Blockchain — a viable alternative for cross-border payments?
Cross-border payments refer to the transfer of funds from one country to another by individuals or companies. Till day, traditional banking methods such as wire transfers are the primary means of making cross-border payments. They involve multiple intermediaries, require strict policy adherence and are also time-consuming. However, with the advent of blockchain technology and cryptocurrencies, there is now an alternative way of making cross-border payments — using the blockchain. There are several advantages to using the blockchain for cross-border payments.
Speed of Transacting
One of the biggest advantages of using the blockchain for cross-border payments is speed. Traditional bank wire transfers can take several days, while cross-border payments using the blockchain can be completed in a matter of hours. This is because blockchain technology allows for the real-time, peer-to-peer transfer of funds without the need for intermediaries such as banks.
Fees of Transacting
Another advantage of using the blockchain for cross-border payments is reduced fees. Because there are no intermediaries involved in the process, the fees associated with making a payment using the blockchain are typically lower than those for traditional bank wire transfers. This can be especially beneficial for businesses that make frequent cross-border payments, as the savings can add up over time.
It is difficult to provide accurate fee comparisons for cross-border payments using Bitcoin, Ethereum, and traditional banking methods, as the fees can vary significantly depending on several factors such as the amount being transferred, the countries involved, and the specific financial institutions or exchanges being used. With that said, here is a general comparison of the fees that may be involved in each type of payment:
- Bitcoin: The fees for making a payment using Bitcoin can vary greatly depending on network congestion and the size of the transaction. According to data from YCharts.com, the average fee for a Bitcoin transaction was around $2 over the past year. However, fees can fluctuate up or down depending on market conditions.
- Ethereum: The fees for making a payment using Ethereum are generally lower than those for Bitcoin. According to data from YCharts.com, the average fee for an Ethereum transaction was around $0.60 over the past year. However, like Bitcoin, fees can vary depending on network congestion and the size of the transaction.
- Traditional banking methods: The fees for traditional bank wire transfers can vary significantly depending on the bank and the countries involved. In general, the fees for bank wire transfers tend to be higher than those for cryptocurrency payments. As per SBNRI, Domestic outgoing wire transfer fee typically ranges from $0 to $35, while international outgoing charges stand between $35 to $50.
Given these data points, it is clear that Blockchain alternatives consistently charge a lesser fee as compared to Traditional Banking methods for cross-border payments, and the transaction fee also does not depend on the amount being transferred. While this might be an issue for lower-value transactions, it is a significant advantage for high-value transactions.
It is worth noting that the fees for cross-border payments using the blockchain and traditional banking methods are not the only costs to consider. There may also be exchange rate fees and other miscellaneous charges that can add to the overall cost of the payment. It is important to carefully compare all the fees and charges involved before deciding on the best payment method for your needs.
Security & Transparency in Transacting
In addition to speed and lower fees, the blockchain offers increased security and transparency compared to traditional banking methods. Because the blockchain is a decentralized, distributed ledger, it is much more difficult for fraud or errors to occur. Additionally, all transactions on the blockchain are recorded and visible to everyone, which can help to increase trust and accountability.
What is limiting the adoption of Blockchain?
While there are certainly some compelling advantages to using the blockchain for cross-border payments, there are also some potential downsides to consider.
- Volatility of cryptocurrencies — Because the value of cryptocurrencies can fluctuate significantly, there is a risk that the value of the funds being transferred could change before the payment is complete. This can be especially problematic for businesses that need to make large payments and are relying on a specific exchange rate. However, this issue is addressed mostly by Layer 2 protocols on the Blockchain, such as Stablecoins which remove the issue of the volatility of cryptocurrencies by pegging to fiat currencies such as the USD.
- Lack of Regulation — In many countries, the use of cryptocurrencies is still in a legal grey area, and it is not always clear how they should be taxed or accounted for. This lack of clarity can be a deterrent for some businesses, particularly those that are risk-averse.
- The issue of adoption — While the use of the blockchain for cross-border payments is certainly growing, it is still not as widely accepted as traditional banking methods. This means that it may be more difficult to find merchants or service providers that are willing to accept payment in the form of cryptocurrency. The issue of the adoption of blockchain in businesses and organizations is so deep that it deserves a deep analysis on its own.
Conclusion — Blockchain is still a niche but it is not going away
In conclusion, there are both pros and cons to using the blockchain for cross-border payments. On the one hand, the technology offers faster speeds, lower fees, and increased security and transparency compared to traditional banking methods. On the other hand, there are concerns about volatility, regulation, and adoption that businesses must consider before making the switch. Ultimately, the decision of whether to use the blockchain for cross-border payments will depend on the specific needs and risk tolerance of the business or individual.
