How On-Chain Value Flows Will Advance Remittance
Every year, over $700 billion flows cross-border for remittance purposes. Mind that this is the official figure; reality might prove that significantly more value is transacted via methods not covered in the analysis.
Millions of people rely on international money transfer systems to send cash to their loved ones, pay bills, engage in ecommerce, or invest. At its simplest level, if you have cash on the ground in Spain, and you want to send money to Vietnam, a remittance broker like Western Union would take your euro bills in Madrid and provide the receiving party with dongs in Ho Chi Minh. This, of course, is fearsomely expensive — but it creates a way for unbanked workers and cash-in-hand societies to move money cross-border.
The Remittance Problem
For the banked — they use the SWIFT system — with the familiar refrain of 2–3 working days. If a bank has a SWIFT number, it is used to communicate with a bank in another country. Similar systems exist, and they allow banks to process cross-border transactions while minimizing risk of transcription error due to various national and private bureaucracies.
SWIFT works by assigning a SWIFT code to a bank. You can then use this number to walk into a Bank of America branch with funds and deposit them into someone’s BNP Paribas account in France. The SWIFT system sends that message and once the funds are cleared, they are available. That last bit is crucial, as SWIFT is just a messaging system. It contains no settlement within it. The banks will go on to sort the settlement later, which comes with settlement risk concerns where one transacting party fails to fulfill its obligations.
When using SWIFT, it is not only very slow, but it is also riddled with fees — and not all of them as a direct result of the bank trying to be greedy or take advantage. It’s just not that easy to settle transactions cross-border, even when both people want the same currency. SEPA, the Single European Payments Area, is an excellent example of this. With most nations in the European Union using the Euro and countries operating under a political union, surely cross-border bank transfers are easy? Not so. In fact, SEPA is still an “ongoing process”.
When currencies are different, it’s an order of magnitude more complicated and expensive. Exchange rates on any given currency pair are set by both banks in the transaction, which may differ from what you’d expect. Additional fees can also be levied on the transaction not only from the bank you are sending from, but also by the bank it’s being sent to.
These fees represent the rather enormous cost of trying to engage in money transfer efficiently enough cross-border for the capital systems of the world to work, but are also a product of the general tax and legislative minefield that occurs when two sets of national regulations rub up against each other.
Attempts at Better Remittance Systems
The popularity of new-age apps like Transferwise, CashApp, Monzo, or Revolut and the success they’ve seen, represent that, for ever more people, viable and dependable cross-border money systems remain an ongoing quest.
However these apps are just digital renditions of the SWIFT messaging system, with the proviso that they are often underpinned by traditional banking systems, which are merely offsetting the cost of processing this for customers by direct alliances with one another, like Goldman Sachs and JP Morgan with Transferwise for example.
The need for this network of alliances means not all currencies are available, and you’re still suffering exchange fees as set by the partner institutions, as these systems are still subject to the problems of international remittance and its burdensome cost. For the unbanked, they aren’t a solution whatsoever, and so cash-in-hand workers must rely on operators like Western Union, MoneyGram, and the debilitatingly expensive services they offer.
PayPal has also stepped into the breach of money transfer using their global centralized network of payments processing, but they are a closed system, with PayPal effectively retaining control over money and fees charged. Moreover, you do need a bank account to truly use it, so it’s not a final solution. PayPal’s foray into crypto has already ruffled some feathers with users not actually buying crypto, but just representations of digital assets, which cannot be sent or received through cryptocurrency wallets.
The advent of globalization will only further increase the cross-border trend, with on-ground workers, digital nomads, and foreign businesses further engaging in remittance. It would perhaps be unfair to say that banks and companies involved with remittance are wolves in sheep’s clothing, but everyone knows there can be a better way.
How Blockchain Can Solve Remittance
And, indeed — with the blockchain — there is hope. Although sometimes the harping on about the application of blockchain technologies to a sector is met with a suitably raised eyebrow — when it comes to money remittance, it’s an excellent solution. The fast finality, full traceability, smart contract governed distribution protocols, and community ownership of a truly global remittance system — all under the distributed trust that a ledger provides — is perfect for the task.
Until volatility hits, that is. We’ve seen 100B flow into the on-chain stablecoin market for a reason. Volatile assets are unfit for remittance purposes, since overseas workers don’t want their dollar value to depend on market trends. However, by pegging blockchain-based assets to the value of fiat currencies and building a transactional infrastructure upon which anyone can send and receive stable assets, the remittance market becomes prime for disruption.
To further expand on the stablecoin narrative, we aren’t yet at the point where you can simply use your dollar-pegged on-chain stablecoin to pay for your morning coffee, or sign a lease on your brand new ride. This is the road to mass-adoption, and we’re still early. However, we do have a plethora of existing use cases for stablecoins within the crypto economy. Few include trading against crypto pairs, providing AMM liquidity, paying online service providers, receiving salaries from crypto/web3 firms, raising capital from VCs, in-game commerce, lending, engaging with neo-banks, accessing insurance, and much more!
Let’s talk about ease of use!
Engaging in remittance isn’t easy. You either need a digital account with a provider and cash deposited, or you need to travel to your nearest branch and initiate the process through pen and paper. The same applies for the receiving party.
However, as on-chain assets capture a larger slice of the monetary transfers economy, cross-border transactions become significantly simpler. Let’s consider Onomy Protocol as the prime example for cross-border payments. To mint stablecoins (Denoms) pegged to major currencies, you must lock NOM away as collateral. Code and liquidity take rule and ensure your stablecoins keep their peg. Then, you simply enter the address of the receiving party, and the stablecoin instantly appears in the other person’s wallet. Quick, cheap, but most importantly, secure and decentralized.
However, users are also free to simply purchase Denoms from the open market using both cryptocurrencies, but also fiat. We’ll have onramps and offramps deployed during the transition period before on-chain stablecoins become synonym to money accepted everywhere. Eventually, the digital economy will rule over the world’s financial markets, with the $6.6T per day Forex market destined to migrate on-chain. Once this paradigm shift is embraced, endless opportunities open, with real world assets becoming usable within the emerging decentralized finance market, where yield opportunities empower financial freedom and cross-border transfers are no longer controlled by a handful of centralized institutions.
Send It Away
The pain of remittance is known to everyone. Companies, banks and users hate the costs and administrative encumbrance of getting money cross-border. A more fluid foreign exchange market will have elevating effects on the entire global economy, as people can get the money they need quicker, safer, and cheaper. Onomy Protocol’s easy onramp into international currency remittance, not only for institutions and crypto technophiles, but for the average user, will be a potent salve for this long-standing issue. Businesses and banks finally moving their Forex engagements on-chain will only further boost integration into this new way of getting people the money they need, whenever they need it.
