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With blockchain and cryptocurrency, a promise has been made for a fee-free world on any transaction of value between two parties. Eventually, all assets of value are predicted to be on a public ledger, or blockchain, meaning transferring these assets will be instantaneous and fee-free. This is also known as the token economy.
Current market for global remittances
The more you learn about the current state of affairs in the international money transfer industry the more you feel like a tiny piece in a vast global network. Just to give a few numbers:
- There are $4.8 trillion in transactions on foreign exchange markets daily
- According to World Bank statistics, global remittances will grow to $616 billion in 2018 ($601 billion in 2016)
- Remittances to low and middle-income countries are expected to grow to $466 billion in 2018 ($441 billion in 2016)
- The average cost of sending $200 is 7.2%, making up a total cost of $44.3 billion globally in 2018
- A reduction of costs in cross-border payments by 5% will result in $16 billion in savings each year
Clearly, an average fee of 7.2% in a $600+ billion industry is not competitive in the blockchain and token economy. At the same time, analysts believe that $32 billion in remittances is failing to reach recipients because of the high transaction costs of international money transfers.
When it comes to remittances, it is expensive to be poor
Transferring between national borders, typically between family members, is known as remittances. The global remittances market is a great example of a legacy financial industry prone to be disrupted by blockchain and cryptocurrency. Currently, the remittance market is largely working as a toll collector, especially for the 2 billion unbanked people and foreign workers. Cryptocurrencies and the blockchain have the potential to provide almost instant transfers of assets from one country to another at a very low cost. For migrants who wish to send money home, this means they will no longer have to spend an insane average of 7% in commissions and fees. Those commissions and fees are mainly due to multiple intermediaries. Intermediaries invoices each of their interactions during the remittance process. Every time a new mediator is involved in the process, commissions increase. Those fee take-ups differ between 1% and up to 24%! Blockchain technology removes the need for intermediaries because of decentralization, making peer to peer transactions secure, fast and cheap. Blockchain connects each other without a third party, and as a result, the total amount of money sent and received is somewhat the same.
The remittance problem digs deeper than high fees
While high fees are a problem when sending money abroad, the main issue that faces migrants is not necessarily the fees, but the identity proof. In order to be a part of the financial market and open a bank account, people should have identity papers. However, some migrants leave their country in desperation and despair. Their main thoughts are not to take their birth certificate when escaping their country. The number are staggering, with 1.1 billion people worldwide that cannot officially prove their identity. The blockchain technology surpasses this obstacle by finding alternative solutions to get those data and enabling foreign people to access the financial structure. Globally, the traditional financial system set security barriers that reduce the access of the remittance process, making it difficult if not impossible for 1.1 billion people to send money to their home country.
This means that they are completely excluded from the global financial system and cannot perform any remittance transfers either. Projects like World Identity Network and Humanized Internet attack this problem by creating tools for storing identifiers like birth certificates or driver licenses in a blockchain database.
According to the World Bank, almost 40% of the people on earth has no access to the global financial system.
The inefficiencies and costs surrounding the conventional financial industry are some of the most significant factors in a globally unfair remittance system. High fees, armies of intermediaries, and regulatory pressure are all enormous problems for the global remittance industry, which could be solved thanks to cryptocurrencies and blockchain technology.
In order to tackle those obstacles, a substitute to the conventional remittance market has been found in blockchain. Platforms powered by the blockchain has emerged, such as Blockbasis, to solve the issues with the conventional bank system, using cryptocurrencies as a money transfer instead of fiat currency.
Nowadays, the main challenge with blockchain remittance systems is to increase the community. Blockchain promises to be revolutionary by reducing the time for money transfer and the price. However, the road ahead is still long. Before diving into that, let’s look at how big the global remittance market is today.
The problem boils down to intermediaries
Let’s take an example to understand how many intermediaries there really are in the global remittance system.
When a person initiates a money transfer from a country in North America or Europe to a developing part of the world like Africa, the money will go via a chain of different banks and financial services. From a person with local US or European bank account, the money will go from the local bank’s account to the national bank’s account, then to the corresponding bank working with the US or European market. After this, the wire will get to the SWIFT network, then on to a corresponding bank serving the market of a target country in Africa. Finally, money arrives at the local bank account.
This process might take several days, sometimes weeks, and fees are charged every step of the way. Currency exchange costs are to be considered as well. Often local currency from one country will need to be changed into dollars before being changed into the final destination currency, which adds on additional fees.
Entire companies like Western Union have developed a worldwide network of physical access points for sending and receiving money, alongside the necessary bank accounts from around the world. Supporting such a large amount of infrastructure is costly, and Western Union are sure to pass these costs on to their customers.
In the current global state of affairs counting more than 60 million refugees worldwide, the largest number ever recorded, which all have problems with identity documentation, they automatically become excluded from traditional banking, which may divert remittance payments to so-called “informal” channels. This is where unrecorded and unregulated money transfer channels are used (for eg. hawala). Risks for users of these informal channels are significantly higher, not to mention cost.
Cryptocurrency to the rescue fixing global remittances!
Since the creation of Bitcoin in 2009, the promise of cryptocurrency has almost become synonymous to providing an innovative solution to the current issues consumers face in today’s remittance market. For example, the BitPesa service – which is currently operating in Nigeria, Kenya, Uganda, Tanzania, Senegal, and the Democratic Republic of the Congo – developed a blockchain-based global payment network, which allows fast (one day instead of one week) and much cheaper (1–3 percent costs) transactions. Another example is the Ethereum-based Monetha payment system, which is able to carry out transactions 5 times cheaper and 10,000 times faster than traditional payment systems.
Remittance costs through a blockchain are thousands if not millions of times cheaper than the cost of remittances in the current market. However, there are only an estimated 20M cryptocurrency users compared with hundreds of millions of customers for traditional banks. In order for cryptocurrency to disrupt the global remittance market, mass adoption has to happen.
This massive opportunity will hopefully lead to innovative companies making it easy for people to send and receive money via the blockchain, allowing millions of people to join the cryptocurrency community to get access to global markets, all while avoiding fees and commissions for services that aren’t providing any real value. At the same time, governments might even issue their own cryptocurrencies or in an extreme case cryptocurrency might replace fiat currency entirely.
Time will tell to what degree cryptocurrency can solve the global remittance problem. One thing is certain, we at Blockbasis are doing what we can to make it easy for people to send and receive cryptocurrency via email. If you have ever tried to send an email, with Blockbasis you can now send and receive money at the fraction of the average cost in the global remittance market.