You have all experienced the following situation in one way or another: You’re at a social gathering chatting and one friend brings up Bitcoin or another obscure cryptocoin and explains how it’s the future. Although there are a lot of arguments for and against digital currencies, I would like to dive into one use case, which I find the most interesting: international transactions. Without going into technical details regarding blockchain protocols, digital currencies such as Bitcoin, Ethereum, or Litecoin allow digital funds to be safely transferred from account to account, without needing to pass through a central institution (bank), which significantly reduces transaction costs.
Developing countries are negatively affected by high international transaction fees
According to the World Bank, last year, international migrants sent USD 441 billion home to their native (developing) countries. Sending money to your native country is called a remittance payment. To show how much developing countries receive from individuals we can compare it to what developing countries receive from the west as aid. Western countries send about USD 150 billion to developing countries, or 1/3 of the amount that individuals send. The problem is that sending money as an individual is expensive due to the numerous intermediary institutions that international transactions need to pass through, which each drive up the price per transaction. According to the World Bank, the global average transaction fee for transferring money across borders is 7.45% of the total amount, which means that last year about USD 33 billion didn’t reach developing countries due to intermediary institutions such as Western Union and Moneygram. Developing countries are thus at a disadvantage, as intermediary institutions charge significant fees to transfer money internationally. Below is an overview of what it costs to send USD 50 to a developing country. The figures are from the World Bank.
What will happen to Western Union and Moneygram?
The market leaders facilitating remittance payments are Western Union and Moneygram. Due to the large sums of money that developing countries aren’t receiving due to intermediary payment-institutions, developing countries have a greater incentive to start regulating the use of popular digital currencies for remittance payments. For this reason, the Philippines recently legalized Bitcoin for the benefit of remittance payments. It’s likely that governments of countries that receive significant remittance payments will continue to make strides easing regulation of digital currencies for remittance use, reducing barriers to entry. Numerous remittance start-ups have popped up, making use of cryptocoins with low transaction costs. Individuals transferring money are unlikely to stay loyal to Western Union, opting to make use of a cheaper service. With numerous countries taking up different positions on Bitcoin and digital currencies, the question remains whether
Concluding
With numerous countries taking up different positions on Bitcoin and digital currencies, the question remains whether digital currency will ever be mainstream accepted by governments. Whether mainstream acceptance comes or not, international payment inefficiency is one of the strongest reasons for why digital currency should be implemented by start-ups and large organizations if they want to decrease transaction costs.
Do you know any other interesting actual use cases for digital currency?
Could there ever be an E-Euro if we continue making strides towards a cashless society?
References:
Remittance Prices Worldwide . (2017). World Bank, (21). Retrieved September 22, 2017, from https://remittanceprices.worldbank.org/sites/default/files/rpw_report_march_2017.pdf.
