The world is getting smaller as digital capabilities expand. However, the effective transfer and easy flow of money are not keeping up. Cryptocurrencies are promised as a solution to remittance barriers but are still only just beginning to become effective.
Cross-border payments are a hot topic when it comes to cryptocurrency use-cases. There is no shortage of discussions on how crypto will revolutionize sending and receiving money across the globe.
Countries are already testing various cross-border payments. In July, the central banks of France and Singapore announced successful cross-border CBDC testing.
However, while it is beneficial for governments, one of the real strengths of cryptocurrencies for improved cross-border payments lies in migrant remittances.
These specifically refer to the transfer of funds by migrant workers. These workers send money back to their home country, either to their own accounts or to their family.
The transfer of money keeps economies going
For lower and middle-income countries, remittances are a central part of the economy and overall development.
For many of these countries, access to jobs and earning opportunities in the country is weak. As a result, many try to find work outside of their borders. This income flowing into the country from migrant labor across the world assists in keeping economic activity active.
Even COVID-19 didn’t stop the flow of money across borders. In a report by the World Bank, 2020 saw official remittance flows to middle and lower-income countries reach $540 billion. This was only a 1.6 percent drop from 2019.
Cryptocurrencies and remittances
These kinds of transfers have been continuing for centuries, before the technology to somewhat simplify them began. People would send envelopes of cash to relatives with those making the journey. At the time, there was little assurance that the cash would arrive.
However, the uptick in technological advances hasn’t completely removed the stress for workers worldwide. While it is easier in some locations, overall, this process is still costly if not also complicated.
For example, even with improved fintech money transfer options, a migrant worker from Zimbabwe living in South Africa will be charged a percentage to transfer through a third party. Thus, losing out on some of their earnings.
In addition, the documentation required is also quite extensive. Depending on the amount, documents like an ID or passport number, ID photo, and other similar Know-Your-Customer (KYC) compliance have to be followed.
This is where cryptocurrencies bring in their benefits.
“There are a number of benefits. Sending via crypto is cheaper and faster than traditional methods of sending money. Crypto is borderless. You can send money anywhere in the world for a very low cost,” says John Colson, Chief Marketing Officer as Yellow Card.
While KYC’s might still be necessary across centralized exchanges, the high cost incurred on both ends is significantly diminished.
To keep the example on the African continent, the same transfer in bitcoin or ethereum from South Africa to Nigeria using the exchange Luno with a registered email address or cellphone number is free. In addition, withdrawals on the exchange don’t incur a cost outside of a network fee.
“Cryptocurrencies bring a lower cost, cheaper and faster option to remittances which are disrupting traditional methods such as MoneyGram, Western Union, and WorldRemit. This is a good thing for the remittances industry,” says Tadii Tendayi, Founder of Zimbabwe-based BitFlex.
Remittances: Sending and recieving
A major aspect of migrant remittances is the need for easy cash access. This is especially true if a person is sending it home to family memebers.
When it comes to cryptocurrencies, third-party on-ramps and rails are key to making this possible.
It is unlikely that most migrant workers or expatriates will be able to teach their relatives back home how to sell their cryptocurrencies on exchange each time they send.
It is not impossible to do. However, it is a bit more challenging and frustrating. This is especially so if you’re someone sending home money to less tech-savvy relatives.
“By offering local payment on-ramps all across Africa, it’s our mission to remove those barriers. Additionally, we are providing education to help users understand the benefits of crypto,” Colson explains.
Centralized exchanges like Yellow Card make the process easier. However, being able to access cryptocurrencies as cash on the other side is still a hurdle.
“Crypto allows me to potentially send money to my relatives in Donetsk, a city that has been entirely disconnected from global banking for seven years,” explains Andrey Shevchenko, a crypto enthusiast.
“The EU and Ukrainian/Russian banking systems are very siloed, and most people’s bank accounts don’t even have Swift codes over there. It all relies on ‘cards,'” he explains.
In his case, Shevchenko can send the cryptocurrency to one of these bank “cards,” therefore avoiding the issue of explaining an exchange to anyone on the other side.
Peer-to-peer benefits for remittances
Alongside needing the ability to buy the cryptocurrency from a viable exchange and possibly ensuring it is received in a usable form like cash on the other end, an additional issue is the number of unbanked people in the world.
According to the World Bank, an estimated 1.6 billion adults are unbanked. This means they have no access to banking or financial services.
As such, a centralized cryptocurrency exchange doesn’t mean much when there is no bank account to send the sold crypto to.
Peer-to-peer services in lower-middle-income contexts have proven incredibly useful and usable. While still requiring an understanding of the technology needed to conduct the transfers, it removes the middlemen and barriers to entry found in traditional financial products.
An example of a peer-to-peer platform that is providing such a service is Paxful. The platform allows for over 350 payment methods, removing the need for a bank.
“We are a peer-to-peer crypto marketplace, so our users individually determine the exchange rate they’re willing to accept to on/off ramp cryptocurrency, and that is often guided by the local demand for crypto, gift cards, etc.,” explains Jean Ng, Paxful Vice President, Growth.
“The result is that for many of our key corridors, we see that the effective exchange rate our users can get ends up being much better than the official exchange rates, sometimes by as much as over 20%. So when a sender sends $100 cross border, the recipient can actually receive the equivalent of $120,” she says.
Peer-to-peer phone payments
As expressed by Ng and Paxful’s wide range of payment methods, low-income countries are already resourceful when it comes to navigating around institutional structures to access funds.
This is where much of the lower-middle-income countries’ impressive fintech comes in. Countries where there are the most unbanked or underbanked individuals have long been using alternate methods to send and receive money.
Tools like M-Pesa allow users to send money without even needing to log onto the internet. Now, cryptocurrencies are joining fiat with transfers between users via Unstructured Supplementary Service Data (USSD).
In Kenya, KotaniPay allows blockchain protocols to integrate money mobile platforms. Users can receive and spend bitcoin, celo, ethereum, and EOS. All without access to the internet or having to learn how to use an exchange.
Understanding payment needs on the ground
As mentioned by Ng, the services gaining traction in low-income countries are those that are responding to the needs on the ground.
Understanding this flow of cross-border payments, how local economies function and adapting to these needs.
“By offering local payment on-ramps all across Africa, it’s our mission to remove those barriers. Additionally, we are providing education to help users understand the benefits of crypto,” says Colson.
This kind of co-operation requires those working with people on the ground to fit into the local framework.
“We started learning from our users actually that [gift cards] were kind of one of the preferred methods that they’ve been using. We’ve been focusing on growing strategically that part of the market knowing that it’s kind of one way they’ve hacked together to get into banking services,” says Ng.
This is apparent in the plans by BitFlex as well. Tendayi explains that with the launch of their BitFlex Wallet, users in Zimbabwe will be able to remit using the Celo Dollar stablecoin. On the other end, the recipient can cash out in the local currency.
For a country like Zimbabwe, this is key. The national currency has only been recently reinstated after over a decade of use of the US dollar. The precarious nature of the new currency makes transfers in cryptocurrency a safer bet for those in the country.
Cryptocurrency adoption makes gains in low-income countries
There is no denying the need and demand for effective cryptocurrency remittances.
“We have seen a huge demand for crypto across Africa, crypto has a real use case here. People are trading, sending, and saving all across Africa,” says Colson.
A ChainAnalysis report on cryptocurrency interest found that India and Vietnam saw massive spikes alongside Ukraine and Pakistan.
Although the institutional investment was present, individual retail investors make up the bulk of those getting involved in crypto.
“In emerging markets, many turn to cryptocurrency to preserve their savings in the face of currency devaluation, send and receive remittances, and carry out business transactions,” says a report from ChainAnalysis. Vietnam and India were specifically rising in adoption.
Overall, India’s remittances inflows for 2020 were $83 billion. In Vietnam, personal remittances in 2020 accounted for 6.3 of the countries GDP.
Overall, lower-middle-income countries have impressive adoption especially compared to some of their high-income counterparts.
According to data from Statista, respondents in a 2020 survey showed higher adoption in countries including Nigeria (34%), Phillippines (20%). By comparison, Germany and Japan are at just 5% and 4% respectively.
Are there real use-cases though?
However, whether all these crypto transfers are specifically migrant remittances is hard to identify.
Reports and news stories claiming to calculate cryptocurrency remittances often conflate centralized exchange use with remittances.
This makes sense as it is not exactly possible to know what people are using their cryptocurrencies for unless they declare it themselves. No bitcoin or ethereum sale has a reference saying “paying my mom.”
As such, it is hard to track how many people are indeed using this technology to send money across the world.
However, those on the ground attest that the demand is there, and people are coming to this still new and novel solution.
“I believe more people are using blockchain/crypto remittances more today than ever as the pros far outweigh the cons,” says Tendayi.
Ng agrees. In a recent Paxful user survey, 22% of the 230,000 respondents said they use the service to send money to family and friends.
“We never really marketed ourselves as something focused on this. Our users are brilliant, and they’re already using this right there. They already trade, figuring out on the ground what is available to them as an option. Those who found out about us realize that they can already use our platform as it is for this without any kind of bells and whistles,” she says.
Paying attention to this sector
While discussion on crypto for remittances may outshine the actual use-cases, the evidence of some cross-border transfers is starting to materialize.
There are select examples and evidence from those building these products on the ground. This makes it a crypto area to watch.
As crypto adoption grows, innovations and key resources will continue to come from those actually using coins and tokens. This makes migrant remittances a sector worth keeping an eye on.
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