Ask about digital currencies like Bitcoin in policy circles and discussion will soon turn to either crime, terrorism and money laundering, or tax and financial regulations. But foreign aid and development might soon be added to that list, following the appearance of Department of Foreign Affairs and Trade senior executive Rebecca Bryant before a Senate inquiry into the new technology last Tuesday.
Where once microfinance was king, now discussion has turned to uses for cryptocurrency.
The “blockchain” technology that underpins digital currencies, or cryptocurrencies, could play a role in aid and development as a way to increase financial inclusion, particularly by slashing the cost of international remittance. While DFAT does not yet have a foreign affairs-specific policy angle on digital currencies, it is trying to keep up.
According to Bryant, DFAT’s assistant secretary for economic engagement, there is a hole in the international aid and development space to be filled by remittance services underpinned by digital currencies. The cost of remittance is usually very high — in the case of sending money from Sydney to Samoa, it averages 12% of the transaction cost.
Committee chair Sam Dastyari was thrilled by the testimony and said “everyone else” he had spoken to for the inquiry had come from a banking or security perspective. “That was incredible,” the Labor senator gushed. “Thank you so much. That really opened my eyes to a different way of looking at this.”
Some of DFAT’s international partners such as the World Bank and the Consultative Group for Assisting the Poor were already looking at how digital currencies could increase financial inclusion, Bryant explained. The department is also very interested with a start-up called Bitpesa, whose app uses Bitcoin as an intermediary to send money from the UK to anyone in Kenya at a fraction of the normal cost.“The private sector are leading this race. They are the ones making the innovations … so we will always be chasing the technology.”
To the fascinated Dastyari, the concept was “huge”. While the money sent home to developing nations by fortunate relatives working in richer economies is small in the grand scheme of international finance, it is indeed huge for those who receive it. According to Bryant, 10% of the Philippines economy is “based on” remittance.
The banks argue the services are expensive because they are passing on the cost of the risk management involved, she explained. But Bryant said new digital tools — like one called KlickEx — were already available for banks to manage international remittance though cheaper digital means similar to Bitpesa:
“The transaction cost is effectively zero. But KlickEx will tell you that the banks have no interest in picking up their service because the banks do not make any money through that transaction if they use a free online service like that.”
Bryant added the department had been trying to keep up with changing technology and trends. Five years ago everyone was gung-ho about microfinance, but now: “We do not talk about that anymore. It is a rapidly moving space. Microfinance is very yesterday.”
The focus on financial inclusion in development springs from the idea that people will use the black market when they are excluded from legal financial products, usually because they can’t afford them, and it’s better for everyone if they can use legitimate services. Anti-money laundering and counter-terrorism financing (AMLCTF) controls make it even harder for some people to send money home, Bryant explained:
“What is being affected by application of AMLCTF regulations worldwide are small-value transactions being made predominantly by poor people. These are itinerant workers who want to send money across specific corridors home to family and friends. In many instances they are unable to do that because they cannot show adequate identification. It is worse than that in a sense, because even people with identification today are having trouble transferring money across corridors that are considered risky.”
For example, she added, the Afghan ambassador to Australia could not directly send small amounts of money home to family and friends.
Now, cryptocurrencies are popping up in aid, development and economic diplomacy, partly due to the global explosion of smart phones, which are now accessible to more people than bank accounts and increasingly available in affordable, generic versions. During Australia’s G20 presidency, Bryant recalled, major financial technology firms came to a forum in Perth to show off “apps, phones and all sorts of different technological things that can enable smarter, faster, cheaper financial transactions”.
“That is where we see the real potential, I guess. We know people are buying phones, we know they are cheaper and we know they can do a lot more than they currently do—and, more importantly, our partners know that too. The [Bill and Melinda] Gates Foundation, the Better Than Cash Alliance, the Consultative Group to Assist the Poor, the IMF and the International Fund for Agricultural Development are all onto this revolutionary change in mobile technology and its potential to reduce poverty. And they are all our partners.”
The committee’s deputy chair, Liberal Senator Sean Edwards, echoed Dastyari’s appreciation of Bryant’s appearance and wanted to know how legislators could “stay in front of this”. Bryant replied:
“I think the first point to make is that we will never be in front of it and that is exactly as it should be. The private sector are leading this race. They are the ones making the innovations. They are motivated by profit drivers that do not motivate governments, so we will always be chasing the technology.”
DFAT has signed memoranda of understanding with Westpac and ANZ in which the banks agreed to support development in the Pacific in several ways, but digital currencies aren’t involved. Edwards asked how the banks could participate in “blockchain-based encryption technology”. Bryant admitted:
“I genuinely do not know the answer to that … Cryptocurrencies are new; they are unstable; they clearly have some application. But I genuinely do not know how banks will deal with those sorts of changes.”
Still, she said the MOUs represented one way the foreign affairs department was trying to keep up with change. As an example of the “strong and deep relationship” between the department and the banks, she said that when Westpac recently sold some services to Bank South Pacific, DFAT’s bureaucrats were “the first ones they called”.
“They do not want to see any poor consumers worse off,” Bryant said. “If we can work together, hopefully things can be managed smoothly and we can work together to make things happen.”
Correction: This article originally quoted Rebecca Bryant saying that 60% of the Philippines economy is “based on” remittances from overseas. DFAT has clarified that she misspoke; the correct figure is 10%.