Written By: Alexander Beaudry (Co-Director of Events), Chandler Otterbein (Executive Vice President), Mark Barry, Vendant Bhagat, Ashwin Kasargode
As the world becomes more globalized, an influx of workers from developing regions are heading to the United States, Europe, and other developed regions to earn higher wages then they would back home. With this, the need for a cheap and efficient system of remittances is stronger than ever. Each year, over 500 billion dollars worth of remittances are sent back to households and individuals in developing countries and comprise a large chunk of the wealth they need to survive. Unfortunately, due to the centralized nature of current remittance services, as much as twenty percent of the payment that a migrant worker sends back home can be lost due to fees imposed by service providers. Through the use of cryptocurrencies, blockchain technology has the power to drastically improve the way we send money around the world by making the process cheaper, faster, and frictionless. This paper analyzes the specific ways that blockchains are able to achieve this as well as looks at how key players in the space are already trying to implement them. The decentralization and shift to on-chain facilitation of the global remittances market will help make the international transfer of money more efficient and fair for the growing number of migrant workers who rely on it.
Introduction to Global Remittances:
Remittance payments are defined as money that is sent from migrant workers to friends and family in their home countries. Due to the increase in global trade, and increasing free flow of human capital throughout the world, developed countries are relying more and more on migrant workers as a source of labor. Between 2005 and 2015, the migrant population in the United States jumped from just over 39 million to over 46 million and went from being 13.26% of the population to being 14.49%.
This increase was not limited to the United States however and indeed the same trend has played out across Europe as well. Between 2005 and 2015, the immigrant population of France jumped from 6.7 million to 7.8 million, the immigrant population of Germany jumped from 10.3 million to 12 million, and the immigrant population of the United Kingdom jumped from 5.9 million to 8.5 million.
This influx of migrants from developing countries has in turn led to an increase in the total remittance payments across the world. In 2019, before the widespread outbreak of COVID-19, the total flow of global remittances to developing countries was 548 Billion USD, which is larger than Foreign Direct Investment (FDI) and Official Development Assistance (ODA). This number declined during 2020 as the world stayed home and most countries adopted stringent immigration policies, but has since recovered as people began returning to work. By the end of 2021, global remittances to developing countries totaled roughly 589 billion USD, and that number is expected to increase by another 2.6 percent by the end of 2022.
The following chart shows the total worldwide remittance market from 2018 and predicts its expected growth until 2026. As shown, worldwide remittances are projected to maintain steady growth over the next couple years which indicates a steady demand for simpler transactions and cheaper fees.
Remittance transactions are typically handled in three steps:
1. Migrants send money to a third party sending agent.
2. The sending agent tells the paying agent in the recipient’s country to deliver the money
3. The paying agent makes the payment to the recipient
The use of third party agencies means a portion of the payment is lost to transaction fees as well as exchange fees between the two currencies. Since these third party agencies are profit driven organizations, these fees can end up totalling a considerable amount of money, especially for low-income migrants. According to the IMF, “transaction costs rarely affect large remittances (for the purpose of trade, investment, or aid): as a percentage of the principal amount, they tend to be small… But for smaller remittances — under $200, which is often typical for poor migrants — fees typically average 7 percent, and can be as high as 15–20 percent in smaller migration corridors”. Additionally the World Bank has previously stated that, in regards to transaction fees, “costs tend to be higher when remittances are sent through banks than through digital channels’’. Sending money around the world can also be painfully slow, with wait times ranging anywhere from a few days to a few weeks before a payment arrives.
For some countries in the developing world, remittance inflows represent sizable portions of national gross domestic product (GDP). The following chart shows which countries received the most remittance payments as percentages of their GDP in 2020. It is important to note that for all ten of the top countries, over one fifth of their GDP consists of remittances, meaning improvements to the system would have drastic real world impacts to their economies.
The Perks of Permissionless Networks:
Before discussing how blockchain technology can improve the remittances market, it is important to understand what a blockchain is. Simply put, a blockchain is an alternative way to store and update data. However, unlike traditional databases where data is stored in a central location and controlled by a single entity, blockchains are maintained and updated by individuals known as validators. A blockchain validator can be anyone willing and able to perform the validation procedure and there is often no rule on the maximum number of validators a blockchain can have. Public blockchains are thus considered to be decentralized since there is no one individual or company managing the data. While different blockchains may implement various consensus mechanisms and permissions, the technology itself has allowed developers and users to completely revolutionize the way that we think about money, the internet, privacy, financial markets, and a whole host of other industries.
One of the most common and popular use cases for blockchains is to support the existence of cryptocurrencies, which act as digital stores of assets. Popular cryptocurrencies include Bitcoin, Ethereum, and Solana, and range widely in both value and utility. Cryptocurrencies do not depend on the monetary policies of central banks due to their decentralized nature and allow holders to make transactions and send money without third party intermediaries. For the purposes of remittance payments, cryptocurrencies are unique in that their transaction fees are ubiquitous regardless of the geographic location of the recipient. In other words, there are no restrictions on sending money internationally. In cases where the sender/recipient is wary of volatility the option to use stablecoins, digital currencies backed by fiat currency or other assets, is also a favorable choice.
As discussed earlier, the major problems with the current remittances system is that transaction fees are high and money transfers are settled over long periods of time, relying on intermediaries. Sending remittance payments via blockchain would bring the system one step closer to solving these problems as payments and remittances have been a crucial use case of blockchain tech since its inception. Blockchain technology proposes distinct advantages over current systems and aims to make these types of transactions more efficient.
Three main advantages blockchain has over current systems include:
1. The need for intermediaries is removed which results in a large reduction of fees and losses from fluctuating exchange rates
2. The ledger provides significant improvements to settlement assurances, transactions settle within minutes at most
3. Transactions can be settled at any time and money can be sent anywhere in the world
In addition, blockchain technology provides a new opportunity for those who do not have access to traditional financial services. As of 2018, over 20% of the world’s adult population, mostly centered in the developing world, did not have access to typical banking services. That number, while on the rise, has been slowed by the lack of infrastructure in emerging economies where having a network of physical bank locations isn’t always practical. In these areas, use of the internet provides an important alternative as many banking services can be performed digitally. The advantage of having internet access is that, by connecting to a blockchain, one has access to all the main features of a bank (checking, saving, online payments, ect) on their phone or computer and can transact at any time across any time zone. As an added benefit of the technology, people will no longer have to travel to financial institutions to send or withdraw funds, which saves time for people in rural environments.
Internet access in developing countries is also on the rise. As stated in an article published by PewResearch in 2018, the percent of adults in emerging economies who used the internet grew from just 40% in 2015 to 60% in 2018. With sustained growth, some analysts predict that 90% of the world’s population could be using the internet by 2030. Below is a chart published in 2021 comparing internet penetration to banking access in a number of developing countries. What is noteworthy, is that in almost every country, more people have access to the internet than to a bank and a large percent of transactions are made using cash. In these areas, blockchains would give users access to much broader markets and provide more secure transactions than are possible with cash.
Traditionally, a number of companies have handled all global remittance and other international payment services. Most dominant among these is Western Union, which currently sends over 5 million online money transfers every month, although other legacy players include Moneygram, Transferwire, and Xoom.
Global remittance flows to middle and low income countries totaled 508 billion dollars in 2021, the majority of which were processed by a third party service. However, as demand for cheaper payment services has increased, many new service providers have begun to chip away at the legacy remittance market share, a number of which are turning to cryptocurrencies as an alternative to traditional currency exchanges.
A prominent example of an emerging player is the Stellar protocol. Stellar is an open source crypto currency that allows money to easily be moved and stored. The main difference between Stellar and other cryptocurrencies is its consensus protocol which allows transactions to be approved without confirmation from the entire miner network, allowing for faster transaction speeds. Stellar’s goal is to unite the world’s financial infrastructure so that money can flow quickly and cheaply between banks, businesses, and people. Stellar is currently supported by a non profit organization that handles every currency and speaks to every payment system in its native language. This allows both people and businesses to move money globally in seconds.
Telcoin is another cryptocurrency player in the Global Remittance space. Telcoin is integrating blockchain and the telecommunications industry to create a user owned decentralized financial platform. Telcoin allows for instantaneous money transfers by integrating blockchain technology with mobile devices via an application you can download on your phone.
Currently 31% of the global population is unbanked while 83.72% of the global population have smartphones. Creating an attractive and easy to use application may bring in a large volume of new blockchain users.
Another blockchain company that has shown previous interest in improving the remittance market is Circle. Circle is a payments infrastructure company that enables businesses to harness the power of blockchain and cryptocurrencies in their day to day operations. It started in 2013 as a peer-to-peer cryptocurrency exchange platform but has since expanded into other areas, notably producing its own stablecoin. The stated goal of Circle is to create a world where there is no distinction between international and domestic money transfers.
A more in depth diagram of the emerging blockchain companies entering the remittance market, provided by Blockdata, is listed below:
There is also a growing interest in traditional institutions partnering with blockchain startups to implement their technology to handle remittance payments. A key example is Ripple, another peer-to-peer cryptocurrency payment network, that partnered with Western Union and MoneyGram in 2018. Ripple has also partnered with SBI Remit, the largest remittance provider in Japan and Siam Commercial Bank to provide support for international payments in Thailand and Southeast Asia.
Though these are just a few of the emerging players aiming to change the remittances market, they are not the only ones. As the infrastructure surrounding cryptocurrencies improves it becomes ever simpler, safer, and faster to send money via the blockchain as opposed to traditional means. As new competition enters the market, the future of remittances appears to be decentralized.
Advantages of Blockchain Tech for Remittances:
The actual benefits of blockchain are displayed in the reduction of transaction costs for consumers conducting remittance payments as well as faster transaction speeds. Europe has a large portion of the world’s immigrants at 20%, and many of them send money home. This caused a remittance outflow of $165 billion in the continent, which is 25% of the world’s market. Africa is the largest destination of European remittance with 2019 numbers for remittances reaching around $48bn in Sub-Saharan Africa alone. Somalia’s remittance inflow in 2020 was estimated at 24.9% as a share of GDP, meaning that remittances are a large source of income and economic growth for citizens there.
However, the cost of sending this money is very expensive in comparison to other parts of the world. The percentage cost of sending $200 to most countries in Sub-Saharan Africa is about 9%, while Southern Africa has one of the highest costs of over 20%. Blockchain technology reduces these costs and makes them fairly consistent regardless of the destination. Traditional fees are broken up into four categories: 1.5% payment fee, 3.4% bank card fee, 0.3% bank account fee, and 0.7% pay in-store fee. Conversely, blockchain transactions consist solely of a mining fee and a gas fee. These fees can vary in percentage based on blockchain gas prices as well as the complexity of the transaction, but can be as low as a hundredth of a percent of the total transaction volume. Below is a comparison of fees as a percentage of transaction volume for sending money internationally via traditional means as opposed to a few popular blockchains.
Cryptocurrency is gaining popularity, especially among a younger demographic of users. According to a survey by PYMNTS, 23% of respondents who made remittance payments to friends or family in other countries used at least one kind of cryptocurrency. 13% of consumers also said that cryptocurrencies were their most used payment method for online cross-border remittances. As crypto adoption increases, so do the incentives for remittance providers to incorporate them as part of their service.
Sending money on the blockchain is also exceedingly simple in comparison to the complex process needed for traditional remittance payments. To send money from one crypto wallet to another, one simply needs to confirm the wallet address of the person they wish to send money to, state the amount they wish to send, and sign the transaction using their personal wallet keys. The transaction is then recorded automatically and the money is sent. There is often still a fee associated with the transaction, which is sent to the miner/validator, but, depending on the blockchain, this number can be as low as a fraction of a percent of the amount being sent and isn’t dependent on the geographic location of the recipient. In virtually all regards, blockchain transactions are faster, cheaper, and simpler than traditional global payment methods.
Risks and Limitations:
As described above, decentralization provides many benefits through cryptocurrency and other blockchain-related services. However, as with any technology, there are a few drawbacks. As a result of this decentralization, scams, stolen funds, and lost wallet addresses result in billions of dollars worth of losses or locked funds.
Lost addresses are one of the most prominent issues that come with the decentralized nature of cryptocurrency. Unlike money stored in a bank, which can be reclaimed even if a user forgets their credentials, money stored on the blockchain is effectively lost should a user forget their private key. This is because there is no third party organization taking partial custody over a wallet’s contents. The stories of crypto-wallets worth millions of dollars being lost are plentiful. As of 2017, a report estimates that between 2.78 million and 3.79 million Bitcoin tokens have been lost and are unrecoverable. At the time of writing this paper, the current price of a single Bitcoin is $29,401. With the total supply of Bitcoin capped at 21 million, the number of lost Bitcoins constitutes a sizable portion of the market.
There has been progress made to minimize the risk of lost wallets and make them more secure, such as multisig wallets, which require multiple signatures from different devices to approve transactions, as well as social recovery wallets19, which recruit trusted third parties to help manage wallet security. Argent, for example, is a company that has already shown promise with their social recovery wallet platform and is currently working to make the process cheaper and more available to the average crypto user. However, for crypto beginners and less technically adept users, forgotten seed phrases and lost wallets are still an issue as adoption of newer crypto wallet designs, while promising, has yet to become mainstream.
That being said, the user is not the only exploitable link on the chain. According to a crypto crime report done by Chainalysis, 2.7 billion dollars worth of crypto was scammed from 7.3 million users in 2020 alone. This came through hacks involving wallets, and exchanges, as well as the users themselves. For example, in 2020, the lending platform Bzx had 8.1 million dollars worth of crypto stolen through exploitation in the code of smart contracts. In 2021, the same platform was hacked again, resulting in 55 million dollars worth of losses. This occurred after a hacker sent a Bzx developer a phishing email that ran a script which gave access to private keys.
At the end of the day, however, when interacting with smart contracts, it is up to the user to audit the smart contracts directly or review an audit at the very least as smart contract vulnerabilities are always in the realm of possibility but less likely with credible audits. There is an element of risk that comes with purchasing and use of cryptocurrency, but it can be greatly mitigated through sufficient knowledge and operational security (opsec).
Blockchain technology holds potential to cut down settlement periods, fees, and intermediary involvement from the remittance industry among others. As blockchains are beginning to take off in terms of adoption and use, it is still unclear what degree of impact the technology will have over the long term or which players will emerge as industry leaders. Additionally, government regulation has yet to come out decisively in favor or against blockchain and cryptocurrencies leading to uncertainty regarding their implementation. Ripple, which has shown itself to be instrumental in crypto adoption in the remittances market, is currently embroiled in a legal battle with the Securities and Exchange Committee (SEC), the outcome of which would set much needed precedence for the industry within the United States. Other countries like Germany and Israel have moved to become more “crypto friendly” with their regulations which encourages innovation and investment. Germany for example, announced in May of 2022 that earnings from cryptocurrencies would be tax free making the country especially attractive to crypto investors within the EU. Israel, for its part, was one of the first countries to seriously consider creating a central bank digital currency (CBDC), and has been working hard towards its implementation, which, while centralized, would provide citizens many of the advantages of digital currencies, like speed of transaction and low fees.
Crypto support has not been unanimous however, and some countries have taken to rejecting the technology entirely, weary of the financial freedom it provides their citizens. Notably among these is China who was the world’s largest Bitcoin mining nation in 2019 before outright banning the use of cryptocurrencies in 2021. The Chinese government has instead chosen to invest in the creation of its own centralized digital currency which would allow it to maintain much greater control over the finances of its people. This kind of aggression towards the crypto industry not only limits the financial freedoms of its citizens, but also alienates would-be innovators and investors. Thus, as the cryptocurrency market continues to grow, China may find itself missing out on some of the benefits the new industry has to offer.
While the future still seems unclear, what is clear is that blockchain technology has many distinct advantages over the current system of remittances and global payments. By highlighting the shortcomings of legacy services, like high transaction fees, slow transaction speeds, and the reliance on third party intermediaries, it has allowed new players to enter the market as well as forced existing ones to become more receptive to blockchain and other forms of digital payments. This increased competition is already leading to a more efficient process for the end user, and will hopefully improve the lives of migrants around the world wishing to send money back home. A system where those with the least are affected the most is a system in need of change, and the user benefits ranging from settlement to costs are leading the way for innovation in the remittances industry.
Written By: Alexander Beaudry (Co-Director of Events), Chandler Otterbein (Executive Vice President), Mark Barry, Vendant Bhagat, Ashwin Kasargode