Remittances via Bitcoin: Why This “Killer Use-Case” Is So Close, Yet So Far
Will international banks soon rely on Bitcoin to move money between countries? American Banker posted an interesting article
on March 3 on a panel of bankers who considered that very question. The panel, incidentally, was organized by SWIFT (The Society for Worldwide International Financial Telecommunication), the global cooperative organization owned by banks that operates a secure financial messaging system that enables the flow of funds across much of the world.
In 2013, developing countries received remittances worth $414 billion (USD). According to World Bank data, the global average cost of a remittance as a percentage of the transaction was 7.9%. Cross-border remittances are expensive because they involve one or more correspondent banks playing the role of intermediary when funds are wired from one country to another. In a report I wrote a couple of months ago (A SWIFT Disruption? Bitcoin and Peer-to-Peer Models Challenge the Remittance Business
) I took an in-depth look at the business of consumer remittances and the potential of new business models, such as those powered by cryptocurrencies like Bitcoin, to upend the status quo.
In my analysis, I compared the prices offered by Rebit
, a Manila-based, Bitcoin-powered remittance service provider to a number of established players operating in the U.S.-Philippines corridor such as Western Union, Xoom, and Remitly. Taking into account both the direct costs (fees) and the indirect costs (exchange rate spread, Bitcoin wallet funding fees) involved in the transactions, I found that Rebit did indeed offer the cheapest way of sending money to the Philippines. This is especially true for small-value transactions. Purely from a price perspective, it’s clear that Bitcoin-backed remittance service providers can play a disruptive role in the market.
I argue in my report that three significant challenges need to be overcome before this model succeeds. First, the regulatory status of various Bitcoin-powered businesses in the U.S. remains unclear. In 2013, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) ruled that “an administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations.” The New York Department of Financial Services is working to specify a version of the money transmitter license (dubbed “Bitlicense”) for Bitcoin businesses operating in that state. Complying with the evolving regulatory regimes at the state and federal level will inevitably impose costs; compliance is nevertheless essential if these businesses are to scale.
The second challenge is what I call an “asset-liability mismatch.” In order to accept a remittance of bitcoins from the United States and convert it into pesos in the Philippines, for example, there has to be a robust domestic demand for bitcoins in the Philippines. It is unclear, to say the least, that such a market exists that would match the volume of remittance flows coming into the country.
The third challenge is that of user experience; few people understand Bitcoin, and even fewer are likely to trust it as a medium of exchange when sending money to their loved ones across the world. Now you could argue that you don’t need to understand the subtleties of correspondent banking in order to send money through Western Union. However, Bitcoin-backed remittance providers like Rebit and BitPesa, presume some level of familiarity with Bitcoin that mostly people simply do not have (you need to at least know how to open a Bitcoin wallet and buy some bitcoins). Sending money through Western Union isn’t nearly as complicated; moreover, there’s no risk of the funds in your U.S. dollar account losing 35% of its value in 2 days as happened in January with Bitcoin
These challenges are difficult but not insurmountable. Bitcoin and other cryptocurrencies like Ripple remain promising innovations, and it is heartening to know that banks are paying attention, as noted in the quote below from an American Banker
"We really can't close our eyes," said Cheryl Gurz, managing director of the emerging technology segment at Bank of New York Mellon Treasury Services. "If we as traditional correspondent bankers don't keep looking and determining where [cryptocurrency technology] will take us, new entrants will completely take our space."