Bitcoin may have an attractive use case in the overseas remittance market. By using cryptocurrency as a medium to send money overseas, users may be able to avoid some of the high costs charged by traditional banks and money transfer services.
Many people around the world regularly send money to their friends and family abroad. A 2019 report by the World Bank projected that remittances to low- and middle-income countries would reach $550 billion that year. Although overseas transfers fell sharply as a result of the COVID-19 pandemic, remittances still provided more wealth to low-income countries than foreign direct investment.
- Remittances are a $550 billion-dollar industry and a major source of wealth for low- and middle-income countries.
- Supporters say that bitcoin can facilitate remittances by removing intermediaries and reducing the costs of overseas payments.
- However, the high fees associated with the bitcoin network make remittances impractical for most remittances. In addition, there are concerns that cryptocurrency could be used for money laundering.
Understanding the Remittance Industry
In a typical remittance payment, a customer in the origin country pays local currency to a Money Transfer Operator (MTO). The recipient can then collect the money in the currency of the destination country, minus any fees by the MTO.
Most MTO's operate through the network of a larger remittance software provider (RSP), like Western Union (WU) or Moneygram. The MTO may only receive a fraction of the charges it takes from the customer, as the bulk is pocketed by the RSP. Additionally, an MTO may also need to pay other regular charges for installation, subscription, and system maintenance.
This financial infrastructure is expensive to use, particularly for smaller remittances. The World Bank found that a remittance of $200 can incur average fees between 5% and 9%, depending on the destination country and the type of service used. These services are expensive due to the cost of complying with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, capital controls, or other restrictions. Additionally, there may be a lack of transparency in the exchange rates, adding another invisible cost to the consumer.
How Bitcoin Can Be Used for Remittances
Bitcoin has been suggested as an attractive medium for international remittances because of the borderless nature of cryptocurrency. Since anyone can use the blockchain, there's no need to send payments through a bank or RSP.
Several blockchain startups offer services to facilitate bitcoin remittances without requiring the users to understand bitcoin technology. Bitspark, based in Hong Kong, offers services to help MTO's move money to countries like the Philippines, Indonesia, and Vietnam.
Another service, Rebit, facilitates money payments to the Philippines, mainly from Canada, Japan, and South Korea, and is planning to expand to the Middle East. Bloom, Payphil, and coins.ph are other players operating in the Asia-Pacific region using a similar model.
These services replace RSPs with software to facilitate bitcoin transactions. A Money Transfer Operator can simply estimate the amount of money needed for their daily operations, purchase the equivalent amount of bitcoins in advance, and immediately sell them for fiat currency in the receiving nation. The business does not hold the virtual currency tokens for a long period of time, and customers' transactions are performed within minutes.
Concerns About Bitcoin Remittances
By far the largest concern about international cryptocurrency transactions is the possibility that they could be used for money laundering. Banks and Money Transfer Operators have strict reporting requirements, and the Office of Foreign Assets Control strictly limits the countries and individuals that can receive payments.
In addition, sending Bitcoin also has transaction fees, which can be unpredictable. Bitcoin fees are calculated on a per-byte basis, rather than a percentage, meaning that small transactions are comparatively more expensive. In February 2021, Coindesk reported that the average bitcoin transaction cost $23, though a patient user could pay $11 by waiting for lower congestion. For a $200 payment, this is even more expensive than traditional remittances.
The Bottom Line
International remittances are one of many financial industries which have been suggested as a possible use case for Bitcoin transactions. Because of the high cost of traditional services, users could save money by sending bitcoins directly to the recipient. Many startups provide software to facilitate Bitcoin remittances without requiring the users to have any understanding of cryptocurrencies.
However, Bitcoin has become less attractive for remittances due to the increasing cost of Bitcoin transactions. Some competing cryptocurrencies, such as Ripple and Dash, are also targeting the remittance market with substantially lower fees. (See also, How Tech Companies are Disrupting the Untapped Remittance Market.)
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