Despite warnings by central banks, one can officially say that bitcoins have finally made their way to the Middle East!
Bitcoin, an experimental digital currency, has gained a toehold in the Middle East. Despite warnings issued by central banks in the region, two small businesses have begun accepting Bitcoin payments over the past two weeks.
Bitcoin is a technology created by an effectively unknown person, or group of people, using the pseudonym Satoshi Nakamoto in 2009. Bitcoin is a decentralized currency, meaning there is no official authority, company, website or even symbol. Rather, individuals appropriate the protocols created by Satoshi, which are available for free download on the Internet and have created a variety of digital platforms to send, receive and exchange Bitcoins.
Today, users can download “Bitcoin wallets” from a number of independent app developers, which enable all transactions. Each wallet is assigned an alphanumeric code but has no personal information associated with the owner.
Using these codes, individuals can send and receive Bitcoins across the network. All Bitcoin transactions are logged on the Blockchain, a public ledger accessible to anyone with an Internet connection.
Instead of relying on a central authority, peer-to-peer transactions are verified by individual users in the Bitcoin network called miners.
“The system is based on the concept of proof of work,” explained David al-Achkar, a Lebanese entrepreneur and active member of the regional Bitcoin community. “Basically they [the miners] are verifying that these transactions are legitimateand that people who are sending money actually have the money and so on.”
To do this, miners use their computers to continuously run the mathematical algorithms at the heart of the Bitcoin protocol.
“In return for spending the CPU [central processing unit] cycles, which means spending their processing power, their computer power, electrical energy etc., miners are rewarded with newly minted Bitcoins, ” Achkar told The Daily Star.
“Bitcoin’s value is determined by market dynamics. A predictable supply and varying demand determine the price,” he added.
Bitcons have a monetary value and can be traded for cash on various online exchanges or used to buy products. According to Coindesk.com, a widely used Bitcoin site, one Bitcoin is worth approximately $620. On average, the 80,000 Bitcoin transactions which occur daily are worth more than $100 million. In December 2013, the daily value of Bitcoin transactions briefly surpassed the value of Western Union transactions.
Critics say that because of the largely anonymous structure of the Bitcoin network, many of these transactions involve illicit activities. In December 2013 the Lebanese Central Bank issued an official warning regarding Bitcoin. “Transactions conducted with Bitcoins facilitate money laundering and the financing of terrorism,” said a circular issued by the Central Bank.
Regionally, the limited Bitcoin economy appears to serve more mundane purposes.
Earlier this month Dubai-based restaurant The Pizza Guys began accepting Bitcoin payments.
Over the past 10 days, The Pizza Guys has processed seven Bitcoin transactions, they said.
Haque and Badawi’s Bitcoin wallet (downloaded onto their Android phone) produces a QR code, like a bar code, for the amount of a customer’s order. The customer then takes a picture of the code with their phone. The customer’s Bitcoin wallet application recognizes the code and transfers funds to Haque and Badawi’s wallet.
Due to its relatively small user base, the value of Bitcoins is subject to intense volatility. “Because the money is not backed by any central bank, the value [of Bitcoin] is not stable, and the price can drop to zero,” the Lebanese Central Bank cautioned in its December circular.
For small- and medium-sized businesses like Haque and Badawi’s, however, Bitcoin’s value fluctuations pose little threat. “We are able to accept the volatility in the price of Bitcoin because our transaction size will always be small: there is only so much you can spend on pizza,” they said.
Mohammad Badran, who began accepting Bitcoin payments at his tea house in Amman last weekend, agrees. “Even if we lost all our [Bitcoin profits] at the end of the day we don’t lose that much.” While he has not yet processed any Bitcoin transactions, Badran says he intends to use online exchanges to transfer any Bitcoins he receives into cash.
The same day Badran decided to open his establishment for Bitcoin business, the Central Bank of Jordan issued a warning against the currency, becoming the second government in the region to do so after Lebanon. “Virtual currencies are not legal tender and there is no obligation on any central bank in the world or any government to exchange its value for real money issued by them,” it said.
Bitcoin advocates, however, say the lack of issuing authority is one of the reasons why the technology is so desirable. “You’ve got a borderless currency that lives on the Internet,” Achkar explained. “Everyone that has access to the Internet or a phone has access to Bitcoin and all the financial services that are built off it.”
Because of the high mobile penetration rates in the Middle East, Achkar says that region is well positioned to join the Bitcoin movement in greater numbers.
Still, some concerns remain. Bitcoin wallets have been hacked, sometimes resulting in millions in losses. The fear that Bitcoin is being used for criminal transactions is legitimate, Achkar said, but added that all currencies are used for such activities.
- Need some space? UAE's banking sector is getting too crowded
- Bank funding in the Middle East doesn't boil down to liquidity alone
- Why is the Israeli shekel so weak?
- What doesn't kill you, makes your stronger: why the Arab Bank is likely to emerge from the Israeli lawsuit 'unscathed with flying colors'
- Too foreign? An inside look into the struggles of foreign banks in Saudi Arabia