advertisement

Bond Notes, an untrusted government & the Bitcoin opportunity in Zimbabwe

advertisement

Earlier today we wrote on how tech can help Zimbabwe in both a short and long term sense in its current predicament of a USD cash shortage and new Bond notes that Zimbabweans are generally very skeptical about.

advertisement

As indicated in that article, the loss of trust is a big factor in Zimbabwe’s cash shortage problem and the Bond Notes. Forget that foreign investors don’t trust the government with their FDI (which would help balance the Export Import discrepancy), Zimbabwe’s own local people:

  • don’t trust that the government won’t wantonly print more notes than the $200 million Afreximbank loan facility guarantees. The question of whether this is possible or not isn’t even under consideration by most.
  • don’t trust that the politically powerful won’t corruptly help themselves to generous amounts of USD cash in bank accounts to fund their business imports/foreign trips/new expensive cars/foreign university fees for children/political campaigning/etc…
  • don’t trust that government won’t raid their USD cash in the bank accounts to fund its debts
  • don’t trust that the government won’t suddenly change its mind on pronunciations it’s making now and suddenly implement new rules without honouring obligations created by the existing ones.

Now to consider if Bitcoin can help with some of these problems and if maybe the government should consider officially allowing the trade of Bitcoin locally.

advertisement

First, What is Bitcoin

Bitcoin is a digital and global money system (currency). It allows for the trading of money across the internet. The Bitcoins have an assigned USD value at any given point just like a regular cash currency (called fiat money). Bitcoins were invented in such a way that, unlike other digital things they can’t be copied over and over again and a person cannot spend a Bitcoin more than once. For a simple explanation even a five-year-old will understand, please read this article.

Though largely considered a currency, many countries including the US, define it as a commodity instead. Globally, most countries don’t have regulation against the use of Bitcoin except for a few like Russia and China. Well known companies among them Dell, Expedia, Microsoft and Bloomberg officially recognise and provide options to pay for their products using Bitcoin.

Yes, Bitcoin is volatile, but it solves trust

Bitcoin is notoriously volatile, but nowhere close to the unpredictable nature of Zimbabwe’s current government, perceived or real. The more important thing however is that reliance on Bitcoin helps with Zimbabwe’s trust problem. No one needs to trust the government to use a crypto-currency like Bitcoin or to store their money in it. The crypto-currency takes most of the decision-making authority out of the hands of individuals leaving it to a good extent to the mathematics in machines.

Not legal tender, just tradeable commodity

To be clear, there’s no need to declare Bitcoins legal tender. It may just be in officially recognition of it as a tradeable commodity in Zimbabwe. This would free up space for unhindered market driven growth of the adoption of the Bitcoin by individuals and maybe even financial institutions and mobile money operators.

A likely scenario that would result is that some people would begin to trust keeping their money in Bitcoin wallets than in Bond Notes that a government can theoretically print more of. While there is the possibility of people mopping up whatever little USD is in the country to buy Bitcoins, if more people have their money stored in Bitcoin wallets, businesses would see reason to start accepting these Bitcoin as payment which would increase liquidity.

One interesting thing is that the success of mobile money in Zimbabwe has prepared people well for using a digital currency. Added to that the ever growing internet penetration, thanks to the need to be on WhatsApp, means most Zimbabweans that need to can have a Bitcoin wallet app and transact.

Such a move would also likely result in financial institutions opening up to the possibility of being the host banks for Bitcoin exchanges locally, which would mean that the local USD buying the Bitcoins would not even need to leave the country’s borders.

Bond Notes vs Bitcoin opportunity in accelerating Diaspora remittances

An important consideration is the likely impact this might have on diaspora remittances. Most people in the diaspora migrated because they lacked faith in the ability of government to create opportunity and to manage the economy well, after they experienced its failure to do so over decades. Who to blame for the failure, sanctions or corruption, is ofcourse a different issue.

There’s no doubt therefore that the Bond Notes announcement spooked those in the diaspora, and they are concerned about the security of the money they send home. Yes, the government assures them the money won’t be touched but the trust issues mentioned above apply.

A Bitcoin wallet owned by their relative back home would therefore feel less vulnerable to the fingers of an untrusted government. This would work in the government’s favour as there’s third party guarantee (the Bitcoin system) which the diaspora can trust better.

Add to that the possibility of Bitcoin remittances significantly lowering the transfer fees, or even the rare possibility (that BitFinance co-founder Tawanda Kembo pointed out to me recently) of a recipient receiving more fiat money than was sent thanks to Bitcoin exchange rate changes.

Bitcoin security against currency mopping

Another interesting thing is the understandable argument by the RBZ for why they chose Bond Notes instead of just injecting the $200 million USD cash in the economy. “For as long as we are using a currency which is appreciating when we have neighbours that have currencies which are depreciating, we become a mopping house. People come to mop up our US dollars. Any US dollars we bring, it will still vanish (as) people want USD as a store of value,” the Finance Minister Chinamasa said this week. Essentially, Bond Notes are not legal tender outside Zimbabwe so they can’t be mopped up and readily spent elsewhere.

Bitcoins, because they are still very experimental and not in high demand globally may adequately provide this security against currency mopping. They sit conveniently (for our situation) between being relatively trustworthy and not being readily spendable outside Zim borders.

Experimental and adjust as we go

Depending on the initial response, the Reserve Bank can then encourage certain use cases and innovations of Bitcoin and discourage others with swift and soft regulation. Zimbabweans and their relatives outside the countries would know that whatever changes come, their Bitcoin can always be sold on the global market to recover some significant value.

Allowing Bitcoin would therefore be experimental, but given we have no currency of our own, it’s probably as good an experiment as the Bond Notes. Likely even better given the lack of trust in a Zimbabwe government managed currency system.

Image via trinitynews.ie

27 thoughts on “Bond Notes, an untrusted government & the Bitcoin opportunity in Zimbabwe

  1. While very tempting, the Bitcoin solution is perhaps compatible under a different political administration. Historically the current administration, briefly interrupted by the 5 years of GNU, having its way prefers not to lose control over the levers of political power which in this case political power is also synonymous with clutching the economic system else it would have been easier to switch officially to the Rand only that levers of power would be transferred to the South African Reserve Bank. All the same this progressive Bitcoin insight presents those in authority with yet another potentially viable remedy which unfortunately, and I strongly suspect, will join a long list of such since the 80s.

  2. This would not solve the problem of money leaving the country, which really is a major, if not the primary cause of the liquidity crisis we are facing.

    1. I disagree. It does solve the problem a lot. Our crisis is not a money crisis but a cash crisis. If people who taking cash out of the country starting taking bitcoin out instead of cash then all the cash would stay and that would help ease the crisis. But the sad thing however is that bitcion (real-money) would leave the country.

      1. I agree with Tawanda and have the perfect scenario:
        – “The People” had GBP/USD/Rand/etc & purchased BTC
        – “The People” lent some BTC to “The Currency”
        – “The Currency” didn’t pay “The People” back
        – Now “The People” have no GBP or no BTC

        [substitute “The Currency” with Tawanda’s unpaid loan, https://btcjam.com/listings/50121-aquiring-addional-hardware-to-expand-mining-operation%5D

        So yes, liquidity/lack of cash, among others, is a symptom of economic illness such as a weak balance of payments (or unpaid loans). We need growing and sustainable inflows of cash into the economy than payments. Plus we need credit lines to ensure that we grow once we have managed the balance of payments challenge. Being a landlocked country does not help with the balance of payments (because we need more raw materials for production) but does presents us with opportunities, such as BTC.

  3. To go on a slight tangent, how easy is it to mine bitcoins nowadays? I saw this video a while ago and thought there was no way my poor desktop would be lucky to dig up even 1 bitcoin per quarter

    1. You’re right. If you want to get into mining you have to invest in the right hardware. I’ve got a small mining operation that’s (just slightly) profitable but I had to invest in the right hardware. I do make more bitcoin though from converting the US dollars my employer pays me to bitcoin than I make from mining.

  4. Who is worried about money “leaving the country”? That’s zanu pf propaganda of course. There is no money leaving the country except the chefs stealing it and they are immune to prosecution

    1. There is money leaving. We import a lot. Most of us are traders. The real problem though is the failed economy, of course ZANU-PF is to blame, no doubt about that

    2. How much money was spent on the 60 member delegation to PNG recently? if that’s not externaliztion, then i have no idea what is

  5. the problem that the bond coins are trying to solve is that people have money in their bank accounts but they can’ access physical cash, so the option is simple – a government legislative framework that punishes the use of cash and makes it cheap to use plastic money, the government can just say we only accept digital money for all transactions for government services

  6. Try as I might,the concept of bit coin and how you mine it lies straight over my head…..Spare a thought for gogo in the maruzevhas please!
    Back to this bondage.Bearer cheques by any other name and 2008 here a revisit.
    Its a trust thing.Do you trust the greenback or this new bond?….That is the question.

    1. I feel your pain. When I first used the internet in 1999, I remember I tried to explain to my grandmother what it was. She didn’t get it. And she told me that she’d never need to use the internet. Last year when started using Whatsapp, I tried to tell her that she is now on the internet – she didn’t believe me then. She still doesn’t believe me today.

      When you think about it, Bitcoin today is like the internet in 1999 most people won’t get it. I work for a company that runs a bitcoin Exchange and I’m excited to say that we’ve partnered with some companies that are building on top of our API to build some very cool apps. Some of these apps will allow our grandmothers to use bitcoin without knowing what bitcoin is because that app would do a great job of abstracting the complexities of bitcoin the same way Whatsapp abstracts the complexities of the internet for my grandmother. We’re living in interesting times and I’m really excited about the near future.

    1. Volatily is everyone-who-is-new-to-bitcoin’s greatest fear. But for most of those people need not fear it all. Most of our customers buy bitcoin to use/spend instantly and so volatility doesn’t affect them at all. Plus we (and most other bitcoin services) allow you to to lock the value of your bitcoin by converting it to USD so you don’t really need to worry about volatility.

      From my experience, volatility only affects those who buy bitcoin to hold on to for a long time and from what I’ve seen, these people are usually speculators who are trying to profit from the deflationary nature of bitcoin and they know very well what they are getting into.

  7. Well, actually the idea that you can send a remittance to Zimbabwe and the person who receives it gets more money than you sent is no longer a ‘rare possibility’. It’s what a lot of people are using BitcoinFundi for. And it’s something we’re calling “negative transfer fees”. Here is how it works:
    – In Zimbabwe, the demand for bitcoin is almost always way higher than the supply so because the value of bitcoin is market-based, the price of bitcoin tends to be higher in Zimbabwe than it is on other international exchanges – whenever demand > supply prices go up. As I’m writing this comment, the price of bitcoin on BitcoinFundi is $481. And the price of bitcoin on Coinbase (a U.S. based bitcoin Exchange) is $460.43.
    – This means that if I buy bitcoin on Coinbase and sell it immediately on BitcoinFundi, I will instantly make a profit. It’s something we call ‘arbitrage’ in this industry.
    – If Alice, who is in Austin, Texas and I have $100 bill, I want to send to Bob, who is in Harare, Zimbabwe, if I go to Western Union, Western Union will charge Alice $12 to do that transaction and Bill will only get $88 (https://www.westernunion.com/us/en/price-estimator/continue.html). Western Union will charge 12% and sometimes their fees go up to 14%.
    – Now if Alice were to, at this very instant that I’m writing this comment, buy $100 worth of bitcoin on Coinbase, she would get 0.2171 BTC. If she immediate sold it on BitcoinFundi, and sent Bob the US dollars she got from the sale, Bob would have $103.36 in his mobile money wallet (or bank account) after we’ve charge the 1% fee that we normally.
    – With Western Union Alice has $100 to send and Bill gets $88
    – With us, Alice has $100 to send and Bill gets $103.36
    – When the bond notes announcement was made, we’ve seen our volume go up and demand for bitcoin increase slightly. My guess is that when Alice tries to send another $100 one week from now, Bob will get more than $103.36.

    1. Please improve your platform. Its not sending verification code, I dont know if I have to wait all day long!

  8. While I am a big proponent of Bitcoin, using it in Zimbabwe will not solve our liquidity crisis. Before I get into that though, first we need to clarify something, people here (and in general in the country) are conflating the liquidity shortage and cash shortage. These two things are very different and the cash crisis is only started this year.

    So we have a liquidity crisis because the combined monetary values of all our exports + FDI + foreign credit is lower than our Imports + debt repayments + illicit outflows. This means that on net, money (both cash and electronic funds) is moving out of the country and we have less of it today than last week than last year etc. So whether you denominate that money in USD or ZAR or GBP or Bitcoins it doesn’t solve our fundamental problem which is we spend more than we earn. It’s the same problem we had during the Zim Dollar era. The only difference is that pre-2008, RBZ could make up the difference in the export/import imbalance by printing massive amounts of the currency which saw it’s massive devaluation. Converting to USD in 2009 was only a temporary solution because it didn’t address the underlying issue. Bitcoin also will not solve this problem. What we need is FDI, a bailout, fresh cheap credit, revival of local industry and removing corruption.

    So inconclusion I disagree with your assertion that bitcoin will help in this sense. However, I think there is a potential solution (to the trust issue with our monetary authorities) not in bitcoin itself but the bitcoin blockchain. We need to think innovattively and explore ways we could use blockchain concepts in removing the human trust element in our systems. Eventually the ZWD will have to return and it needs to be managed properly. A ZimDollar Blockchain would be perfect in my opinion. Though as someone pointed out before that the powers that be aren’t very keen on giving up levers of power.

    1. Well thought out argument and as a bitcoin evangelist may I add that in the current environment where trust in the government is at zero all that is needed is a trusted partner to introduce the Bitcoin concept as an add on to the current mobile money payment system. A first step would be to pay part of salaries through the mobile money wallets and that takes people away from banks and forces them into using phones , transfers etc. The next step would be to piggy back Bitcoin onto the payment system. Zimbabwe needs to be a cashless society first and thus move away from the concept of hoarding green backs . There is need to improve FDI as long as we import $15 million dollars of cars and trinkets while we only export $9 million dollars of goods were are doomed and heading into financial Armageddon which I’m afraid this government is not up to the task as they are still using 1980s discredited policies to solve 2016 problems.

  9. I agree with CharlesM, there is a major misunderstanding of the problems at hand, and Bitcoin cannot solve the “problem” but a symptom as TT said. Liquidity is actually the issue, our net imports outweigh our net exports continuously, so the currency (of any type) circulating in our economy is always decreasing. Bitcoin as a currency like USD and Rand, cannot solve this.
    As a result of spending more than we make, the economy will be in a currency deficit (currency available currency needed. Then banks can issue loans to businesses that can produce more exports and lower the imports.

    That or find a way to tap into the informal sector, which is fantastic at recycling the products of our economy and creating value. Which is probably the best option for us at this stage.

    1. I agree with @CharlesM, there is a major misunderstanding of the problems at hand, and Bitcoin cannot solve the “problem” but a symptom as @TT said. Liquidity is actually the issue, our net imports outweigh our net exports continuously, so the currency (of any type) circulating in our economy is always decreasing. Bitcoin as a currency like USD and Rand, cannot solve this.
      As a result of spending more than we make, the economy will be in a currency deficit (currency available, is less then, CURRENCY NEEDED). Regardless of who trusts what, Zim needs a way to keep the currency (whatever currency) in our economy consistently above what the country needs.

      A tool (together with many others) to help minimise the reduction of currency locally and monitor how currency is leaving the economy, is controlling how and when currency is taken out of the economy. Enter the bond notes.

      The upside of Bitcoin would be it’s transparency and it’s finite supply. The down side to bond notes, lying and lying and lying about how much currency there is the economy, covered up by printing more bond notes.

      If the authorities did find a way to stop corruption (i.e stealing of public funds) then the bond notes could help stabilise currency outflows. But again more is needed, as much as they want to make it difficult for currency outside of Zim to be put into the Zim economy, we NEED it so there is more CURRENCY AVAILABLE than currency needed. Then banks can issue loans to businesses that can produce more exports and lower the imports.

      That or find a way to tap into the informal sector, which is fantastic at recycling the products of our economy and creating value. Which is probably the best option for us at this stage.

Comments are closed.

%d bloggers like this: