Markets

The Importance of Peer-to-Peer Finance for the Developing World

By Ray Youssef, CEO, Paxful

We all have that one “Bitcoin Evangelist” in our lives -- the person preaching about how cryptocurrency will change the world and replace paper money. On the other hand, according to a May 2018 Gallup Poll, 75% of investors consider Bitcoin very risky. So who is right? Is Bitcoin an unreliable investment or a visionary method of improving the world?

One thing is certain: as a form of digital currency that can be bought and sold from peers, it is impacting economies in some of the world’s most overlooked places.

To comprehend how Bitcoin can empower the developing world, we must first understand what peer-to-peer trading entails. Long before the digital age and even banking, people traded directly, without any third party to facilitate. This changed over time as our financial systems grew larger and increasingly complicated, and nations emerged with borders and independent currencies.

Banks, checks, bonds, and credit provided opportunity but came at the cost of transactional independence. Cash became the last vestige of the peer-to-peer transaction, with diminished benefits in an increasingly globalized economy.

Unfortunately, not everybody can take advantage of all these financial services - in some areas of the world, access to them is extremely limited. The underbanked have a need for an online universal wallet that allows them to receive payments, make purchases, and send money anywhere around the world. But neither banks nor the digital wallets that depend on them (e.g. PayPal and Venmo) can help those who have no bank account and thus no way to add funds to the wallets.

Through peer-to-peer finance, these people can add money to online wallets with gift cards or dozens of other ways, almost none of which require a bank account. From there, they can sell bitcoin to a peer with a bank account anywhere in the world and ask that buyer to pay their bills, remit funds or take care of any other payment-related transactions that we take for granted. It is a huge shining light of financial independence for developing countries.

One of the most pleasant surprises about using bitcoin for peer-to-peer finance is that it doesn’t just allow people to save money: they can actually make money as well. For example, migrant workers who want to remit funds back home can save an additional 10-20% by not having to pay a Western Union fee. Some people can even start their own import/export businesses. This is possible due to the free market around bitcoin: while the strong demand for bitcoin in emerging economies means that there is a higher price for it, migrant workers living in the West have far cheaper access.

Through peer-to-peer finance platforms, those who make a living in the West can buy bitcoin at the free market price. They can then sell it to people in other nations, who are happy to pay a premium for the opportunity to secure immediate bankless funds. It is a win-win for all.

Peer-to-peer exchanges also allow merchants to circumvent capital controls and conduct business on a global scale. Many don't realize that without the luxury of an American or European bank account, merchants cannot officially be associated with Visa or Mastercard and thus cannot accept online payments.

What then are they to do if they cannot readily fly to New York or London and open a bank account? They can accept bitcoin or use other merchant solutions to accept payments from anyone anywhere in the world, and then convert the payment to local currency at their local banks.

In countries with unstable currencies where traditional methods of purchasing bitcoin are banned or otherwise impossible, peer-to-peer exchanges allow citizens to store their assets out of the reach of governments and volatile economies. Many nation-states are extending their internal monetary blockades to cryptocurrency in an effort to protect their broken financial systems.

Banks are being ordered not to do business with crypto exchanges, and exchange officers have even been arrested in India. As such, centralized exchanges are clearly not going to be the main on-ramps to a crypto-based economy.

While the West has identified vices and speculation as the only use cases for crypto, the emerging world has shown us other examples that are truly life-changing and have immense potential for growth. The future of cryptocurrency undoubtedly lies within P2P finance and it looks bright.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.