Can bitcoin still provide a truly cheap money-sending service?
While the idea might be out of favor in some circles, London startup Cashaa is now using bitcoin price differentials – the same feature long used as evidence for why it wouldn't work as a currency – to deliver a novel payments product.
Founded in 2016, the service works by connecting traditional remittance participants with two traders, each of whom are able to execute bitcoin-fiat trades in each local currency. Due to price arbitrage opportunities that exist in the global crypto markets, the traders using Cashaa are able to make a profit while filling Cashaa's order book.
The system works because bitcoin prices tend to be higher in markets that are receivers of remittances, and because of the availability of digital currency exchanges in a range of markets.
As explained by Kumar Gaurav, the CEO of Cashaa, there is an ongoing price differential between the UK bitcoin market and the Indian and Nigerian bitcoin markets where Cashaa currently operates.
"We consistently see a 3–4% spread between UK and India, and 8–11% spread between UK and Nigeria," he said in interview.
Gaurav told CoinDesk:
While limited in jurisdiction today, Gaurav believes the service can be deployed between any two markets where a bitcoin arbitrage opportunity exists.
Bitcoin in the background
Behind the scenes, Cashaa is split into two systems.
One is the traditional remittance service. Here, the remittance user sees the market exchange rate between local fiat and receiver's fiat. There are no fees to send the money (Cashaa charges £1 in order to guarantee execution at a fixed exchange rate, otherwise, the rate is floating based on the market price).
The sender can pay either via cash or bank account, and the receiver can accept money either via cash or bank account.
"The end consumer seeking to send money home doesn’t even need to know what bitcoin is," Gaurav explained.
The second system (working behind the scenes) breaks up the remittance order into two trades against bitcoin. Each of these is put into an order book that can be picked up by the traders.
The first leg is converting between sender's fiat into bitcoin, and the second leg is converting between bitcoin and receiver's fiat. Each of these traders can make a profit by filling these orders, since the bitcoin price in receiver's fiat is higher than the bitcoin price in sender's fiat.
Traders must put 10% into escrow, which is forfeited if they accept an order and don’t fulfill it. This helps guard against bitcoin price volatility and order cancellation.
Of course, a number of companies are tackling the remittance market using bitcoin, but there are a few features that stand out with Cashaa.
One is the ability for Cashaa to process cash payments by the sender. This makes up a bulk of the low amount remittance market currently held by companies like Western Union.
Further, Cashaa is able to process the whole payment chain without the sender or receiver ever having to interact with bitcoin, which means they are able to truly use bitcoin in the background, Gaurav said.
Cashaa is currently working to sign up remittance agents to the service, firms that today use existing players like Western Union to transfer money.
In this model, the savers will still go to the same agent, but the agent, instead of using Western Union, would use Cashaa to save money on fees. The savings are then split between the consumer and the agent.
"The agent, the receiver, and Cashaa all make a profit," Gaurav said, concluding:
Historical globe 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.