For many, however, that is still too long to wait.
Despite the hard times Bitcoin is going through, others like Mr Christensen also see light at the end of the tunnel for digital currencies and the recent turbulence may turn out to be teething problems for this financial innovation.
Bank of America Merrill Lynch, the second-largest US bank, gave Bitcoin some respectability at the end of last year when it issued a report on the digital currency in which they mainly gave it a thumbs up despite some of its drawbacks such as volatility.
“We believe Bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money transfer providers,” said analysts led by David Woo, a foreign exchange and rates strategist.
“As a medium of exchange, Bitcoin is attractive as it offers low transaction costs.
In addition, it provides an alternative payment method to users who may not have access to credit or debit cards, or other forms of electronic payment.”
Maybe Bitcoin’s time will come –and sooner than established financial players would like.