Submitted by the community - Author: Igor Davidov
In simple terms, remittances can be defined as the transfer of funds to another distant place, and cross-border remittances are a common form of remittances. For example, foreign workers send their funds to their home countries.
Today, remittances have replaced foreign direct investment and official government development funding as the worldโs largest financial flow. According to the World Bank Group, remittances have seen significant growth in the past few years, increasing by 8.8% in 2017 and 9.6% in 2018.
Some developing economies rely heavily on funds from abroad, and remittances have become an important part of their economies. Therefore, the inflow of funds from migrant workers is a major source of income for many countries. For example, international remittances received by Haiti accounted for about 29% of its GDP in 2017. This share increased to 30.7% in 2018.
Problems
The World Bank estimates that the current transaction fee for a $200 remittance is about 7% (the global average). In 2018, global remittances will reach $689 billion, of which 7% is the operating cost of the transfer, worth about $48 billion.
In addition to high fees, most remittances rely on third-party services and financial institutions. The involvement of multiple intermediaries makes the current transfer system very inefficient. Not only is the transfer fee high, but it also takes a long time, most of which take days or even weeks.
Blockchain technology can provide a viable and more efficient alternative for the remittance industry. This article will cite some company cases to introduce its feasibility and existing solutions.
Is blockchain an effective solution?
The main goal of blockchain remittance agencies is to simplify the entire transfer process and eliminate unnecessary middlemen. The core is to provide a solution for non-blocking and near-instant remittance. Traditional services usually require multiple reviewers to review and the workload is very large. The blockchain network eliminates this drawback and no longer has a slow transaction approval process.
The blockchain system is based on a distributed computer network that can perform financial transactions on a global scale. This means that the transaction process can be carried out securely in a decentralized manner, which only requires a few computers to participate in verifying and confirming the transaction. Compared with the traditional banking system, blockchain technology can provide faster and more reliable payment solutions with lower operating costs.
In other words, blockchain technology can solve some of the major problems facing the industry, such as high fees and long transaction times. Simply by reducing the number of intermediaries, operating costs will drop significantly.
Case
Mobile Applications
Many companies are trying to use blockchain technology to provide new payment solutions. Some mobile digital currency wallets allow users to send and receive digital assets around the world and quickly convert between digital currencies and legal tender.
Take Coins.ph, for example. It is an all-in-one mobile wallet app. Users can use it to make international remittances, pay bills, buy game credits, or simply trade Bitcoin and other digital currencies. And some of its financial services do not require the creation of a bank account.
Digital Platforms
Some companies try to operate infrastructure related to the traditional financial system. For example, BitPesa, an online blockchain platform in Africa, was established in 2013. The platform provides payment solutions and currency exchange services to customers with lower fees and higher timeliness.
The Stellar blockchain platform is also an example of a remittance service in this area. Stellar was founded in 2014 with the goal of promoting financial services and connecting financial institutions and individuals.
The Stellar network uses its own independent currency as well as distributed computing, the token is called Stellar lumens (XLM). Their native token can be used as a bridge currency to facilitate global transactions between fiat and digital currency assets. Similar to BitPesa, users and financial institutions can use the Stellar platform to conduct transactions with lower transaction costs.
ATM
Along with mobile apps and online platforms, the proliferation of ATMs offers another interesting solution for global transactions, particularly in regions with limited internet access and underdeveloped banking systems.
Companies like Bit2Me and MoneyFi are developing new remittance systems that combine blockchain technology with ATMs. Their goal is to issue credit cards with multiple functions.
The combination of blockchain's distributed ledger and ATMs can greatly reduce the need for users to use intermediaries. Users do not need a bank account, and the ATM operating company may charge a small fee for the transaction.
Current challenges and limitations
While blockchain technology can bring many significant advantages to the remittance industry, there is still a long way to go. Below are the potential barriers and major limitations that currently exist, along with possible solutions.
Conversion between digital and fiat currencies. The global economy is still based on fiat currencies, and conversion between digital and fiat currencies is not an easy task. In many cases, a bank account is required. Peer-to-peer (P2P) transactions can eliminate the need for banks, but users still need to convert from fiat to digital currency to use the funds.
Millions of people living in less developed countries still donโt have access to the internet, and many donโt have smartphones. Nowadays, mobile and internet facilities have become a necessity. As mentioned above, blockchain-based ATMs may be part of the solution.
Legal regulation. Cryptocurrency regulation is still in its infancy. In some countries, legal regulation is either unclear or non-existent, especially in countries that rely on overseas capital inflows. However, as blockchain technology is further promoted, it will continue to push legal regulation forward.
Complexity. Using digital currency and blockchain technology requires a certain amount of technical knowledge. Most users still rely on third-party service providers because it is not easy to run and use blockchain independently. In addition, many digital currency wallets and exchanges still lack guidance and intuitive interfaces.
Volatility. The digital currency market is still immature and susceptible to volatility. Therefore, they are not always suitable for daily transactions, and their market value may change dramatically in a short period of time. In addition, highly volatile currencies are not suitable for the basic needs of transfers. Of course, there is no need to worry too much about this problem, and stablecoins can provide a viable solution.
Summarize
The remittance industry has grown significantly over the past decade and will continue to grow in the coming years. One of the main reasons may be the rising rate of migration of people seeking work and educational opportunities. According to the "World Migration Report 2018", there were approximately 244 million international migrants in 2015, an increase of about 57% from the estimated 155 million in 2000.
However, the industry is still plagued by inefficiencies and numerous limitations. As a result, more and more companies are leveraging blockchain technology to provide more efficient alternatives, and we are likely to see a large-scale use of this technology by foreign workers in the near future.