Will international banks soon rely on Bitcoin to move moneybetween countries? American Banker posted an interestingarticle on March 3 on a panel of bankers who considered that very question.The panel, incidentally, was organized by SWIFT (The Society for WorldwideInternational Financial Telecommunication), the global cooperative organizationowned by banks that operates a secure financial messaging system that enablesthe flow of funds across much of the world.
In 2013, developing countries received remittances worth$414 billion (USD). According to World Bank data, the global average cost of aremittance as a percentage of the transaction was 7.9%. Cross-borderremittances are expensive because they involve one or more correspondent banksplaying the role of intermediary when funds are wired from one country toanother. In a report I wrote a couple of months ago (ASWIFT Disruption? Bitcoin and Peer-to-Peer Models Challenge the RemittanceBusiness) I took an in-depth look at the business of consumerremittances and the potential of new business models, such as those powered bycryptocurrencies like Bitcoin, to upend the status quo.
In my analysis, I compared the prices offered by Rebit, a Manila-based, Bitcoin-powered remittanceservice provider to a number of established players operating in the U.S.-Philippinescorridor such as Western Union, Xoom, and Remitly. Taking into account both thedirect costs (fees) and the indirect costs (exchange rate spread, Bitcoinwallet funding fees) involved in the transactions, I found that Rebit didindeed offer the cheapest way of sending money to the Philippines. This is especiallytrue for small-value transactions. Purely from a price perspective, it’s clear that Bitcoin-backedremittance service providers can play a disruptive role in the market.
I argue in my report that three significant challenges needto be overcome before this model succeeds. First, the regulatory status ofvarious Bitcoin-powered businesses in the U.S. remains unclear. In 2013, theU.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) ruledthat “an administrator or exchanger that (1) accepts and transmits aconvertible virtual currency or (2) buys or sells convertible virtual currencyfor any reason is a money transmitter under FinCEN’s regulations.” The New YorkDepartment of Financial Services is working to specify a version of the moneytransmitter license (dubbed “Bitlicense”) for Bitcoin businesses operating inthat state. Complying with the evolving regulatory regimes at the state andfederal level will inevitably impose costs; compliance is neverthelessessential if these businesses are to scale.
The second challenge is what I call an “asset-liabilitymismatch.” In order to accept a remittance of bitcoins from the United Statesand convert it into pesos in the Philippines, for example, there has to be arobust domestic demand for bitcoins in the Philippines. It is unclear, to saythe least, that such a market exists that would match the volume of remittanceflows coming into the country.
The third challenge is that of user experience; few peopleunderstand Bitcoin, and even fewer are likely to trust it as a medium ofexchange when sending money to their loved ones across the world. Now you couldargue that you don’t need to understand the subtleties of correspondent bankingin order to send money through Western Union. However, Bitcoin-backedremittance providers like Rebit and BitPesa, presume some level of familiaritywith Bitcoin that mostly people simply do not have (you need to at least knowhow to open a Bitcoin wallet and buy some bitcoins). Sending money throughWestern Union isn’t nearly as complicated; moreover, there’s no risk of thefunds in your U.S. dollar account losing35% of its value in 2 days as happened in January with Bitcoin.
These challenges are difficult but not insurmountable.Bitcoin and other cryptocurrencies like Ripple remain promising innovations,and it is heartening to know that banks are paying attention, as noted in thequote below from an AmericanBanker article.
“We really can’t close oureyes,” said Cheryl Gurz, managing director of the emerging technologysegment at Bank of New York Mellon Treasury Services. “If we astraditional correspondent bankers don’t keep looking and determining where [cryptocurrencytechnology] will take us, new entrants will completely take our space.”