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 $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.
"We are under no illusion that our service is going to satisfy hardcore bitcoin nerds," Braendgaard said. "This is fine for small transactions for people to use on some devices."
The bitcoins are also not stored on a mobile device. Bitcoin uses public key cryptography to complete transactions, and Kipochi's servers securely store the bitcoins' private key needed to send the currency, Braendgaard said.
So far, Kipochi is just a web service, but developers are working on an operator menu for use on feature phones. People in the U.S. are blocked from using Kipochi to send bitcoins due to regulatory concerns, Braendgaard said.
Perhaps surprisingly, Kipochi doesn't have a plan to make money. Aside from the fees a user pays to buy or sell bitcoins at the exchange and the fees associated with M-Pesa, Kipochi itself is free.
Braendgaard said Kipochi is a "loss leader" intended to spur more interest in Bitcoin in developing countries. But Braendgaard said he is working on a merchant platform called "Soko" that uses bitcoin. He won't reveal many details, but said the platform will tackle authentication issues around payments and scenarios such as recurring subscriptions.
But before a merchant platform is feasible, people have to start using Bitcoin. Braendgaard said he has seen many virtual currency projects fail, but Bitcoin holds the most promise of any.
"I'm betting everything on it," he said.