How cryptocurrencies are disrupting remittances in developing countries
The COVID-19 pandemic caused a change in the way remittances circulated around the world, not to developing countries. This, along with the current pull towards cryptocurrency, has changed the face of the remittance industry in these countries, writes Kate Anderson..
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Global remittances have fallen amid lockdowns induced by COVID-19. But just like other financial services, the industry had to adapt to ensure a constant flow of remittances, resulting in a much smaller decline than previously expected. Low- and middle-income countries received $ 540 billion in 2020, barely $ 8 billion less than in 2019. One of the main changes has been the shift from cash flows to digital and from informal to formal channels .
But while the pandemic has reinforced the trend to use different mediums for remittances, the use of cryptocurrencies in developing countries is nothing new. Reports that El Salvador adopted Bitcoin as legal tender grabbed the headlines this year. Elsewhere, other countries have also turned to cryptocurrency as a way to hedge against high inflation or to fight against a weak local currency. The cryptocurrency is becoming increasingly popular in Venezuela and Cuba, where both countries have been hit by US sanctions.
The potential benefit of using cryptocurrency for remittances is that it means the sender can avoid some of the high costs charged by traditional banks and money transfers. World Bank data found that a $ 200 shipment can incur an average charge of between 5% and 9.3%, depending on the country of destination and the type of service used. For people in developing countries who depend on these funds, finding a cheaper and faster way to send money is essential. And it seems that some are turning their attention to cryptocurrency as the answer.
Why Developing Countries Are Turning To Cryptocurrency For Remittances
It is safe to say that cryptocurrency has caught the attention of developing countries. 3 of the top 5 countries for cryptocurrency adoption are developing countries, with Nigeria and Malaysia ranking first and second respectively for cryptocurrency ownership rates among internet users.
For countries where remittances are essential to their economies, being able to transfer money free of charge or at very low cost is a definite appeal. In El Salvador, remittances totaled nearly $ 6 billion last year, with President Nayib Bukele arguing that the introduction of Bitcoin as the new national currency would save Salvadorians the $ 400 million spent each year on commission on remittances.
Meanwhile, countries where sanctions have been imposed on them have turned to cryptocurrency to bypass their embargoes. Cuba now recognizes and regulates cryptocurrencies such as Bitcoin. In 2020, increasingly aggressive Trump-era sanctions led Western Union to shut down all of its 400+ sites across the country. The process of getting money in and out of Cuba has been further complicated by the pandemic. As travel stopped, underground and semi-formal courier services called mulas could not operate as efficiently. All of this has helped support the increase in crypto adoption.
In fact, industry experts are starting to predict that Bitcoin will eventually become the most common form of currency in developing countries. Thomson Reuters technologist and futurist Joe Raczynski commented: “There is no doubt that BTC will lead the way here, but Ethereum could eventually take its place or serve alongside BTC as money for developing countries.”
Is Using Crypto For Remittances The Right Way To Go?
While there are reasons for this trend in adopting crypto for remittances in developing countries, that doesn’t mean that there are still no risks associated with this type of transaction. While the rationale may be that the decentralized nature of blockchain technology will allow cross-border payment without third parties, thereby reducing the costs involved – this does not guarantee that there will be no risk of losses at some point.
The main problem is that there is an element of uncertainty as to the value of the coin you have chosen when the recipient sells it. The value of various cryptocurrencies in fiat currency can be volatile. Moreover, just like a traditional money transfer, you should also take into account current exchange rates, as the money will need to be exchanged twice – first for the coin you chose, and then again when your recipient will sell it. There is also the fear that human error could be made during a transaction. And since it is a largely unregulated market, trades cannot be reversed.
However, the potential reduction in third-party fees as well as quick transaction times is a definite plus. Cryptocurrency lends itself to larger transactions, as there are usually higher maximums for the amount you can send someone compared to more traditional providers. Additionally, because coins such as Bitcoin have transaction fees, which are calculated per byte rather than a percentage, smaller transactions tend to be comparatively more expensive.
A trend that will stay?
For countries where remittances are at the heart of their economy, crypto adoption is expected to strengthen over the next few years. But that doesn’t mean there aren’t challenges. The volatile nature of the value of some coins will deter citizens of developing countries, as well as a lack of understanding. This can be seen in El Salvador itself where Bitcoin is now legal tender, but 67.9% of people disagree with this choice.
However, crypto is a rapidly changing market, and there will inevitably be new innovations that continue to respond to the use of cryptocurrencies for remittances. This is already seen through the emergence of several blockchain start-ups that facilitate Bitcoin transfers without requiring users to have prior knowledge of the technology. These include Satoshi Citadel Industries, AZA Group, Bitso and RippleNet – the latter of which claims its cost per transaction is about 90% lower than the status quo of traditional money transfer companies.
In the years to come, we could easily see this trend of using crypto for remittances grow, with the promise of lower transaction costs and a more efficient way to send money. silver. There is a potential end result where the adoption of blockchain technology creates a truly decentralized money transfer model that results in lower fees, better exchange rates, and faster delivery speeds.
Kate Anderson is a writer at Finder specializing in money transfers. She previously wrote for The Motley Fool UK and Fitch Solutions, where she covered a wide range of personal finance topics and closely monitored market trends. Kate holds a Bachelor of Arts in Modern History from the University of East Anglia. When not working, she is usually found curled up with a good book or running.