July 11, 2013, 3:02 AM — A project underway in Kenya is linking Bitcoin with M-Pesa, a popular mobile payments system, in an experiment designed to spur innovative payments in Africa.
Kipochi, which means wallet in Swahili, is a web service launched earlier this month by entrepreneur and programmer Pelle Braendgaard, who has followed digital currencies since the 1990s.
The service lets people buy bitcoins using M-Pesa, a widely used mobile payments service launched by Kenyan operator Safaricom with partner Vodafone in 2007. About a third of Kenya's 44 million people use the service to transfer small amounts to other people using their phone number and to merchants.
M-Pesa runs on a SIM card on feature phones and uses an operator menu to perform transactions. A network of agents not affiliated with banks accept M-Pesa deposits to credit accounts. Small fees are charged to transfer and withdraw money.
But M-Pesa only works within Kenya. Braendgaard sees Kipochi as a way for Kenyans to use the Bitcoin system in order to receive, for example, remittances from outside the country without incurring high bank or wire transfer fees. Kenyans send an average of about US$99 million per month back home, according to the country's central bank.
"For us, Bitcoin solves most of those issues," Braendgaard said an interview from Kenya.
Bitcoin is a virtual currency that is transferred using a peer-to-peer software system. Bitcoins can be transferred for free, and the time it takes for a transaction to be verified by the system can be sped up by paying a very small fee.
But obtaining bitcoins is still difficult and often requires sending wire transfers to virtual currency exchanges. And Bitcoin is a complicated system, so Kipochi has taken several steps to make bitcoin purchases using M-Pesa balances as easy as possible.
When a user wants to buy bitcoins, Kipochi's backend servers place an order with a local bitcoin exchange, which charges a 2 percent spread to buy or sell the currency. The local exchange delivers the bitcoins to Kipochi's servers. Kipochi users receive an SMS when their account is credited.
Kipochi maps a user's phone number to a 34-character alphanumeric Bitcoin address, which is needed in order to receive the digital currency. It also allows users to send bitcoins to another person just using their phone number, a key component for usability, Braendgaard said.
Due to the low-value transactions handled by M-Pesa, Kipochi also works in a much smaller denomination of bitcoin, a "millibit," or one-thousandth of a bitcoin. A millibit was worth about $.08 as of Thursday afternoon.