The COVID-19 pandemic has caused a shift in how remittances flow around the world, no more so than in developing countries. This, along with the current pull toward cryptocurrency, has changed the face of the remittance industry in these countries, writes Kate Anderson.
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Global remittances have fallen in the face of the coronavirus shutdowns. But like so many other financial services, the sector has had to adapt to ensure a steady flow of remittances, resulting in a much smaller decline than previously expected. Low- and middle-income countries received $540 billion in 2020, just $8 billion less than in 2019. One of the major changes was the shift in flows from cash to digital channels, and from informal to formal channels.
But while the pandemic has reinforced the trend towards using different modes of remittances, the use of cryptocurrencies in developing countries is nothing new. Reports that El Salvador has adopted bitcoin as a legal currency dominated headlines this year. Elsewhere, other countries have also turned to cryptocurrencies as a way to hedge against high inflation or combat weak local currency. Cryptocurrency is growing in popularity in Venezuela and Cuba, as both countries have been affected by US sanctions.
The potential benefit of using cryptocurrency for remittances is that it means that the sender can avoid some of the high costs charged by traditional banks and money transfers. World Bank data found that a $200 transfer can incur an average fee of 5% to 9.3%, depending on the destination country and the type of service used. For people in developing countries who depend on this money, finding a cheaper and faster way to transfer money is essential. And some seem to turn their attention to cryptocurrencies as an answer.
Why are developing countries turning to cryptocurrencies for remittances
It is safe to say that cryptocurrency has caught the attention of developing countries. 3 of the top 5 countries for crypto adoption are developing countries, with Nigeria and Malaysia ranking first and second, respectively, for cryptocurrency ownership rates among internet users.
For countries where remittances are essential to their economy, the ability to transfer money at no or very low costs is a sure attraction. In El Salvador, remittances totaled nearly $6 billion last year, with President Nepe Bukele saying the introduction of bitcoin as the new national currency would save El Salvador $400 million spent annually in commission remittances.
Meanwhile, sanctioned countries are turning to cryptocurrencies as a way to get around the ban. Cuba now recognizes and regulates cryptocurrencies such as Bitcoin. In 2020, increasingly severe sanctions under Trump led Western Union to shutter all of its 400 sites in the country. The pandemic further complicated the process of obtaining funds to and from Cuba. As travel was halted, semi-official courier services called mulas were unable to function efficiently. All of this has helped support the rise in cryptocurrency adoption rates.
In fact, industry professionals are beginning to predict that Bitcoin will eventually become the most popular form of currency in developing nations. Joe Raczynski, technologist and futurist at Thomson Reuters commented, “There is no doubt that BTC will lead the way here, but Ethereum may eventually replace it or work alongside BTC as money for developing countries.”
Is Using Cryptocurrencies for Remittances the Right Way?
While there are reasons for this trend towards the adoption of cryptocurrencies for remittances in developing countries, this does not mean that there are still risks associated with this type of transaction. While the rationale might be the decentralized nature of blockchain technology would allow for free cross-border payments from third parties, thus reducing the costs involved – it does not guarantee that there will be no possibility of losses at some point.
The main problem is that there is an element of uncertainty regarding the value of your chosen currency when the recipient sells it. The value of different cryptocurrencies in fiat money can be volatile. Additionally, just like a traditional money transfer, you must also take into account the exchange rates at the time, as the money must be exchanged twice – first in your chosen currency and then rolled back when the recipient sells it. There is also the concern that human error could be made while conducting a transaction. Because it is a largely unregulated market, trades cannot be reversed.
However, the potential reduction in third-party fees as well as fast transaction times is an obvious attraction. Cryptocurrency lends itself to larger transactions, as there tends to be a larger cap on how much you can send to someone than with traditional providers. Additionally, since coins like Bitcoin incur transaction fees, which are calculated on a per-byte basis rather than a percentage, smaller transactions tend to be relatively more expensive.
trend will remain?
For countries where remittances are at the heart of their economy, cryptocurrency adoption is likely to gain traction over the coming years. But this does not mean that there are no challenges ahead. The volatile nature of the value of certain currencies will discourage citizens in developing countries, as well as a lack of understanding. This can be seen in El Salvador itself, where Bitcoin is now legal tender, but 67.9% of people disagree with this choice.
However, cryptocurrencies are a fast-moving market, and there will inevitably be new innovations that will continue to meet the use of cryptocurrencies for remittances. This can already be seen by the emergence of several blockchain startups that facilitate Bitcoin transfers without requiring users to have prior knowledge of the technology. These companies include the likes of Satoshi Citadel Industries, AZA Group, Bitso and RippleNet – the latest of which claims that their cost per transaction is about 90% lower than the status quo of legacy money transfer companies.
Over the coming years, we can easily see this trend towards using cryptocurrencies for remittances, based on the promise of lower transaction costs and a more efficient way to send money. There is a potential end result where the adoption of blockchain technology creates a truly decentralized transfer model that results in lower fees, better exchange rates, and faster delivery speeds.
Kate Anderson is a writer at Finder who specializes in money transfers. She has previously written for The Motley Fool UK and Fitch Solutions, covering a wide range of personal finance topics and keeping a close eye on market trends. Kate received her Bachelor of Arts in Modern History from the University of East Anglia. When she’s not working, she can usually be found curled up with a good book or heading out for a run.