Many new fintech and payments startups are now thinking of using bitcoin or other currencies for purposes of remittances. While the gesture is noble, they forget one key element in this flow of funds – what exactly does a central bank look for in remittances?
Hello my name is Faisal Khan and am a banking and a payment consultant. And today we will talk about what central banks look for in inward remittances.
So the most important thing is they’re looking at foreign exchange coming in. As a central bank of a country, the biggest thing what remittances do is they increase the foreign exchange reserves so when money comes in, the central banks take the money. And you surrender the foreign exchange and you get the local currency instead. The central bank can print as much currency as they want but local currency only. So they take the foreign exchange from you and they give you the equivalent in Nairas or Rupees or Takas or what have you.
What happens on the country level is the dollar reserves or the pound reserves of the euro reserves of the country goes up. So at any time a remittance is done the bank the central bank is looking at ways of increasing their reserves so foreign exchange needs to flow in. It is very very important. What makes it different from Bitcoin remittances is let’s say let’s take an example of Chicago to Manila. So someone selling traditional remittances that money will eventually the thousand dollars from Chicago that money a thousand dollars minus the fees will eventually come into Manila. And the thousand dollars will be surrendered to the central bank. And the equivalent in Filipino pesos would be given. But when you do the same transaction using bitcoin. You might take a thousand dollars. You buy bitcoins. Those bitcoins are transported to let’s say the Philippines.
They’re sold on the local exchange and local exchange will give you the local Filipino pesos equivalent. And you know that money is now sent to the beneficiary. The foreign exchange reserves of the country have not improved unless you take those bitcoins sell it in London or you know in Amsterdam and then bring that money back into Philippines. The foreign exchange reserves of the country have not improved. All you’ve done is you’ve taken payment from the U.S. in the form of bitcoins bought it and sold it locally at a local exchange cashed out in local currency which is already dead in the economy and just set it aside for the beneficiary. So when you look at Bitcoin remittances if those bitcoins are being sold at a local exchange the foreign exchange reserves of a country do not improve and hence the country deems it that they are being robbed of the very much needed foreign exchange.
What they can do to make it legal is to say okay you’ve sold your bitcoins, rather than selling them locally, why don’t you sell them internationally and bring those dollars in. One of the reasons why they don’t do that is obviously because of arbitrage. The Bitcoin price may be lower in Canada maybe slightly higher in India. So they want a little bit of extra cushion that they can get. But this is one of the main reasons why most of the central banks worldwide do not encourage bitcoin remittances. It’s a mindset that will eventually change but they feel that they are getting robbed of the much needed foreign exchange.
So if you’re making or designing a remittance product always keep this factor in mind that the central bank is looking at increasing foreign exchange reserves that in your flow of funds and in your transactions at the foreign exchange does indeed come into the country.
I hope I was able to answer the question, until next time, take care.
This page was last updated on September 1, 2022.