Bitcoins taking the place of petrodollars is not a novel idea, but this time it was an established institution – Kuwait Financial Center ‘Markaz’ – suggesting it. Since OPEC has been – unsuccesfully – entertaining the idea to add other petrocurrencies to dollar for some time, the response of region’s big oil to the bitcoin adoption scenario was to be expected. A kind of colective ‘Huh?!« speaks for itself about the possibilities of such a thing happening. So we turned to the experts in the virtual currency field to comment on the Markaz’ suggestion. »GCC region depends heavily on oil exports, (90% of exports and 75% of government revenue). As a result, they receive payments from all over the world. International payments might take close to 1-3 days or sometimes even more owing to different time zones. Revamping the payment system in line with bitcoin systems will yield in savings in terms of cost, time and paperwork involved. Alternatively the same payment method could be adopted for fund transfers among the GCC regions as well as the whole of Middle East,« they had written in the report.
Imagine sending an email
David El Achkar, founder of the Yellow, a bitcoin payment startup from Lebanon, generally agrees with the statement above as bitcoin greatly simplifies payments. »A simple analogy is that of “email”. Sending bitcoins is as simple as sending an email. That is a significant improvement when compared to the hassle of conventional money transfer options. I think that ultimately neither companies nor individuals are especially tied to the underlying technology used to transfer money (whether it is Visa, Western Union, cash, or Bitcoin). They will eventually adopt the technology that provides them with the greatest benefits (in terms of cost savings, low hassle, speed, etc.). And I believe that Bitcoin is already coming out as a very strong contender.« However, El Achkar stresses, before bitcoin is adopted at a larger scale, we will need to see many improvements. For example, bitcoins are still difficult to acquire today (there are no exchanges in the Middle East), they have limited utility (they can only be spent in few places), starting to use bitcoin still requires a certain level of technical proficiency, and so on. But, all of these hurdles are temporary ones, El Achkar is convinced, and points out that several companies, including Yellow, are working to make bitcoin more mainstream and consumer- or company-friendly.
Tom Holub of BitOasis, the first platform in the Middle East where you can buy and sell bitcoins, believes that from the technology standpoint, bitcoin is ready for institutional use of that sort, however in terms of liquidity, the virtual currency is not there yet. »I think that right now is the best time to start experimenting with the concept, because innovative companies who experiment early will have an edge over the slow ones. But in terms of liquidity, Bitcoin economy would not be able to effectively support large value (hundreds of millions USD) transfers, if the coins are to be exchanged at origin or destination. Only a part of the today’s USD 7 billion worth of coins is being held on BTC/USD markets.«
The effect on bitcoin’s financial landscape
Today (August 31st), the price of one bitcoin stands at USD 483.80, there are 13 174 600 bitcoins in circulation and taking into account the GCC hydrocarbon income in 2013 (600 billion), there’s some fun to be had with the numbers. At the current price, the GCC oil could buy all existing bitcoins with just above one percent of its ‘budget’ (USD 6.373.871.480). And if it insisted to pour all of its billions into bitcoins, one would have to be worth USD 45.542 to swallow the 600 billions. That would undoubtedly make the current owners very happy, but of course this toying with numbers has nothing to do with the reality of what would happen if oil really was being sold for bitcoins. These numbers just help put things into perspective.
El Achkar says the effect of billions of dollars pouring into bitcoin is very hard to predict. »Today the market cap of Bitcoin hovers around USD 5- 10 bn. That would be a significant jump. Realistically, that “pouring of dollars” would have to happen gradually as the Bitcoin ecosystem matures (and in turn will help the ecosystem mature). We’re already seeing many institutional investors pour millions into Bitcoin.«
Holub agrees: »Even a USD 5 mil trade will move prices at any given market 10-20%. This is called slippage, and it’s what makes very large orders in markets hard to execute. This is especially true for Bitcoin, as there is not sufficient liquidity in the markets for orders of that size. Trades of this size or larger are usually settled over the counter (off-exchange) as to not move the market prices. Possibly, the oil companies could use Bitcoin for cash transfers between their own branches internationally. Or if they had a small percentage of their revenue in Bitcoin, then they can pay one of their smaller suppliers in Bitcoin too – maybe for IT infrastructure and such, where there are already many service providers accepting Bitcoin. They could also use Bitcoin to pay their workers abroad. This is true for any company looking to experiment with Bitcoin.«
Currency no, payment system yes
So as a currency, bitcoin is far from ready. But not as a payment system. »Authors of the report state correctly that, in use-cases where the liquidity is not an issue, decentralized currencies will provide indisputable advantage over legacy banking systems. Coins can be transferred immediately, regardless of national borders. The Bitcoin network doesn’t particularly care if a certain transaction is worth USD1 or USD1,000,000,000: all transactions are treated the same way, typically costing zero to 10 cents in fees. The choke points are always exchanging coins to and from national currencies, which is something we are working on with BitOasis,« says Holub.
He expects to see Bitcoin adoption in use-cases where current pain of dealing with legacy banking is the greatest. That is international worker remittances(Western Union type of transfers), small and medium size international trade, and consumer-faced international services, where dealing with credit cards and associated fraud is getting out of control. The largest of institutions will follow later, Holub is convinced, when the market size can already support the size of their trades.