On a Tuesday night at a Nairobi tech incubator, Michael Kimani preaches the virtues of crypto currencies to a small gathering of tech-savvy Kenyans.
The startups at the meeting are already busy building businesses–to disrupt Kenya’s large remittances market; or create Kenya’s first bitcoin exchange; or establish a crypto-wallet app as the on-campus currency of nearby Kenyatta University.
While global entrepreneurs and investors have been cautiously eying the potential of bitcoin in Africa, a more aggressive homegrown breed of African startups is already experimenting in Kenya, East Africa’s powerhouse economy. There are the same problems with criminal use of bitcoin–this month, hackers reportedly demanded a ransom of bitcoins from a major Kenyan bank–but also an unusually big market hungry for an easier way to move money.
“It’s up to us to decide how to use it,” says Kimani, head of the African Digital Currency Association (ADCA). Kimani first heard about bitcoin three years ago on a BBC podcast. A year later he found a way to buy bitcoins in Kenya, buying and selling bitcoin speculatively with a small handful of traders in the country.
In March of last year, Kimani met up with the founders of Kenyan digital currency BitPesa and other bitcoin startups and established the ADCA as an industry lobby group to promote the local bitcoin ecosystem, pushing for adoption, awareness, and policy around digital currencies.
“I saw an opportunity to be a pioneer,” he said. “I compare it to the Internet of the 1990s. As much as I see people are not really aware of it, in the next 10 years I think it’s going to be huge.”
Africa’s huge diaspora remittances–flows of money from African workers in the U.S. and Europe back to their families–are opportunities for bitcoin companies. Over a billion dollars in remittances flowed into Kenya in 2013, and the amount of money being sent back to Kenya increased by around 12% last year.
Across the continent, Africans spent around $24 to send $200 to their home countries, double the global average rate. According to the World Bank, Africans pay more than any other migrant group to send money home. Weak competition and flawed financial regulations contribute to the high cost of remittances, the U.K.’s Overseas Development Institute says.
Meanwhile, Kenya is primed for virtual currencies in a way western economies aren’t: While it’s a big deal in the U.S. that Apple and Google are launching mobile payment services on phones in the U.S., Kenyan telco Safaricom claims that up to 43% of Kenya’s GDP already flows through their M-Pesa mobile money service. A decade ago, tens of millions of cell phones swept a continent that was barely wired with traditional phone infrastructure. Today, African countries like Kenya could leap ahead multiple generations at once with the right financial sector technology.
BitPesa, a one year old startup aiming to capture a slice of the huge African remittances market, chose to start in Kenya because of the popularity of mobile money here and the more open regulatory environment, says company CEO Elizabeth Rossiello.
Rossiello first arrived in Kenya in 2009 from the U.S., and while working on microfinance projects she witnessed the simultaneous rise of Non-Banking Financial Institutions (NBFIs) and the birth of mobile money.
“So two things happened,” says Rossiello. “One, we saw that regulators had to move faster to catch up with innovation, and two, we saw operating expenses slide down with the advent of mobile money.”
In other regions of Africa bitcoin startups have faced challenges simply because their customers didn’t have access to bank accounts.
“But in Kenya, there’s not really a need for a bank account–once you have a mobile phone you already have a bank account,” said Kimani. “People here are already familiar with value on their mobile phones.” (Bonga Points, an award scheme by Safaricom, are already traded back and forth as a pseudo currency by enterprising Kenyans.)
Kimani hopes that the bitcoin community can reshape the narrative around crypto-currencies, tarnished as they are in some circles by bitcoin’s associations with shady online operations like the Silk Road.
“I can’t rule out the fact that someone might do something fishy with bitcoin,” he said. “But we’re the ones bringing it here. We have a chance to build a good reputation from the ground up.”
Rossiello guessed that, just as M-Pesa was cutting costs in Kenya’s relatively small domestic financial sector, bitcoin could do the same for the expensive world of international money transfers.
Unlike traditional transfer companies and banks, where sending money to Kenya costs around 12%, BitPesa plans to use bitcoin to help workers overseas send money home to Kenya for a 3% flat fee. BitPesa then transfers that money to an M-Pesa account in Kenya where the recipient can withdraw Kenyan shillings from one of the 81,000 M-Pesa agents across the country.
BitPesa aims to capture at least 1% of the $1.3 billion Kenyan remittance market by May, targeting retail and business payments to the country.
“We’re not alleviating poverty,” Rossiello says, swatting away the suggestion that her business is built to be a panacea. “We’re stabilizing incomes and helping small and mid size businesses and families grow.”
Another startup is using crypto currency technology to cut the operating costs of group saving schemes that are popular in Kenya. Savings And Credits Cooperatives (SACCOs) help members combine their savings into investments, sharing the profits of those investments among the group. ChamaPesa co-founder Ken Griffith said that by using a cryptographic finance technology, they plan to allow SACCOs access investments that today only multinational banks could offer.
“The banks are very expensive to operate with their current model, which makes them too expensive to the base of the pyramid,” he said.
Griffith says the cost of maintaining a bank account is close to 500 shillings a month, which is two days’ wages for low-income Kenyans. “But our technology reduces the cost so that we can offer the same services,” he said.
In 2014 Pelle Braendgaard’s high-profile bitcoin wallet called Kipochi–”wallet” or “purse” in Swahili–made a big splash by allowing users to send and receive bitcoin by integrating with Safaricom’s M-Pesa network while bypassing their fee structure. However, within twelve months the project suddenly went dead.
“With Kipochi they straight out went for M-Pesa,” says Kimani, who also reported on Kipochi for the Kenyan cryptocurrency news site Coinbase.
Kimani speculated that Kipochi may have been killed off because it violated M-Pesa’s terms of service. Industry insiders also say the media buzz around Kipochi and a Vice article claiming that ‘One Third of Kenyans Now Have a Bitcoin Wallet’ spooked Kenyan regulators.
BitPesa’s Rossiello says that bitcoin companies wanting to operate in Kenya should consider it a high-risk market where legal frameworks are still playing catch up.
“Just the same as mobile money was, the innovation is happening before the regulation. So when that happens you have to develop a close relationship with the regulators, because at any moment’s notice, anything can happen here.”