Bitcoin Remittance Transfers: What Central Banks look for in Remittances?

The world of remittances is changing fast. New innovative methods for money transfer are now being applied to the remittance industry with a pace never seen before.

A question often asked of me is why a certain method of remittance is deemed correct and an alternative method not? Well, lets take a look at a particular example: Value Transfer Using Bitcoins.

Fiat to Fiat Money Transfer

Take an example of a money transfer transaction from say New York to Manila: In a traditional fiat to fiat transfer, the following takes places (more or less):

  • A US MSB/MTO will reach out and partner up with a Philippines based MTO/Bank.
  • Both these licensed entities will formulate a Correspondent Agreement (which can take a couple of weeks)
  • Once the agreement is in place, there is now a route and a settlement mechanism on how money will traverse from US to Philippines.
  • Let us assume a person in NYC signs up for the service as being offered by the US MTO.
  • The Sender decides to send US$ 1,000 to Philippines.
  • The US MTO extracts US$ 1,000 from Sender’s account.
  • Based on the Correspondent Agreement with the MTO in Philippines, the US MTO instructs them to payout the equivalent in Philippines Pesos.
  • The MTO in Philippines pays out from its local currency account to the Beneficiary.
  • There is now a pending IOU of US$ 1,000 that the MTO in US needs to send to the MTO in Philippines.
  • Then money is sent on say T+2, via SWIFT
  • The money (US Dollars) now arrives in Philippines… and here is perhaps the most important part of the transaction
  • The US Dollars are surrendered to the Central Bank and its equivalent are presented to the MTO.
  • The Central Bank of Philippines’ US Dollars Reserves have now just increased by US$ 1,000.

When remittances come into the country, the US Dollars (or whatever Foreign Exchange is in play) is surrendered to the Central Bank, thereby increasing the Foreign Exchange Reserves of a country. In other words, the books of the country have now improved.

A country can print as much of its own money but cannot print the foreign exchange currency of others. This is why it depends on the inflow of foreign exchange to keep its forex reserves healthy.

Bitcoin Remittance

Now lets look at a transaction from a Bitcoin Remittance point of view. Taking the same play, of a transfer from NYC to Manila.

I’m going to remove the word licensed/unlicensed from the example below, as that is a debate/argument that depends on which country/territory we are referring to. Going to concentrate just on the transfer mechanism itself

  • A US Entity offers Money Transfers to Philippines.
  • A working Pinoy logs on to the US Website and initiates a transfer.
  • He wants to send US$ 1,000 out to someone in Manila.
  • The US Entity takes US$ 1,000 equivalent and concerts them immediately into Bitcoin. Let us assume 1 BTC = US$ 250, so this is 4 Bitcoins.
  • The 4 Bitcoins are then immediately inserted into a multi-signature wallet that is shared by the US Entity and the Payout Partner in Philippines.
  • When the Payout Partner in Philippines sees that 4 Bitcoins are now in the multi-sig wallet, the partner then releases to the beneficiary in Manila the equivalent of US$ 1,000 in local Pesos.
  • Once the local payout has been confirmed, the 4 Bitcoins are released to the Payout Partner in Philippines
  • The transaction is now essentially complete.

What the Payout Partner in Philippines does with the 4 Bitcoins is up to them. They can retain them, send them elsewhere in the world, cash them out at a local exchange, sell them on an international exchange, there is no restriction on what they can do.

And herein lies the problem…

The Central Bank of Philippines does NOT get to see this transfer. Since no US Dollars were surrendered, this transaction essentially went undocumented in the books of the central bank.

The foreign exchange reserves did NOT improve.

Many developing markets/countries rely on remittances, for the sheer fact that their foreign exchange reserves can build up. In transactions where Bitcoins are being used for value transfers and there is no surrendering of the original fiat currency that was received, it is bad for business as far as the central bank is concerned. It is bad for the economy.

So how does one make it better? Simple: Add another component leg that transfers US Dollars into the economy.

Bitcoin Remittances Compliant with Central Bank Reporting

Consider the very same transaction as before, but with a few additional steps that would make the transaction more favorable to the central bank.

Remember this not about being a libertarian and promoting Laissez-faire economics. This is about looking at ground reality and what is in play at the moment within the confines of the law.

So, here are the previous steps:

  • A US Entity offers Money Transfers to Philippines.
  • A working Pinoy logs on to the US Website and initiates a transfer.
  • He wants to send US$ 1,000 out to someone in Manila.
  • The US Entity takes US$ 1,000 equivalent and concerts them immediately into Bitcoin. Let us assume 1 BTC = US$ 250, so this is 4 Bitcoins.
  • The 4 Bitcoins are then immediately inserted into a multi-signature wallet that is shared by the US Entity and the Payout Partner in Philippines.
  • When the Payout Partner in Philippines sees that 4 Bitcoins are now in the multi-sig wallet, the partner then releases to the beneficiary in Manila the equivalent of US$ 1,000 in local Pesos.
  • Once the local payout has been confirmed, the 4 Bitcoins are released to the Payout Partner in Philippines
  • The Partner then sells these 4 Bitcoins immediately on an exchange outside the Philippines, thus booking a sale in US Dollars. As an added option, the US Entity can agree to buy back the coins at US$ 1,000 also (Sell/Buy transaction for them).
  • On an agreed settlement date, T+1 (for example), the funds are then wired into Philippines, where they are surrendered for local Pesos.
  • Now the transaction is recorded by the Central Bank.

This additional step is very important when fighting for your case for Bitcoin remittances in developing markets. Attitudes of central bankers from around the world range from cautious to skeptical and, in some cases, downright negative when it comes to Bitcoin. But if you can show that you are indeed maintaining status quo, it would help towards the legitimizing of Bitcoin remittances in these developing nations.

Comments

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9 thoughts on “Bitcoin Remittance Transfers: What Central Banks look for in Remittances?”

  • Great right up Faisal but you have to realize the end point of this. If bitcoins moved from x country to y country, y country can then use the same btc to send to z company hence elminating the USD all together. You have to realize the potential of bitcoin. It is a world currency unlike USD which is printed at will. Therefore see bitcoin as replacement. When you do that you will realize that bitcoins are actually good for the economy and if used properly can eliminate the cost of transfers hence saving millions to the national inquirer and at the same time if used as a national currency it would also save huge amount of tax payer money which is right now used for printing and reprinting of the same currecies.

    • You’re trying to preach to choir here. I realize the potential in full. You, however, must realize the law of the land. Whilst Bitcoins are great (and being an advocate I can tell you that). They are NOT great as money. Sure value transfer has it plus points, the blockchain is what is even greater. In a fractional reserve economy, I don’ think you understand the mechanics of why money is printed and how. You cannot just deflate the situation and go all libertarian on the government. Not going to happen. Whilst I am truly impressed by the value-transfer mechanism, I’m also pragmatic about how money ledgers are maintained and how country level accounting is done, right now, BTC transfers don’t act well as far as the financial regulator’s ledgers are concerned.

  • I am not trying to go libertarian on the government. I for one believe that bitcoin has a future if used properly. I do also believe that all exchanges should be regulated to follow strict aml/kyc policy. I am just pointing how money can be saved for the governments if used properly. I dought that it will happen anytime soon partly because of reasons you mentioned. As such we will continue to see bitcoin fight the currnet policies as put forth by each country.

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