Bitcoin: not just for the privileged few

Credit: Wikimedia Commons

On Thursday, the liberal website, Think Progress, published a critique, Bitcoin: By The Privileged, For The Privileged, saying the controversial digital currency only benefits the privileged, and does not address the needs of the poor and working poor.

Basically, says writer Annie-Rose Strasser, Bitcoin’s libertarian proponents oppose government intervention in financial matters, while the underprivileged need government protection from financial abuse. So, she says, Bitcoin cannot help the underprivileged.

Bitcoin users’ rejection of the government reflects the luxury of being able to live well without state support, while the less advantaged desperately need a larger government role in the banking system to help them them overcome deep, systemic bias.

Strasser raises some valid points in her column, but her suggestion that Bitcoin offers nothing to the underprivileged and the “unbanked,” as the phrase goes, does not follow logically from her objections to the currency. Rather, she seems opposed to the idea of Bitcoin simply because of libertarians’ fondness for the currency. She fails to see the advantages Bitcoin may offer the less privileged.

To be honest, Bitcoin proponents have done a piss-poor job marketing their pet project to the public at large, and debacles such as the recent collapse of the Mt. Gox Bitcoin exchange and government seizures of bitcoins associated with alleged criminal activities have not helped the public’s perception of Bitcoin.

It’s been called a Ponzi scheme, an economic buble, a repeat of the 17th-century Dutch mania about tulip bulbs, a fool’s game and a losing gamble in the media. Conversely, online retailers like Overstock.com and Tiger Direct are now accepting Bitcoin for payment, and venture capitalists are pumping millions into new Bitcoin enterprises in the US and abroad.

Clearly, the future of Bitcoin falls somewhere between a total fraud and a complete financial revolution. For Bitcoin to survive as a financial alternative to existing financial systems, it needs to appeal to people who are not libertarians, computer geeks, or crooks. It needs to be as commonplace as debit cards, PayPal and Western Union.

The American Banker interviewed a New School professor, who was researching why low-wage workers prefer using check cashing services over banks.

The common belief is that check cashing services are taking advantage of low wage workers by charging exorbitant fees to cash their paychecks, send out their bill payments, or wire money abroad to relatives. In fact, says Prof. Lisa Servon, their customers prefer using these businesses, because banks don’t provide the services they need.

She offers the example of someone who gets paid on Friday. With a regular checking account, that paycheck’s funds won’t be available until Monday or Tuesday. With a check cashing service, the worker gets her pay immediately, and moreover, can take care of her other financial chores at the same time and place. A worker does not need to worry about overdraft charges, her checks bouncing, or keeping a miniumum balance in her account.

Banks, Servon points out, are not designed for the needs of a low wage earner with a small bank balance who needs to make frequent withdrawals. Check cashing services are. Morever, there are no hidden fees for their services; customers know exactly how much those services cost upfront.

Keeping this in mind, let’s turn to Strasser’s Bitcoin critique. She spends four paragraphs establishing that Bitcoin fans are predominantly young white,technically adept males with a notable libertarian bent. They would prefer their currency be free of government interference and, in particular, want to eliminate the Federal Reserve and federal regulation of the markets.

This generalization is misleading. While Bitcoin’s early adopters were mostly young, white technophile males, its use and benefits are being adopted by a growing number of people outside the demographic Strasser cites. I am one example, being middle-aged and a liberal, and here is another, Meghan K. Lords, who is obviously not male.

Strasser then compares the Bitcoin crowd to another group of people who operate outside traditional financial systems, the working class poor.

The clinical terminology for those people is the “unbanked” — they rely on informal, instead of formalized, systems of trading or borrowing capital. Why? The unbanked, comprised of women and people of color, are much more frequently turned down for auto loans, mortgages, and investment advice. Or, when they go into formalized systems, the government isn’t there to protect them. Instead, they’re taken advantage of by unregulated banking — unbanked households on average spend over $2,400, about 10 percent of their income, to use services like payday lending and check cashing.

[Judging from Servon’s analysis, I surmise most of that average comes from payday lending charges, and not from the more modest check cashing fees.]

In contrast to Bitcoin-ists, the so-called unbanked want more government protection, she says — protection against exorbitant payday lending rates, against discriminatory practices by banks, mortgagors and auto lenders.

Bitcoin is not addressing those people’s needs, Strasser notes, because Bitcoin fans are too concerned with “undermining the state.”

Well, yes and no. There is a segment of users who see Bitcoin as an escape from government regulated currencies — “fiat currencies” — like the US dollar. These Bitcoin boosters are in it for political and philosophical reasons, and some have the quixotic dream that Bitcoin will someday replace fiat currencies altogether.

Perhaps overlapping with the libertarian dreamers are the crowd who hope to make money off Bitcoin. They see it as yet another kind of commodity, like gold or pork bellies, to buy and sell at a profit.

Meanwhile, there are Bitcoin proponents who are pushing the crypto-currency as a means to help people in the developing world gain wider markets abroad, as a way to donate to charitable causes, and as a way to reduce transaction costs for merchants and foreign currency exchanges. Strasser makes no mention of this demographic in her column at all. Meghan K. Lords does, and I refer you to her blog for details.

But more to the point, how could Bitcoin benefit the so-called “unbanked?”

Let’s look at the reasons why people don’t or can’t use banks, and how Bitcoin could be an alternative.

  • Poor credit history. Many banks refuse checking accounts to customers with poor credit histories. Bitcoin is credit-blind, and your Bitcoin wallet is under your own control.
  • Minimum deposit requirements. Some banks will open an account with a $25 deposit, or sometimes more. That’s a large fraction of a low wage earner’s paycheck, which might only be $200 a week. Further, banks charge fees if the balance falls below a minimum, sometimes to the point of overdrawing the account. (Drawing blood from a turnip, as I put it.) Bitcoin wallets have no minimum balance requirements.
  • Check float. This waiting period varies state to state. Paycheck deposits may not be credited immediately, and banks don’t work on weekends, even when workers have to. Someone living paycheck to paycheck may not be able to wait the weekend for that check to clear. Drawing on the account before the deposit clears risks overdraft charges and/or bounced checks. Bitcoin deposits are generally available for spending within two hours, 24/7.
  • Fees right and left. Nowadays, it seems banks charge fees for everything. I’m surprised they don’t also charge admission at the door. If your account is inactive, there are “inactivity” fees, or the bank just closes the account. If your account is too active, there are fees for that, too. Then, there are ATM fees, especially off-network, and checking account maintenance fees. For an accountholder with modest or large balance, these fees are a nuisance. For someone with only $50 in the bank, they are threatening. Bitcoin transaction fees are 1% or less, and there are no fees associated with holding a Bitcoin wallet.
  • Unfriendly service. Putting it bluntly, banks do not welcome poor people. If you look like you’re living hand to mouth, your banker is not going to go out of her or his way to get your business. You’re small potatoes, and may be more trouble than you’re worth, in their minds. Bitcoin is egalitarian, in that anyone with cash can buy it and keep it.
  • Identification. Someone with a paycheck presumably has a Social Security number and an address. But day laborers and migrant workers lack both, and they are usually paid in cash. They spend the cash, or wire some via Western Union back home. Banks can offer them no services at all. In some locales, it’s possible to buy Bitcoin anonymously from an ATM or face-to-face, and presenting ID is not necessary.

One big advantage of banks is the FDIC. There is nothing like that for Bitcoin or cash stuffed into a mattress. Banks can also offer reasonable rates on auto and home loans, if you have a good-sized balance, credit cards, if your credit is sound, and debit cards.

Some employers are now giving wage earners the choice of a payroll debit card. Their paycheck ends up in a bank account, and they can draw money from the account at an ATM or POS terminal. This is somewhere between being banked and unbanked, because the card and the terminal removes the wage earner one or two degrees from directly dealing with his or her money. I don’t see it as much of an improvement over using check cashing services, as these debit cards also carry the risk of penalty and usage fees.

The main problem for Bitcoin right now is the chicken-and-egg conundrum. You can’t use Bitcoin to pay the rent or buy groceries with it. In a sense, Strasser is right in saying Bitcoin does not appeal to the underprivileged. Until they can use Bitcoin for everyday use, as they can good old-fashioned greenbacks, no one is going to bother with it.

Another problem is the physical requirements to manage Bitcoin. You need a computer or cellphone, with Internet access and decent security, to store, exchange or spend bitcoins. Many people in minimum wage jobs can’t afford a computer, and mobile Internet access may be too costly for them to consider. Though she does not mention this problem specifically, Strasser was probably considering it when she characterized Bitcoin as something for the privileged.

[Note: I left a message for Strasser on the Think Progress website the day after her piece appeared. She has not responded as yet.]

A group of entrepreneurs in Mexico have a clever solution to this problem. Piggybacking on a mobile payment network already in place in Mexico, they have partnered with Coinbase to allow transmission of bitcoins through the cellphone network, and the recipients can get pesos for the bitcoins at any one of thousands of convenience stores across Mexico.

What’s needed is a quick and easy to buy bitcoins, say at a 7-Eleven or a supermarket, where you can already pick up a Green Dot card or prepaid VISA card or recharge cards for your T-mobile account. A Bitcoin “recharge card” would allow someone with no computer access to buy bitcoins and perhaps store them on his or her mobile phone, or at a Bitcoin payment processor like Coinbase, for later ATM access.

Of course, this begs the question, why bother? What benefits does Bitcoin offer the average person, or someone who’s making less than $15,000 a year?

First, Bitcoin offers autonomy from the banking system. You are your own bank, in a sense. You needn’t worry about penalty fees dinging your account or being refused service because of credit history, race, sex, or sexual orientation. The downside of this autonomy is the need to be extra vigilant in securing your bitcoins from theft or loss.

Assuming the creditor accepts Bitcoin (another part of the chicken-and-egg conundrum), payments can be made anytime, day or night, and be received and confirmed within hours. There is no risk of bouncing a check or overdrawing your account, because you cannot spend more than what is in your wallet. Fees are also negligible. Moreover, the transaction is transparent, as you can check its progress on the public blockchain. The drawback is that such transactions now require a computer or cellphone with Internet access.

For undocumented foreign nationals, aka migrant workers, Bitcoin cross-border transfers are more anonymous than Western Union, and less costly. The big problem here is getting the Bitcoin in the first place. Linking a bank account to Coinbase is clearly out of the question, so ATMs or over-the-counter purchases would be the only recourse. In time, it might be possible to buy Bitcoin using a cellphone, but I don’t know if this is available in the USA now.

Bitcoin in principle is not limited to the privileged. Anyone can use Bitcoin. In that, Strasser in her Think Progress article is just plain wrong. However, she is quite right in pointing out the lack of focus on and outreach toward the “underprivileged.” Bitcoin is a new technology and a new paradigm. Its early adopters may be considered “privileged,” but it does not logically follow that all future Bitcoin users must also be privileged. Because it is so new, Bitcoin lacks a widespread infrastructure and ease of use. If Bitcoin is to grow and become a part of everyday finance, it needs to be made available to everyone, regardless of economic class or technical prowess. In that, Strasser and Think Progress hit the nail on the head.

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