Given the high cost the remittance services, it's no surprise that many in the bitcoin industry take its potential in the space for granted. After all, its underlying technology offers anyone the ability to conduct low-cost, peer-to-peer payments without restriction.
Due to the power of the technology, it can sound like the traditional remittance market is already dead in the water. However, what's not often considered is that the technology might not be allowed to reach its full potential.
According to Andrew Brown, head of compliance at cross-border payments specialist Earthport, the current high fees in the traditional remittance market aren't just imposed by greedy service providers.
Brown believes much of these charges come from the added costs of compliance and regulation, costs that won't just disappear when bitcoin businesses enter the market. His prediction in light of this estimation is grim:
Although Brown doesn't specialize in digital currency, testimonials from bitcoin entrepreneurs in the field suggest similar difficulties, if less dire, conclusions.
Tomas Alvarez, CEO of bitcoin remittance startup Coincove, for example, was forced back to the drawing board on his bitcoin remittance plans after being regulated out of the US market.
As Alvarez's story shows, bitcoin businesses are potentially facing a long, uphill battle on the remittance front.
The high cost of failure
Perhaps most notable of Brown's concerns was that current regulation poses a formidable barrier even to new traditional remittance businesses. For example, Brown notes that the banking networks that service remittance providers are increasingly deciding not to serve aspiring entrants.
Brown cautioned that bitcoin can't be seen as the "weak leak" when it comes to money laundering, a criticism that has been prevalent of bitcoin among law enforcement officials:
Brown also discussed how banks are pulling back from servicing accounts for cash remittances due to heavy fines, in particular he noted that the UK to Somalia service has badly impacted the Somalian communities.
The catch-22 inherent in the current system was perhaps summed up by Forbes, when it wrote:
Mexico, one of the markets in which Coincove is working, for example, has very strict AML guidelines due to the local drug trade, and high penalties for non-compliance. But, Alvarez said that he believes Coincove can adapt around this challenge, saying:
Coincove is not considered a money business in Mexico, but it is following the guidelines as a preemptive measure, Alvarez says. Due to these steps, he says his group is now working with domestic payment processors and banks.
, a risk and compliance expert who serves on the Bitcoin Foundation's regulatory affairs committee, however, notes that compliance is different from the risk of money laundering.
He told CoinDesk: "You can be non-compliant and still have low money-laundering risk because of the nature and size of your business."
Due to these differences, Brown says, regulators will not provide bitcoin remittance businesses with the free reign they may need to innovate.
Alvarez echoed this danger. Coincove is now operating in Latin America, due in part to its slow response on digital currency regulation, providing it exactly this testing ground.
However, as an early market entrant, he sees an opportunity to influence regulation through eventual dialogue in these countries.
Brown acknowledged that companies that facilitate remittances between certain lucrative markets may be the most likely to take hold, provided the legislative framework is complementary, and so far Coincove provides evidence to this claim.
However, as Alvarez indicates, it still finds itself locked out of the US, the largest sender of remittances, so such arrangements are inherently limiting to the expansion of his business.
Llanos was more optimistic than Brown, noting that technology always outpaces regulation and that, although there will be challenges ahead, bitcoin can find a way to overcome them.
Still, he mentioned similar challenges to those cited up by Brown, indicating that both Western Union and a new bitcoin remittance startup with no customers and no volume, would still be expected to meet the same licensing and anti-money laundering requirements.
With the right know-how and resources, he says, licensing can be achieved, but the inability to obtain banking services is yet another hurdle. However, Llanos suggested that the entire financial industry – from remittance to prepaid card providers, is facing these challenges:
Furthermore, even once banks get on board, liquidity is another obstacle – due in part to the nature of the markets in which remittance businesses operate. Llanos explained:
What lies ahead
Of course, given that bitcoin can be transmitted freely by users without boundaries, it remains unclear exactly what function bitcoin remittance businesses would provide consumers.
Alvarez, however, disagrees with this notion. He believes bitcoin remittance companies will be essential, especially in the early stages, as there is very little overlap between his target market and current bitcoin users.
As for when Alvarez may be able to reach such a goal in a cost-effective manner, Llanos says that is a matter bitcoin's proponents will ultimately decide.
Even though he supports this burgeoning industry, Llanos questions whether more traditional remittance businesses based on bitcoin will be necessary given the technology's ability:
Remittance image via Shutterstock
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.
Learn more about Consensus 2023, CoinDesk’s longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.