Crypto has cross-border promise

For nearly 30 countries or territories, inward-flowing remittances—noncommercial money transfers that typically go to family and friends in another country—make up more than 10% of the annual GDP. For Lebanon, Somalia, and Tonga, it was over 30% in 2020.

Although remittances saw a temporary decline during the pandemic—attributed in part to rising unemployment—$540 billion in remittances flowed to low- and middle-income countries in 2020, per the World Bank. By the end of 2022, the institution projects remittances to tick up to $565 billion.

Most remittance payments are made via wire transfer or bank transfer, but increasingly, people are using cryptocurrency to send money back home. Mexican crypto company Bitso says it now handles 2.5% of remittances sent from the US to Mexico—totaling more than $1 billion annually. And RippleNet, the blockchain-based money transfer network owned by crypto company Ripple, reported fivefold growth in transactions between 2019 and 2020. Some of the biggest players in the money transfer space, like Western Union and MoneyGram, are beginning to team up with crypto companies.

“Blockchain’s strengths really play to exactly what’s missing in the remittance space, so whether it’s processing costs, transaction speed, complexity—blockchain is really able to...hit those points,” Grace Broadbent, a research analyst at Insider Intelligence, told us.

The pros: Quicker and cheaper

If you wanted to send money abroad via traditional forms of remittance, it may take two-to-three days for the recipient to be able to cash out. In some areas of the world, that may be a minor inconvenience—but in others, where the local currency is more volatile, it could significantly change the value of the payment.

Although some newer entrants to the remittance space have gotten transfer time down to minutes, “Blockchain is by far the fastest route to go about this,” Broadbent said.

Exhibit A: Sending a crypto remittance through RippleNet usually takes between four and six seconds, Broadbent said. And speed of transmission can drastically reduce the risk factor of changing value. Though cryptocurrency’s own value has a reputation for volatility, some fiat currencies are even more unstable—in Venezuela, for instance, the inflation rate skyrocketed to 6,500% last year.

Another pro? Lower fees, which can be notoriously high in the remittance space.

“If there's a criticism about the remittance industry...it's that fees are high,” Alex Holmes, CEO of money transfer company MoneyGram said. “Number one, you have shareholders and you need to make money. On the other hand, a lot of times, buying and selling foreign exchange is expensive.” He added that compliance risks, as well as volatile fiat currencies, are concerns for participating companies.

Since blockchain-based solutions aim to cut out extra steps involved in sending money back and forth, it can lead to anywhere from 40% to 80% in cost reduction, Broadbent told us. Holmes said MoneyGram charges an average of 2.9% of the amount sent, compared with the World Bank’s reported global average of 6.4%. Sendi Young, European lead for Ripple, told us its cost per transaction is about 90% less than the status quo for legacy money transfer companies.

As more money transfer companies partner up with exchanges and begin to offer crypto options, fees will still exist. But they’ll probably be lower than those associated with other methods.

“You are cutting out some of the middlemen, but obviously there still is a middleman that exists when you use a firm like MoneyGram, when you’re not sending something just directly off the blockchain yourself,” Broadbent said. “But it is still able to bypass some of the bank transfers.”

There are plenty of kinks that the space needs to work out, Young said, but she expects the space to grow and mature in the years to come.

“For the next, let’s say, three-to-five years, there’s still...efficiency improvements to be had,” Young said. “My dream, and Ripple’s as well, is really to be able to send these payments very quickly, real time, minimal costs across the world—just like we send an email today.”

The cons: Logistics and liquidity

One main differentiator between traditional remittances and crypto options: the type of institution you use to move the funds. With traditional remittances, you’re using a bank; with crypto, you’re dealing with an exchange.

“Most individuals today are not really looking at moving crypto as much as they’re looking at holding crypto and/or the interoperability between crypto and traditional fiat currencies in their markets,” Holmes said. “Because of that, there’s a lot of cost and inefficiency still in the system around crypto because oftentimes...crypto is sort of being treated like regular fiat currency.”

In order to buy the majority of goods and services with crypto, it typically must be converted back into local fiat currency. And that’s tough for many people who rely on remittances for quick access to funds.

“Most of the remittances that we send are picked up within 24 hours, and, you know, from conversations with the receivers, we know that a lot of that money is spent within 24-to-48 hours on food, shelter, education, clothing, and...life’s necessities,” Holmes said.

He added that there’s modernization involved that “a lot of the world is not quite ready for at scale,” since the process also requires senders and recipients to have bank accounts or crypto wallets. With traditional money transfers, there are typically options for people to send or receive money without a bank account, like cash pickup.

“What we’ve seen is that these remittance players really need to take a measured approach to cryptos,” Broadbent said. “With remittances, the first mile and the last mile of the transaction is the hardest because a lot of it is traditionally cash-based. ...There really still needs to be that component of converting from fiat to crypto.”

A knight in stable armor

Stablecoins, a way to tokenize fiat currency, are gaining a reputation as a relatively fixed way to send crypto remittances. The sender can transfer their local fiat currency, like US dollars, into a stablecoin—like USDC—then move the money across a border for speed and simplicity. If the Argentinian peso was extremely volatile that day, for example, the recipient could wait to transfer the stablecoin remittance back into pesos until the rate was more favorable.

“Most countries don't really have a strong desire to just have money either flowing in freely or flowing out freely without them controlling it,” Holmes said. “Pure-play crypto and bitcoin perfectionists, I think, would argue that creates...this utopia, but I think for a government, it creates a dystopia, and that scares them. So I think stablecoins bring, sort of, that interoperability between both.”

Broadbent predicts we’ll see stablecoins play a bigger role in crypto remittances as regulations firm up, adding that they’ll likely be a “huge catalyst for future adoption.” The stablecoin blends the best features of crypto and fiat currencies, she said—a speedy transaction, a lower cost, and even less volatility.

And although Broadbent says there isn’t much data available for blockchain-based remittances at the moment, “The data that’s available on...the digitization of remittances over the past year is extremely promising. It definitely proves that consumers are ready to make this shift to digital remittances, and so I think that’s really encouraging for the growth moving forward.”