“How the Coming Switch to Digital Currency Could Make You Rich” (Jeff Opdyke)

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I usually have fun looking at Jeff Opdyke’s teasers — he writes the Sovereign Individual letter for the Sovereign Society, and he often picks up on little foreign stocks that pique my interest (as you’ve probably noted, I have a soft spot in my heart for obscure stuff that’s sometimes hard to trade — it’s a personal weakness).

Not that they’re all tough to buy, of course — or worth buying. He has teased at least halfway intriguing stuff like the California land owner Limoneira and the laser company Cymer, but he also got revved up about the silly Greenland rare earths stocks that everyone seemed to adore in late 2010 … so let’s see whether we’re enamored of he’s pitching this time.

He starts with his take on the “paperless money” pitch that we’ve heard a few times before, from folks touting well-known stocks like Mastercard (MA), Visa (V) and Verifone (PAY), but then it gets into a bit more of conspiratorial spiel:

“As you know, the world’s paper currencies are deflating faster than a punctured balloon…

“But what you may not realize is that dozens of central banks – including the Fed – are starting to abandon the paper money system… and force us into a new, trackable currency.

“According to the New York Times, the U.S. government is ‘shredding and burying’ billions of dollars in landfills… enough to fill 1,750 dump trucks each year.”

So it’s not just that we’re going paperless with our credit cards for convenience and speed and efficiency, it’s also that the gummint is pushing us all in that direction so we can be tracked. Not that this mightn’t be true on some level, I dunno, I just know that these kinds of “hide from the government” pitches are the heartbeat of the Sovereign Society and the other “get your money offshore or hide it where they can’t find it” newsletter publishers, and they must work very nicely to pull in new subscribers.

But the pitch continues — we get a few pages about how governments are printing fewer and fewer banknotes, and how despite the endless “printing press” of the Fed those dollars are not actually being printed, it’s all just digital money floating around. Which you probably knew already — it is, after all, expensive to print money … all that fancy ink and anti-counterfeit technology and the strong cotton paper so the dollar bills can survive being put through the wash in my pants pocket, and still they don’t last long and have to be replaced by new bills every couple years.

And he paints a picture of the dying greenback as well — not the currency (though that’s happening as well, he says), but the actual bills … with some retail outlets now not even accepting cash for purchases.

So that all serves as the backdrop: cash is already mostly digital, and it’s going to get more so, with more and more transactions happening electronically — which doesn’t just mean the end of the anonymous transaction, it also means there are new systems and services for handling electronic payments. Which gets us to the pick he’s teasing — it’s somehow connected to cell phones (don’t worry, I’m sure it’s not the same pick David Gardner over at the Motley Fool has been touting for a year or so as his “death of the credit card” stock).

So what are the clues?

“The easy money has already been made in the telecom business. And while AT&T and Verizon pay some incredible dividends, it’s highly unlikely you’ll see their shares triple… or quadruple in price anytime soon.

“That’s what has me so excited about a tiny company I recently discovered.

“They have a hammerlock on digital cash payments in the world’s second largest market.

“And some pretty big names – you’d recognize in a heartbeat – are racing to partner with them.

“The key to their business is a proprietary technology that allows you to send (or receive) money from any merchant… any individual… any time – practically anywhere!

“Just as quick as you’d send an email or text message.

“To give you an idea how popular their app is. When they rolled it out in a ‘beta test,’ 52,453 people jumped at the chance to try it. Within 48 months, nearly 14 million people – more than the entire population of New York City, Philadelphia and Dallas combined – signed up.”

Sound exciting? We get a few more specific clues to help us narrow it down:

“According to one insider group:

“This future kingpin ‘has a clear edge over the banks, because they cost overwhelmingly less, and deliver funds over great distances in real time.’

“No wonder… Vodafone, the largest telecom firm in the world, has scooped up a major stake.

“But if they want more, they’d better hurry…

“Because this tiny company just entered agreements with EMC, Cisco … and even the British government’s Department for International Development.

“And they’re showing no signs of slowing down.

“Their mobile business is growing at an astonishing rate… posting a 43% increase in the first half of 2011.

“That said…

“You’d think it’d be trading for $50… even $100+ per share.

“But as of fall 2011, it’s not anywhere near $100 or even $20.

“You could scoop it up right now for less than $1.”

And, not surprisingly, this does turn out to be one of those “tough to buy” companies — or at least, there’s something a little bit tricky about it. Here’s the final pile of clues:

Barron’s agrees, calling them ‘one of the most successful’ digital cash companies of the future.

“But there is one potential problem you should know about…

“It’s impossible to buy this stock directly on the New York Stock Exchange.

“And it’s likely no full service broker will sell it to you.

“For that reason, most Americans have no idea it exists.

“But I’ve found a back-door way to buy shares of this company – right from your home computer.”

So … who is it?

Well, we get a bit of help from the mighty, mighty Thinkolator, as usual — enough, at least, to tell us that the “digital wallet” service he’s teasing is M-Pesa, which is primarily offered by Safaricom, the major mobile telephone provider in Kenya.

M-Pesa is basically a mobile money exchange service, think “Western Union,” only you can send money to anyone who has a mobile phone number instantly — and it evolved to be almost a banking system, since most people didn’t have bank accounts and you could “save” money in your M-Pesa account and use it to pay anyone or take cash out from any of the thousands of available mobile phone agent offices that are already almost as prevalent as convenience stores. The basic system is explained pretty well in this older Economist article.

But we can’t easily buy Safaricom, as he hinted — it trades only in Kenya, not even anything as handy as a pink sheets listing or a listing on a major international exchange that we might have access to (not trading in London or Johannesburg, for example). Safaricom in Nairobi, by the way, trades for 3.35 Kenyan Shillings, which is about four cents a share, should you decide to open a brokerage account in Kenya and buy the stock (you can probably do most of that online if you like, though I doubt it’s quick or easy).

So what’s the deal? Well, Safaricom is actually managed by Vodafone (VOD), which owns 40% of the company. And M-Pesa is owned and run by Vodafone, their affiliate Vodacom out of South Africa, and IBM. None of which are one dollar stocks — and frankly, the spread of M-Pesa has been underway for a while as folks try to emulate the incredible success Safaricom has had with it in Kenya, but it’s not being adopted with quite the same overwhelming enthusiasm anywhere else so far.

I don’t know a lot about the mobile payments business in Africa or other frontier and emerging markets, but what lit the fire under Safaricom was that the service was launched with very little regulatory oversight so it was simple to sign up as either a customer or an agent, and there are thousands of agents where you can turn your M-Pesa money into cash or vice versa, and a huge percentage of people and businesses with whom you can transact via M-Pesa payments, including agricultural vendors, health care providers, etc., so it emerged as a de facto national banking system in a place where less than a quarter of the population had any relationship with a bank previously and where there was an overwhelming shortage of bank branches and ATMs but a pretty solid wireless network built by a national monopoly telecom. The banks fought it, too, though by then it was so popular and widespread that M-Pesa apparently managed to hold on to their simple model. Vodacom’s efforts to expand the system to South Africa and Tanzania have been much less successful, from what I can tell.

And there is at least one other company that was involved in creating M-Pesa, that being the outsourced R&D shop Sagentia — they actually are listed in London (at ticker SAG), and do trade for about a dollar (75 pence at the moment), but as far as I can tell they were hired on as consultants to get M-Pesa developed and running by Safaricom and Vodafone, they don’t own any of it or receive royalties. Or at least, if they do they don’t talk about it in their latest annual report.

So what on earth is Opdyke pitching as his investment idea? Well, if it’s directly related to M-Pesa, which is probably the most outsized success story in mobile payments and which is the subject of all the quotes he notes in the teaser (such as from the Barron’s article here), then I confess to being stumped. The M-Pesa technology is owned, effectively, by Vodafone, though there are hundreds of other mobile payment technologies and systems in existence around the world, and the biggest beneficiary is Safaricom, which you can’t easily buy shares of. Safaricom has resisted sharing the M-Pesa network with their competitors or opening it up at all, which means that, with the huge power of the network effect, Safaricom continues to be incredibly dominant in the Kenyan mobile business (no one wants to use a different network if it means they lose access to M-Pesa, though as in many other emerging nations many folks use more than one network by swapping SIM cards).

M-Pesa is the fastest growing segment of Safaricom’s business (other segments are mobile data — most Kenyan’s get internet access through their phone, if at all, SMS Chat, and traditional voice “minutes” sales, which is still by far the largest piece of the pie), they have about 15 million users and 32,000 agents in the network that help it to build on itself, and they’re trying to continue to grow the business and provide more banking-type services through M-Pesa … but it’s still less than 20% of revenues.

So we’ll guess, since he clearly is teasing Safaricom … that he means, well, buying Safaricom shares. Which means setting up a Nairobi brokerage account. Lousy answer? Yep, I agree, but Opdyke is a clear and continuing advocate of setting up foreign brokerage accounts around the world, so that’s what I’ll go with. If you can identify a better way to play off of Safaricom specifically — a stock which, by the way, completely dominates trading in Nairobi — then please do feel free to let us know. There may be a smaller closed-end investment fund that owns enough of Safaricom to move the needle, or perhaps Sagentia is secretly collecting M-Pesa royalties and I just didn’t find that information.

Personally, I do own shares of Vodafone (VOD), and find it a fine play generally on emerging markets telecom with a foundation in European and US mobile, and if you want to be more specifically Afro-centric you could look at their separately listed subsidiary Vodacom (VDCMY on the pink sheets), which is controlled by Mama Vodafone and owns networks in Tanzania, the Democratic Republic of Congo, Mozambique and Lesotho in addition to their South African mobile business … and the most frequently discussed African mobile play is MTN Group (MTNOY on the pink sheets). If you’re curious about how to invest in this mobile payment revolution — which still faces a lot of hurdles in most places, particularly in regulation-heavy developed economies with strong banking systems and telecom competition — then there’s also a good Marketwatch article here that mentions many of the larger global players, from Vodafone to Visa to Google to the NFC chip companies like NXPI.

And yes, Safaricom does look like it’s still growing nicely and leveraging M-Pesa for more future growth, and Vodafone is still trying to get M-Pesa to “kick in” in other countries (Tanzania, South Africa, Afghanistan, etc.) with (very) limited success, but I don’t feel like trying to buy Safaricom shares on the local exchange and, though it is growing, I doubt it will explode dramatically enough to “make me rich” in the near future — I’ll be happy with my shares of Vodafone as I watch those dividends compound year after year, and accept that Vodafone’s 40% holding in Safaricom accounts for, oh, about half a percent of Vodafone’s market capitalization. If you’ve a better idea in mobile telecom or mobile payments investing, well, I’d be delighted to hear it — just use the friendly little comment box below. Thanks!

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15 Responses to “How the Coming Switch to Digital Currency Could Make You Rich” (Jeff Opdyke)


  1. All and everything i heard or witnessed coming out of Africa has been no good (nigerian liars and scammers), unless there is a clear cut answer I shall avoid africa like the plague., BTW China pretty much owns nearly everything useful in Africa., anyway, Can you tell I do not like Africa and all that goes with it? LOL

    Like(0)

    • Your loss. I am doing great with African oil prospering in Kenya. Gumshoe has the skinny. And my Chinese NQ doing fine also.

      Like(0)

    • The best long term investment company in Africa would be the most favorite Gumshoe’s company , I think so………….

      It is Lonrho, with a symbol LNAFF.PK

      Good Luck

      Like(0)

  2. These “gumshoe” written articles always make good reading and do give color and back ground ideas for further study. Some have actually resulted in putting me on track to seek out several positive opportunities. Thank you!

    Like(0)

  3. Canada already turning into vinyl bills ,hovewer for the future i prefer keep some small gold and silver coins , no way Big Brother will control my casch flow.
    Thank you Gumshoe

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    • You mean Bitcoin?

      Kenya would be a good place for it … as the banks aren’t friendly with it so an area where the people are already used to exchanging their cash with an agent to get the digital money would be an area in which Bitcoin could quickly gain traction.

      Unfortunately, there are a few challenges which might take a while to figure out. Bitcoin is like dynamite — very powerful, but very dangerous when used incorrectly. Sure, bitcoins can be transferred person-to-person via mobile. But since smartphones are managed devices, it might be possible that a thief (or bank, or government) could co-opt the user’s mobiles and steal their funds. Bitcoin can be used anonymously and even though millions and millions of dollars worth of coins have been stolen to-day, not a single thief has been identified even, nonetheless prosecuted.

      So a system that this would work for would probably need voice print analysis or something like that to be secured from the thieves (for mobile use). For desktop use, passphrase encryption works fine and for online EWallets, two factor authentication seems to be working as a secure approach as well.

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  4. What is the relationship of Vodafone to Verizon? When I look for news on Vodaphone I get Verizon news!

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  5. @MonV

    Vodafone owns a 45% stake in Verizon Wireless.

    The rest of Verizon Wireless is owned by Verizon. Verizon also contains its old landline business and broadband networks, etc.

    The big deal recently with Vodafone is that Verizon Wireless has paid off a lot of its debt so it has now started paying a large distribution which is split between Verizon and Vodafone. This uptick in a new cash flow has allowed Vodafone to increase its dividends starting this year.

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  6. I have a sister that lives near them in Nairobi. Perhaps she could shed some light on this
    stock and whether or not it’s worth putting some of my American dollars into them.

    Like(0)

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