George Harrap is the CEO of Bitspark, a Hong Kong-based cash-in, cash-out remittance service leveraging bitcoin and blockchain technology.
In this CoinDesk 2016 in Review special feature, Harrap gives a deep dive into his takeaways from nearly three years of running a bitcoin-based remittance startup. His conclusion? Bitcoin is still a game changer.
As of the end of 2016, we are now about seven years into the bitcoin experiment. In that time, remittances have gone from one of the most buzzed-about use cases for bitcoin to one that's billed as one of its biggest challenges.
So, can bitcoin make an impact as an intermediary for exotic currencies not often traded? Can it help deliver cash on the ground quicker and cheaper?
Well, it turns out there's a lot of ways to approach remittances – from private blockchains, consortiums, apps, FX dealers to decentralized cryptocurrencies.
Let's explore some of them below.
What doesn't work
Traditional FX integrations
Only a tiny minority of currencies are freely floated and exchangeable outside their country of origin (generally, it's the top eight currency pairs: USD, EUR, AUD, GBP, CAD, JPY, SGD, HKD).
Prices are as good as they get here and spreads are tiny, but these are the currencies of rich countries, not of the recipient nations of remittances globally.
There are of course other currencies that are freely traded. But, if we are to solve the issue of remittances globally, we would need close to 180 currencies to be able to be transacted easily and cost effectively, and this is not currently possible.
So, FX providers and websites providing FX services are great for B2B payments between the above currencies, and there is an immense market for that.
But, this is not the use case we are discussing, the use case we are interested in is that of cash distribution on the ground to individuals in currencies and countries that are often not well connected to the financial system.
FX providers work fine, however, more is involved to deliver cash to the street corner where its needed by the recipient.
P2P netting of payments
As startups, TransferWise and CurrencyFair popularized this model, but banks have been doing it for decades.
Essentially transactions going from A to B and B to A can be ‘matched’, and instead of actually transferring the money via the SWIFT network, you can keep currency A and B in-country. The ownership of those balances will then change to be withdrawn domestically via lower cost domestic withdrawal methods.
It's a neat idea, but it works only for the most frequently traded and transacted currency pairs where there is an equal amount going each way to 'match'.
For the big remittance recipient countries, there are always more transactions going in than is coming out, so matching an equal number of transactions to and from is mathematically impossible.
At the end of the day you will need to send money to the destination and how will you do that?
Likely a bank-to-bank transfer, which for exotic currencies are always expensive. So you are not solving any problems here and will be subject to those higher exchange rates at the end of the day and will need to use traditional forms of settlement.
This model is still trying to establish itself via mobile apps, but fundamentally, it actually is based on an ancient system that has been in operation for thousands of years called ‘hawala’.
Mobile apps try to make this more efficient by digitizing the connections between people that power the system.
However, people need to trust the places they are putting in and receiving money. The usual workflow is deposit money with someone on the app, then the person at the other end will withdraw it from someone else at the recipient end.
P2P apps generally want to try to connect you to people who can act as links in the chain nearby. However, some guy on the side of a street you track down via a dot on GPS doesn't exactly illicit trust.
So, the logical conclusion is that you onboard trusted entities who deal in cash: the money transfer operators (MTOs, or physical cash money transfer shops), and MTOs are not about to ditch their complicated compliance and remittance system for a mobile app.
Even if you assume the most optimistic scenario (where let's say people trust the guy by the side of the road), how will it be scalable for that person to handle hundreds or thousands of transactions via an app that will eventually attract the attention of government agencies?
Getting money into and out of the app is the hard part. Hawala has been working for centuries, but it will just take time for people to adjust to applying it with new technologies.
In our experience, we have found many foreign workers sending money home often have long established trust with the shop they send money home with or the guy on the motorbike who collects their cash at a construction site.
Switching to something new is daunting, and it is also why bitcoin ATM-powered remittances haven't taken off. Nobody trusts new things.
If you are a bank, a private blockchain may offer a few benefits to you in settling payments between your intermediaries or other banks.
However, when other currencies are involved, the lines get blurred, and there is no way to avoid the global FX markets.
If you have a tokenless blockchain (that is, a unit of account that does not have a floating open market price), there is no 'value' to transact across borders, it is merely a database entry on either your system or your connected intermediaries' – and this is possible without a blockchain.
If you have a blockchain with an underlying value token, you need buy-in from entities in your private blockchain system other than yourself to act as counterparties and, regardless of how you structure it, it will never be as liquid as the global FX markets.
There may be a case to be made for exotic currencies (which are not currently traded or adequately connected to global FX markets), but settling payments across currency pairs requires liquidity.
A private blockchain requires buy-in from entities other than yourself, so the solution may be to setup a consortium to debit and credit balance between consortium members using a blockchain as an asset-tracking database.
Consortiums in this space that might be set up to debit and credit payments between each other are an efficient way of settling payments, but it requires everyone to be on the same page (or ledger).
What Does Work
Central bank blockchains
I have previously theorized that the use of a blockchain-type system is inevitable for central banks – it offers them the control and oversight they require, while also removing inefficiencies in the existing monetary system.
All private banks dealing in a national currency would also be participants in the blockchain and be running the same ledger – any transactional payment metadata can be associated with the blockchain transaction is built into the currency itself.
This provides the benefits of a consortium described above (all on the same ledger debiting and crediting balances on the ledger) and also effectively handles end-of-day clearing.
Central banks are not innovators (to say the least), so it will be slow for this to catch on. But I would argue such a move will be inevitable, as it aligns with their goals: more control over monetary policy and better oversight of their licensees.
Various central banks have been talking about blockchain pilots and, as competition between jurisdictions in this space heats up (we are already seeing this with various 'FinTech rankings' of regulators), more are likely to follow.
Using a token of value
Physical money transfer shops have customers because they are trusted entities dealing with physical cash.
Today, there are a few bitcoin-and-cash startups around the place, but we believe there is space for 10x more of them, in every country, in every currency.
But, these brokers need to have access to local forms of payments. Maybe people in one country predominantly get their cash and pay bills, whereas other countries people pay with prepaid RFID cards.
Whatever the payment method, it's important to have companies on the ground who understand this and can offer their services using the local mechanisms, while accepting bitcoin in exchange for these localized payments.
The problem bitcoin solves here is reducing capital requirements.
With bitcoin you don't need to take a $10m position to batch a small payment. You can transfer each individual $200 transaction individually for close to no cost internationally. Game changer!
What if I want 5,000 Liberian dollars right now, how can I make that trade? Normally it requires various antiquated in-country mechanisms, bank contacts, accounts, shaking the right peoples hands and ultimately settlement through the US dollar – a very time-consuming and costly process.
However, bitcoin is traded 24/7 around the world at the touch of a button.
The ‘last mile’ is an essential part of this, and in our case, we connect all the existing last-mile providers and act as the bridge between them.
We don't seek to disrupt their business, but to offer them new efficiencies.
One of my favorites for a while now has been pegged cryptos, particularly the decentralized kind, like Nubits. (While the Nubits project has had some hiccups of late, I think the idea is intriguing.)
Essentially these pegged cryptos are a token of value that adjusts automatically to market conditions to maintain a peg to a chosen fiat currency or commodity.
However, it only works if its decentralized. If I have to trust any company or single entity along the way for a pegged crypto it becomes uninteresting and subject to all the common problems associated with holding customer funds.
But, having 180 parallel FX assets can't be understated, this will be huge.
If it costs me nothing to trade into and out of a token of value for exotic currencies, this will be a massive boon to the remittance industry.
So, there you have it. The truth about bitcoin remittances is that the digital currency can and already does bring value to the remittance industry.
It's providing a solution for trading into and out of exotic currencies.
As a token of value it is reducing barriers to entry, simplifying back-office work for new companies in the space, and at the end of the day, providing superior pricing to end users – even when taking into account the last mile.
As more people realize this, we believe we're in for exciting years ahead.
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