Source: FxStreet Date: Nov. 03, 2021 Author: Bybit
For its detractors, cryptocurrencies like Bitcoin are a “limited supply of nothing”, but remittances are an open space worthy of closer observation.
In twelve years, cryptocurrencies have flattered to deceive. Regularly cited as a decentralized replacement for international currencies and assets, cryptocurrency markets remain largely speculative. They’re noted for high levels of volatility while an unregulated ecosystem has emerged that mostly involves the world’s digital natives i.e. individuals who conduct their services and activities online.
The Bank of International Settlements (BIS), the central bank of central banks, concluded in a recent report that central bank digital currencies (CBDCs) are unlikely to replace digital assets like Bitcoin and Tether, a stablecoin notionally pegged to the U.S. dollar that enables crypto-based trading activity. Earlier reports that seemed to indicate CBDCs could end the cryptocurrency era seem to miss the mark in a geopolitically fractured world.
Proponents of cryptocurrencies argue that the convenience, speed, the familiarity with app-based solutions and the innovations of private actors means CBDCs will never be able to replace the new digital assets. The onerous regulatory burdens and the involvement of multiple actors along the international money transfer value chain means they will invariably be slower and costlier. The adoption of digital crypto-based remittances would drive sustainable development, they argue, as it saves families money in remittance fees. According to them, the challenges with local currency conversion among the unbanked and the regulatory uncertainty around cryptocurrency are, ultimately, temporary issues.
There is clearly demand.
The pandemic led migrants to search for digital solutions to send money home with the sudden closure of money transfer outlets. Awareness is limited but growing rapidly in the $700 billion remittance market. In countries like the Philippines, the World Bank reports that remittances account for more than 10% of national income since the turn of the century. However, cryptocurrencies, including Bitcoin, with a total market capitalization of more than $2 trillion dollars, only account for a miniscule fraction of remittances for now.
It’s well-known that the early adopters of crypto-based remittance services were citizens living in countries with volatile markets. In the past year, the balance appears to have shifted — for example, a March survey by Statista, a German market and consumer data firm, found that Nigeria, Vietnam and Philippines led the pack in terms of the proportion of residents using or owning cryptocurrencies. All three are countries that depend heavily on remittances and where there are high levels of smartphone usage. Tellingly, the Nigerian Central Bank even reported last month that remittances recorded in official channels fell by $4 billion, even as the economy is recuperating.
Although it’s true that financial technology has improved leading to regulatory-compliant fintech solutions (Wise, the London-based start-up formerly known as TransferWise, is one), a growing number of migrants are young, digitally-savvy users who have become accustomed to low-fee digital services. Not only do they have lower barriers to technology, they are likely to be more interested in adopting decentralized cross-border remittance rails — even if it might not strictly be legal — they know that online activity can be masked by the use of virtual private networks (VPNs).
To be sure, it’s not a scenario that one can envisage developing in major economies like the United States, India, and China where financial regulators are a lot more conservative. Meanwhile, enforcement agencies are empowered by law and regularly clamp down on unregulated financial activity.
For users in many other countries, however, cryptocurrencies are an increasingly popular way to transfer savings across borders and involve fewer intermediaries.
Global adoption of cryptocurrency has taken off in the last year, with many countries turning to cryptocurrency to send and receive remittances, carry out business transactions, and preserve their savings in the face of currency devaluation. Furthermore, traditional banking systems till this day works to the exclusion of 30% of the world's population. As such, crypto adoption in struggling economies may be seen as a moral and humanitarian necessity.
Bybit was established in March 2018 and offers a professional platform. Striving to be the most reliable exchange for the emerging digital asset class, Bybit is among the most popular destinations for crypto lovers. It does not accept user registrations from the U.S. or China.
Bybit knows that cryptocurrencies hold great promise for people in the developing world who need a lot more financial support to recover from the pandemic. For many, their first line of support comes from loved ones. It’s unfortunate that the traditional banking system continues to exclude a large proportion of the world's population, with the intermediary costs for remittance sent to countries that most need them are often egregious. There’s no clearer proof than how the global average cost of sending $200 remained high at 6.5 percent in the fourth quarter of 2020, more than double the Sustainable Development Goal target of 3 percent.
Could the widespread use of cryptocurrency to facilitate global remittances upset the forex markets? Could they replace leading international currencies — the U.S. dollar, the yen, the British pound sterling or the euro — as the intermediary currency in international transfers?
“The FX angle however only becomes relevant if there is a currency conversion in the process, or alternatively if the demand and supply for currencies changes radically,” state Francesco Perole and Teunis Brosens, economists with the Dutch bank ING in a research note. Given that a vast majority of crypto-based remittances are used to support simple payments like paying for healthcare and household goods, they are a negligent proportion of total foreign inflows.
Simply put, a change in the use of the intermediary “currency” in international cross-border money flows due to crypto remittances would still be dwarfed by the amount received by economies through foreign direct investment. A company wiring a large sum of money to pay for construction services for a new factory, for example, would still use traditional channels involving regulated currencies and financial institutions. Crypto-to-fiat currency conversion, when it happens, would be sporadic and limited.
Nevertheless, FX analysts should pay attention because remittances remain one of the best use-cases for cryptocurrencies that have yet to be fully explored. It may not necessarily be Bitcoin, but instead XRP, a cryptocurrency purposely-built for cross-border transactions, or regionally popular cryptocurrencies, such as AXS in the Philippines, that could eventually be in vogue. Perhaps, it could even be a stablecoin issued by an internationally recognized institution like the World Bank or the International Monetary Fund leveraging a basket of currencies.
In El Salvador’s case, it’s too early. Still, that’s not where the activity is taking place. Locals may not use Bitcoin to buy bread, but their relatives living abroad will soon find alternative crypto-based money transfer solution providers.
In this regard, it’s heartening to note that El Salvador is looking to install Bitcoin ATMs in the United States. However, it’s more likely that a private enterprise in the sender’s country will figure out an app-based solution that works for migrants and unbanked relatives alike.
If successful, it could lead to substantial savings in terms of reduced transaction costs. It is estimated that 2.5 million Salvadorians living abroad send money back home — the total remittance pool supports more than a fifth of households.
A cheaper way to send and receive will make a difference to the 272 million migrants who continue to support their families back home. As a young industry that has come up with novel solutions, including helping digital content creators a way to monetize their “digital labor” — the endless creativity in the cryptocurrency industry should not be dismissed.
Through public-private partnerships and the development of innovative technology, cryptocurrencies can be more than just the anonymous transfer of funds and benefit the world in a way that existing assets simply cannot.
by Igneus Terrenus, Head of Communications, Bybit