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How crypto is changing remittances

Cryptocurrency is believed to have massive potential when it comes to changing the way the world sends and receives remittance payments. This article considers why that’s the case.

27 Oct 2021by Geoffrey Lyons

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If you’ve been in this space long enough you’ll undoubtedly have come across the argument that cryptocurrencies will help solve some of the problems around cross-border remittance payments. But how exactly? We take a closer look at remittances and where crypto might play a useful role. 

What are remittances

From the Latin remittere "send back”, a remittance is a non-commercial payment made by someone living abroad to family in his or her home country.  

In countries like the US and UK, there are few incoming remittances since these rich countries are often the source of such payments. But in developing countries, such as India, Lebanon, and Nigeria, remittances make up a sizable portion of GDP. 

In Somalia, for example, remittances account for over a third of the country’s income, and in Tonga, four of five households receive remittances from abroad. So while most people living in developed countries pay little mind to remittances, globally they’re a huge source of income. 

A Statista chart showing the top-10 remittance-receiving countries.
India and China top the charts for the amount of money received in remittances (Image source)

In fact, according to the International Fund for Agricultural Development (IFAD), over 70 countries rely on remittances for more than 4 per cent of their GDP. The IFAD is an institution that works on food and agricultural issues, so why is it reporting on remittance statistics? Because as stated in its research, over half the world’s remittances are sent to rural households where 75 per cent of the world's poor and food-insecure live.

This goes to show that not only is the scale of global remittance payments noteworthy, so too is the fact that they remain a crucial lifeline for millions of people. 

How remittances work

Remittances are typically paid in a local currency to what’s called a Money Transfer Operator (MTO). The MTO then tells its agent in the recipient country to deliver the funds, which the payee collects in his or her home country currency. 

For example, a Malaysian in New York City might pay an MTO $200 (according to the UN, the average remittance payment is $200-$300 every two months), which will then instruct its agent in Kuala Lumpur to deliver the funds in Malaysian ringgit. 

A picture of an international money transfer point. 
Money Transfer Operators (MTOs) typically charge fees for sending money abroad (Image source)

But here’s the rub: the payee won’t actually receive $200 worth of Malaysian ringgit. MTOs will charge a fee, typically to the sender, averaging 5.2% of the transaction. And then there’s also a currency-conversion fee, and, for some operators, a fee for the recipient. Add to this the exchange rate margin, and the payee is left with a full 7% shaved off the initial payment

In practice, then, global remittances can more accurately be described as payments made by someone living abroad for which the recipient gets only a portion

Enter crypto

One of the most notable features of cryptocurrency is that it cuts out the middleman. Crypto can be freely transferred without the need for a bank or other third party intermediary, which in the case of remittances are not only the MTOs facilitating (and profiting from) payments, but also the software providers through which they operate.   

Of these providers, Western Union dominates the market. The Abu Dhabi-based UAE Exchange is a distant second, accounting for about a third of the Western Union’s cross-border transfer volumes (see chart). 

A chart showing Western Union’s dominance of the remittance market.
Western Union dominates the remittance market (Image source)

With such few players commanding the space, any decisions from on high can have enormous consequences. Around this time last year, for example, Western Union shut the doors of its 407 locations across Cuba in the wake of President Trump’s sanctions on the country. 

“The problem is not the closure of Western Union,” said director of the Center for Migration and Economic Stabilization at Creative Associates International, Manuel Orozco, to NBC News, “but that Western Union is practically the only U.S.-to-Cuba provider of remittance payments.” 

In August, the company also decided to suspend services in Afghanistan until the political turbulence there subsided, cutting off remittance flows when they were arguably most needed. 

And who could forget Venezuela, where remittance payments have boomed as a result of people fleeing the Maduro regime? Had software providers and MTOs decided to close shop, this would have pulled the rug out from under an already beleaguered population. Crypto is therefore a safe alternative to financial institutions that are subject to disruptions in the face of political turmoil. 

A picture of a rural woman with her child. 
Crypto is often touted as a means to “bank the unbanked”, providing financial access to millions of people around the world (Image source)

It’s also an attractive option to people who don’t have bank accounts. It’s estimated that 1.7 billion adults (over a fifth of the world’s population) are unbanked. Crypto won’t be the only solution to this problem, as there are many factors that account for it, but it has the potential to be the greatest driver of financial inclusion the world has ever seen. In the case of remittances, it will allow people who previously had no financial presence online to send and receive payments anywhere in the world. 

But it’s pointless to speculate about crypto remittances when there’s already first-hand experience of how they work. For example, columnist José Rafael Peña Gholam, who covers cryptocurrencies in Venezuela, writes that sending crypto abroad is a simpler process than working through traditional MTOs. “I’ve sent [crypto] from Venezuela to family members in Colombia and Spain,” he writes. “These transactions are often faster and cheaper than their traditional finance counterparts, with fewer steps to send money, at least if you know how to take advantage of the platform.” If crypto can provide easy access to remittances and be simpler and cheaper than MTOs, then it’s hard to imagine this emerging technology not playing a major role in future cross-border payments. 

In fact, crypto might play such a big role that the very idea of a remittance will become an anachronism. As former Coinbase UK CEO and MoonPay’s Chief Growth Officer Zeeshan Feroz argues, remittances are an “artefact of our current financial system.” 

“They divide payments into domestic vs. cross border,” he says. “Crypto transfers do away with this two-tier system as all transfers are executed at the same speed and cost, regardless of the recipient’s location.”

In other words, crypto might not only change remittances, it could replace them. 

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