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Wired

 

How Digital Currency Could End Corruption In Afghanistan

May 30, 2014

By Robert Bryce

Humans have been using gold as a store of value for millennia. The earliest pure gold coins date to about 560 B.C. in what is now Turkey. Gold coins proliferated for many reasons: The metal is shiny, durable, malleable, easy to test for authenticity, and non-reactive.

We can count on it to not dissolve, mildew, or catch fire. Gold was, and still is, pretty scarce. In all of history, the total amount of gold ever mined totals about 165,000 tons, a weight equal to that of one and a half US aircraft carriers. Coins made from silver (the word “coin” means “invent”) have many of the same attributes as their gold cousins and have been in use for centuries.

While silver and gold have many positive characteristics, they also have a key drawback: They're heavy.

In the 13th century, the Chinese emperor Kublai Khan changed the way we think about money. Khan's great insight was that money—in the form of sea shells or gold coins—was valuable only if people believed in it. He also knew that the different regions of China were issuing their own coins, which made trade within his empire more difficult.

So Khan created a new currency based on paper money. By decreeing that his paper money had value, his subjects believed that it did. Khan's paper money not only provided a common currency for his empire, it was also far superior to gold and silver coins for an obvious reason: It was lighter. Being lighter, Khan's paper money made trade faster.

Consider, for example, the farmer rich in chickens or apples. He could, of course, transport his birds and fruit to town and barter them for something he really needs, like horseshoes or butter. But if the farmer can instead sell his products, collect some currency, and then use it to pay the farrier or the dairyman, the entire process happens faster, with less friction for both parties.

Africa: Where the New Money Is

In 2012, James Surowiecki, an author and staff writer for the New Yorker, wrote that successful currencies “lubricate commerce, allow people to exchange goods and services, and thus encourage people to work and create.” He then quoted the German sociologist Georg Simmel, who has described money as “pure interaction.” Surowiecki continued, writing that “when money is working as it should, it is not so much a thing as it is a process.”

That's an essential point: Money isn't a thing, it's a process. It's only worthwhile because it allows us to engage in “pure interaction.”

We want to sell, buy, haggle, argue, travel. We want to do more, of everything. We don't give a darn about the form of our money; we only care that it allows us to buy and to do, whether that means buying a bale of toilet paper at Costco or securing passage to Panama City. Having an easy method of exchanging value greases the wheels of commerce and the slicker the lubricant, the better.

Today, the slickest currency exists as digits that reside on the SIM cards inside mobile phones. To be sure, digital money is not entirely new. For decades, financial institutions, corporations, and individuals have relied on wire transfers to exchange money.

In 2012, according to the Fedwire Funds Service, the wire-payments network operated by the US Federal Reserve, nearly $2.4 trillion per day was moved by wire transfer. For banks and big companies, digital money has long been a fact of life.

That hasn't been the case for consumers, though. Sure, lots of people forgo cash by carrying credit cards and debit cards, which are a form of electronic payment. But those methods are not truly digital.

Perhaps the most remarkable thing about the move toward digital money and mobile payments is that the trend shows its strongest growth in Africa, a continent that has often struggled to keep up with the world in other areas of development.

In countries like Kenya and South Africa, pure interactions are happening with currency that weighs nothing at all. Currency is being exchanged on the simplest cell phones using the simplest technology: text messaging, or SMS, for short message service.

SMS is the perfect communication system for Africa, where the majority of consumers can't afford high-dollar devices like the iPhone or an Android-powered device. They use older Nokia phones or the decade-old Samsung E250, a phone that has been dubbed the AK-47 of African telecom because it is cheap and nearly indestructible.

Most people living in sub-Saharan Africa are “unbanked,” meaning they don't have bank accounts or credit cards. But nearly all of them have a phone. And those phones are giving millions of Africans access to a trustworthy, secure money ecosystem.

Just as Africa leapfrogged the idea of landline telephones and went straight to digital mobile phones, so, too, is Africa vaulting over the idea of currencies and going straight to digital money.

By 2013, about 80 percent of the world's mobile payment transactions were happening in East Africa.

The biggest player in East Africa is M-PESA, which was launched in March 2007 by Safaricom, a Kenyan mobile phone provider that is 40 percent owned by mobile giant Vodafone. Within 16 months, M-PESA—the “m” stands for mobile, while “pesa” is the Swahili word for money—had 3.6 million customers, and the system was adding 10,000 new registrations every day.

By July 2008, the system was handling 21 billion Kenyan shillings ($245 million) of transactions per month, with an average value of 2,800 Kenyan shillings, (about $33) each.

The system is simple: Customers who have cash in their pockets can go to any of M-PESA's agents and have that paper money converted into mobile money. They can also reverse that process.

M-PESA has grown rapidly thanks to Safaricom's dominance of the Kenyan mobile phone sector. By 2013, Safaricom had nearly as many subscribers, about 19 million, as Kenya has adults. And of those 19 million phone subscribers, about 15 million were using M-PESA. (Kenya's population is about 43 million.)

Those 15 million have been using M-PESA to pay for everything from utilities and insurance to school fees and health care. They can also transfer money directly to another person. The system is easy to use: When an M-PESA user wants to buy something from a vendor, he uses his phone to transfer the required amount via text message.

The Unexpected Side Effects of Digital Currency

Although digital money can be used by criminals, it can also be used to fight corruption.

In 2012, Jessica Leber wrote an article for MIT Technology Review in which she told about a group of Afghan policemen in Wardak province who began getting their wages paid through their cell phones in 2009. The payments came through M-Paisa, a mobile payment system run by Afghanistan's biggest telecom company, Roshan, which was modeled on Kenya's M-PESA.

Immediately after the first pay period in which they got paid through their phones, the policemen assumed they'd gotten a raise. The reality was that for the first time, their wages weren't paid in cash, and therefore, weren't subject to skimming by their superior officers, who had been stealing about 30 percent of the money.

Leber pointed out that about half of the 700,000 government employees in Afghanistan don't have bank accounts. And getting cash to those employees is fraught with danger because of the country's security problems.

Paying them with digital cash on their phones is cheaper because it doesn't require the government to print currency. In addition, digital money obviates the need for armored trucks and armed personnel, both of which are needed when large sums of currency are transported. Using mobile payments could also help alleviate both security and corruption issues. The scale of the latter problem is both staggering and depressing. In 2012, Afghans paid nearly $4 billion in bribes, an amount that's roughly double the country's domestic tax revenue.

Mobile payments are not going to cure the world's corruption problems or bring all of the people who are living in poverty into prosperity. And it remains to be seen what will happen with other forms of digital currencies, such as Bitcoin, a cryptocurrency that launched a flurry of financial speculation in 2013 when investors started buying Bitcoins — and driving up their price — with the hope that they will gain in value in the years ahead.

But M-PESA and other mobile payment schemes show us what can happen if people who don't have access to paper money or formal banking systems are allowed to engage in commerce with digital currency. Having a reliable, trustable method of exchanging value—even if it's just digits on your phone—builds communities and economies. It allows people to save the fruit of their labor. And it fosters the diffusion and accumulation of wealth.

Original Source: http://www.wired.com/2014/05/how-digital-currency-could-end-corruption-in-afghanistan/

 

 
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