Why cross border transaction fees are the Achilles heel to virtual good
trading — and cryptocurrency is the answer.
“The process of buying and selling a digital item is relatively complicated. And risky. You have to understand quite a bit about the trading system and the pitfalls to avoid. We want to simplify this process…” — Malcolm CasSelle, President, WAX
In the age of the global Internet, sending money abroad has become an easier and faster process than it was in decades past. It’s now possible for somebody in Russia to send a payment to a friend in Australia in a matter of seconds — something that previously could only be done with a banking intermediary can now be done between individuals on their mobile phones. Fantastic. But that is only part of the story
For all the improvements we have seen in cross border payments, the task of sending money across international borders is still riddled with complications and risks. These problems are strongly felt by the participants in the $50 billion virtual item trading industry
Take, for example, a video gamer in Germany who wishes to sell a virtual item, like a Counter-Strike: Global Offensive (CS:GO) skin, to a buyer in the U.S.
Trades of this kind happen every day on Reddit, just one popular social networking platform where buyers and sellers connect to trade virtual items. Once the German video game enthusiast contacts his or her American counterpart, the first step is to establish trust.
This is a major hurdle, and one that stands in the way of many potential virtual item trades. Because virtual item buyers and sellers generally don’t know each other, traditional fiat (USD/Euro, etc.) payment networks like PayPal or Skrill are undesirable methods to transfer cash. Buyers can initiate a chargeback, or payment reversal after receiving the digital item, depriving the seller of his rightful payment. And even if a legitimate buyer sends proper payment, an unscrupulous seller may still not deliver the promised virtual item to the buyer.
But let’s assume in this example that the American buyer is reliable and sends the correct payment to the German seller using one of the popular fiat payment networks in exchange for the item.
Now the second obstacle presents itself — transaction fees. Sending money from the U.S. to Germany by conventional methods such as online banking or Skrill is expensive. The payment processing and currency conversion fees can be a sizable percentage of the overall item cost.
The seller doesn’t fare well either. In many cases a payment recipient fee applies. So both parties bear fiat based transaction costs — and this is before the currency exchange rate comes into play.
Most cross border payments come with currency conversion costs. And the less popular the currencies, the more expensive it is to convert them.
These are some of the hurdles virtual item traders face when transacting in fiat currencies. These sub-optimal conditions discourage would-be virtual item traders from partaking in the global market, which reduces the size and the liquidity of this market to the detriment of all market participants.
Even low cost payment providers like Transferwise can’t do much about high currency conversion costs or dishonest buyers reversing payments.
So what’s the solution? Well, it may be helpful to look towards the world’s developing economies, where for the past several years people have been using cryptocurrencies to get around volatile currencies and unreliable banking systems.
The advantages of cryptocurrency
In Venezuela, inflation is out of control. It’s become so serious a problem that the largest Bolivar denomination is too low to buy anything. Imagine the cheapest item you can think of — you would probably need at least two Bolivar notes to pay for it.
In addition to this, many Venezuelans have lost trust in their banking system, which is considered unreliable and unsafe. Sending money abroad via airplane or boat, however, isn’t really an option in the 21st Century. So it’s necessary to consider other options.
Cryptocurrencies such as Bitcoin are a way of not only making cross border payments safely, they’re also being used as a way of storing money that’s more reliable than holding it in currencies like the Venezuelan Bolívar.
Using Bitcoin and other cryptocurrencies, residents of Venezuela can send and receive money to and from their foreign friends at a fraction of the cost of traditional fiat networks, and without worrying about the payment being ‘lost’ in the process.
Venezuela may be an extreme situation, but cryptocurrency has huge benefits for ecommerce shoppers and digital item traders.
Think about the time it takes to send money conventionally. A 2015 report by McKinsey & Company found that the average time to complete a cross-border transaction was 3 to 5 business days, while cryptocurrency payments are generally done in a few minutes. And importantly are irreversible unless the recipient agrees to do so. No more issues with buyers improperly submitting payment reversals.
Fees are another area where cryptocurrencies comes out on top. Cryptocurrency transactions avoid many of the complicated costs mentioned above such as payment processor fees and exchange rate charges.
Global average remittance costs currently stand at 7.45% — so if you send $100 abroad it’ll cost you $7.45. Not exactly cheap. And in many parts of the world cross border payment processing fees are much higher.
How WAX will make the virtual goods trading process easier
Buying and selling virtual items using cryptocurrencies is still not a perfect system. People must first must obtain the cryptocurrency before they can use it. That requires the use of brokers, banks and cryptocurrency exchanges to convert fiat currency into bitcoin or other cryptos.
Companies already exist to expedite this process, such as Abra who allow peer to peer payments across borders. Payers send their cash to a mobile teller, which then sends bitcoin to the recipient.
For virtual item traders, however, things look set to get even better. The founders of OPSkins, are launching WAX, or Worldwide Asset eXchange™, to make virtual item trading even easier by removing many of the issues associated with fiat payment processing, currency conversion costs and security risks.
OPSkins is the largest virtual item marketplace in the world. They’ve been around since 2015, providing a centralized consignment marketplace that allows video gamers to trade skins easily and safely. They serve millions of customers and are adding 200,000 new users per month.
WAX is a decentralized marketplace trading virtual items such as CS:GO, PUBG and DOTA 2 skins. The WAX platform will use its own blockchain based utility tokens and smart contracts to give provide the security and liquidity that other centralized platforms lack.
In the world of video gaming, the ability to send money abroad with minimal hassle is a big issue, because video gaming is such a global community. WAX estimates that a potential 400 million video gamers can benefit from their blockchain based service, and these people reside in nearly 100 countries.
That’s a lot of countries, a lot of currencies — and while ‘big’ currencies like Dollars and Euros can be mildly annoying to send abroad, their weaker and more obscure counterparts can be a real headache.
WAX aims to integrate with local agents who buy and sell cryptocurrency using their own currency, and allow peer-to-peer trades to take place across international borders in a decentralized market.
It will remove much of the pain and worry associated with virtual trading by using settlement protected payments and smart contracts, and help build a world where distance and traditional money networks are no longer an obstacle to buying and selling digital items.