Why Bitcoin & Other Crypto-Currencies Will Eventually Rule Remittances

Remittances this year (2015) are poised to grow even more. By various estimates this year’s official count would most likely breach the US$ 600 Billion marker.

The competition in the remittance value-space is increasing while the players are decreasing. Banks are unilaterally closing down accounts of money transfer companies, citing risk. They (the banks) are de-risking themselves from what they call the high-risk money transfer industry.

What are the risk elements when it comes to money transfer? As per the banks, there is a high-probability for terrorist financing and/or money laundering.

The average remittance price across the world is about US$ 250. Sliding the average price on a high and low, and the average remittance value is US$ 500 and US$ 200 respectively.

Dilip Ratha, who is considered the oracle for all things remittances, cites:

“…even though there is little data, to support any connection, any significant connection between money laundering and these small remittance transactions.”

Enter: The Banking Regulations

Despite this, via regulations, banks continue to deny facilities to money services businesses for purposes of money transfer.

Put a squeeze on MTOs, and what you end up with are a few players who dominate a particular remittance corridor. What this invariably does, is create a larger oligopoly as far as pricing for the corridor is concerned.

One can spend all day Googling for the supposed litany of cases related to money laundering and discover that you will be hard pressed to find cases where small-value remittances were contributing towards money laundering.

Any half-way decent AML system can detect smurfing (using multiple people to structure transactions), which is what would be required to channel large amounts, using small value remittance transfers.

The checks and balances today can very easily correlate such money laundering techniques before transactions take place. In the case of the US, where real-time money transfer is not allowed by law (See: Dodd-Frank Act, Section 1072 / Regulation E of CFPB), correlation and mitigation becomes even more manageable.

All these actions will yield the market (i.e. customers) to seek alternative methods of sending money across.

With these regulatory restrictions in play, prices tend to increase. When prices rise, or alternatives are diminished &/or restricted, the money meanders and finds its own way.

Value Transfer Methods Remain Unchanged

Complacency is still the name of the game here. UI/UX may have changed, but the method of value transfer based on pre-funded accounts, Nostro balances being pushed forward for settlement, etc. still remains the same.

If money needs to go from Chicago to Mumbai, the trail is very predictable. Chicago Bank to Nostro Bank of MTO in NY, Pre-funded Nostro in Mumbai releases money to beneficiary. Money from Nostro US is wired via SWIFT to money in Mumbai.

Large, medium and small MTOs still do not have a way of instant value transfer. The instant that currently exists is based on weeks of paperwork to setup and is a very rigid path for money flow. There is no flexibility.

Bitcoin is Like Email

About three decades ago, email was very segmented. Various networks operated email in their own vertical silos. Sending email from one network to another seamlessly was no easy feat, and in some cases, impossible.

Enter “@” or SMTP (Simple Mail Transport Protocol), as the name suggests, the simple mail allowed anyone to send email to anyone, regardless of geography or network. The binding factor was the underlying protocol. Today, everyone uses email without even thinking how it is delivered, the complexities involved, the underlying protocol, and the unification of it all. Email just happens.

The same analogy was not available with value-transfer i.e. Money. We could not transfer money just like email, until a person(s) going by the name of Satoshi Nakamoto published a paper on Bitcoin: A Peer-to-Peer Electronic Cash System.

What the paper solved was the ability to send-value across, digitally, without the fear of double-spend, based on a decentralized open-ledger that is consensus based, otherwise known as the blockchain.

Today, the fastest way to transport money, physically, would be via a plane. New York — Mumbai, give or take 18 hours. The digital equivalent is a couple of seconds with Bitcoin. It is as good as sending cash across.

What Nakamoto did, was essentially create the unifying protocol for sending money. The implication of this statement is far reaching and is truly disruptive.

If I were to hand over a gold coin to someone to send it to anyone on this planet, the gold coin would need to physically travel. Assuming the price of gold fluctuates every hour, the end result after a 20 hour journey could be in your favor or against, but rest assured, the value and the coin is in your hand.

Bitcoin operates no differently; the value and the digital possession of the coin will be in your hand within minutes. However, there is an upside to it. If one can convert money from fiat-to-Bitcoin, send it across, and then the recipient converts it from Bitcoin-to-fiat, the risk associated with the fluctuating prices is reduced significantly. And just like gold, which anyone in your community would be willing to exchange for fiat, the same concept applies to Bitcoins. With enough market-makers and liquidity, one can sell their Bitcoins locally or internationally and take possessions of the fiat money.

There is a hurdle when you sell internationally, the fact that your fiat money is usually parked overseas and now you will have to use the traditional banking and payment rails to pull the money in. However, this is a temporary hurdle.

Creating Acceptance for Adoption

The adoption of Bitcoin is still in its early stages.

Once more money services businesses start accepting Bitcoin and cash in/out against a particular fiat currency, this problem of funds being parked internationally would also disappear.

It is a scenario that is bound to happen. Bitcoin is slowly cruising towards its critical-mass-point, after which it would be extremely difficult to stop the growth and usage of the cryptocurrency.

Almost every currency in play today took years to establish themselves. Even after its inception, the US Dollar itself took a couple of decades before it was truly, globally, accepted.

The thing about value is that it derives its power from acceptance. Demand creates acceptance. Many nay-sayers are quick to point out faults with Bitcoin. That’s okay, let them be. As a proponent of Bitcoin I can confidently say, that Bitcoin is here to stay and to be used by all those who find purpose in its value-transfer.

Once users across the world start to first understand the benefits of real-time value transfer that Bitcoin provides and second to actually start using Bitcoin, there would be no going back.

Small Money Transfer Operators (MTOs) would be the first one (in my estimation) to jump onboard the Bitcoin train — using Bitcoins for value-transfer between countries for purposes of remittances.

Bitpesa is one such company, run by Elisabeth Rossiello out of Kenya. She is championing the cause of Bitcoin based remittances. Utilizing the payment rails of Bitcoin, her company is empowering people to send money across, in a fast, reliable and efficient manner.

Despite all this promise, the larger money transfer companies like Western Union, RIA Financial, MoneyGram, et. al, are all in a complacent mode. Billions of dollars are made through transfer-fees by these companies and Bitcoin or adoption of other crypto-currency based payment rails like Ripple, Stellar, etc. could pose a monumental challenge to these companies.

Ken Miller recently wrote an article in TechCrunch: Bitcoin Will Fix Remittances With Or Without The Western Unions Of The World (thank you Shakir for pointing the article out). This is a must-read article. The analogy of Bitcoin to traditional Money Transfer Operators is highlighted by the real-world example of Netflix and Blockbuster. We all know what the outcome was.

The greater question is: What is the floor price for Bitcoin Remittances? I feel it would probably level out at about the 4% mark, and certainly no lower than 2% (for extremely competitive markets).

By any measure, right now, Bitcoin remittances hardly constitute a significant fraction of all things remittances. Once they start showing some serious traction (2015–2016), expect market pressure to drive down remittance prices below the 4% mark.

Instant value transfer is changing the world. Right now, everyone is just busy building their Bitcoin engines and marketing to the customers. Expect improved traction in late 2015 and early 2016.

This page was last updated on January 13, 2025.