Bitcoin might be useful in the international remittance business. Users may be able to avoid some of the high fees imposed by conventional banks and money transfer services by utilizing cryptocurrencies as a means to move money internationally.
Many individuals all across the globe send money to their friends and family who live in other countries. According to a 2019 World Bank study, remittances to low- and middle-income nations will surpass $550 billion that year. 1 Despite a drop in foreign transfers as a consequence of the COVID-19 epidemic, remittances remained resilient, topping $540 billion in 2020. 2
- Remittances are a $540 billion business and a significant source of money for low- and middle-income nations.
- Bitcoin supporters argue that it can help with remittances by eliminating middlemen and lowering the cost of international payments.
- However, the hefty costs connected with the bitcoin network make most payments impracticable. Furthermore, there are fears that cryptocurrencies may be utilized for money laundering.
Understanding the Remittance Industry
In a typical remittance payment, a consumer in the origin nation pays a Money Transfer Operator in local currency (MTO).The beneficiary may then collect the funds in the destination country’s currency, less any MTO costs.
The majority of MTOs operate through the network of a bigger remittance software provider (RSP), such as Western Union (WU) or Moneygram. The MTO may only get a portion of the charges collected from the consumer, since the RSP keeps the majority. In addition, an MTO may be required to pay ongoing fees for installation, subscription, and system maintenance.
This banking infrastructure is costly to utilize, especially for little transfers. According to the World Bank, a $200 transfer might incur costs ranging from 5% to 9.3%, depending on the destination country and the kind of service utilized. 3 These services are costly because of the costs of compliance with Know Your Customer (KYC) and Anti-Money Laundering (AML) rules, capital controls, and other constraints. Furthermore, there may be a lack of transparency in currency rates, which adds additional unnoticed expense to the customer.
According to the World Bank, the worldwide average cost of transmitting $200 in the third quarter of 2020. 4
How Bitcoin Can Be Used for Remittances
Because of its borderless nature, bitcoin has been proposed as an appealing medium for international remittances. There is no need to transmit payments via a bank or RSP since anybody may utilize the blockchain.
Several blockchain businesses provide services to let customers send bitcoin without having to comprehend bitcoin technology. Satoshi Citadel Industries/Rebit.ph helps people send money to the Philippines, mostly from Canada, Japan, and South Korea. 5 Other players employing a similar approach include AZA Group (aka BitPesa), Bitso, RippleNet, and BloomX. 67
These services use software instead of RSPs to enable bitcoin transfers. A Money Transfer Operator may simply predict the amount of money required for their daily operations, buy the same number of bitcoins ahead of time, and quickly sell them for fiat currency in the receiving country. The company does not keep the virtual currency tokens for an extended length of time, and consumer transactions are completed in minutes.
Concerns About Bitcoin Remittances
The risk of international bitcoin transactions being utilized for money laundering is by far the most serious issue. Banks and Money Transfer Operators must comply with tight reporting rules, and the Office of Foreign Assets Control restricts the nations and persons who may receive funds.
Furthermore, transmitting Bitcoin incurs transaction fees, which might be unexpected. Bitcoin fees are determined per byte rather than as a percentage, which means that little transactions are more costly. Coindesk stated that the typical bitcoin transaction cost $23 in February 2021, while a patient user might save money by waiting for lesser congestion, paying $9-$11 instead. 8 This is significantly more costly than standard transfers for a $200 payment.
The Bottom Line
Many financial businesses have been identified as potential use cases for Bitcoin transactions, including international remittances. Because conventional services are expensive, customers might save money by delivering bitcoins directly to the receiver. Many firms provide software that facilitates Bitcoin payments without needing customers to comprehend bitcoins.
However, owing to the rising cost of bitcoin transactions, Bitcoin has become less appealing for remittances. Some rival cryptocurrencies, such as Ripple and Dash, are also aiming for the remittance business with far cheaper costs.
Investing in cryptocurrencies and Initial Coin Offerings (ICOs) is very dangerous and speculative, and neither Investopedia nor the author suggest that you do so. Because every person’s circumstance is different, a knowledgeable specialist should always be contacted before making any financial choices. Investopedia makes no guarantees or warranties about the accuracy or timeliness of the information provided on this site. The author owns no cryptocurrencies as of the day this post was published.
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