Blockchain’s utility for international payments
Even in 2017, many people often confuse a cryptocurrency like Bitcoin or Ethereum with Blockchain and vice-versa.
Blockchain, simply put, is the underlying technology of cryptocurrencies. The technology gave the ability to send funds from one part of the globe to another instantly and in a seamless way, using cryptocurrency.
The most disruptive feature of blockchain technology was removing the necessity of traditional banking infrastructure for fund transfers. The motivation for Bitcoin itself, the first cryptocurrency, was to be a peer to peer digital money to be used online and without any intermediaries.
Given the nationless nature of the digital world, blockchain technology is an obvious contender in the global remittance market – the sending and receiving of international payments.
Cryptocurrencies for Fund Transfer
Cryptocurrencies like Bitcoin and Ether are global by definition. Fund transfer applications built on top of these networks provide the complete end to end lifecycle of the transaction without depending on any third party.
Fund transfer is instant on blockchains and as the cryptocurrency market is getting mature, there is hardly any price difference in different geographies. All that a sender and receiver needs is a mobile application. Given WiFi and mobile data penetration in the world, remittance is easily done with cryptocurrency.
The only dependency required for cryptocurrency-based remittance is an exchange or a converter which gives local currency, or fiat money, for the cryptocurrency.
As well, with more positive regulation that is encouraging widespread adoption of blockchain and cryptocurrency, there is now at least one major cryptocurrency exchange in every part of the world. Unocoin, for example, is India’s biggest bitcoin exchange. While it took over two years to add its first 100,000 users, it took just six months to add the next 100,000 users.
Naturally, fintech startups were attracted to build innovative remittance products in order to grab a piece of the reported $500 billion global remittance market.
Incumbent financial services firms soon realized the disruptive potential of blockchain and decided to adopt and embrace it rather than being left behind.
It was a tricky situation for the incumbents as implementation of blockchain solution would have taken away their own transaction fees. However, incumbents charged customers since they themselves were spending tremendous amounts of money on settlement and clearance. Given that Blockchain lowers the costs associated with settlement and clearance, banks could become more competitive in this space.
Traditional Vs Blockchain based remittance
When funds are remitted from one bank to another then the backend process is lot complicated than one may think.
Each bank, central bank, and clearance system has its own IT infrastructure ecosystem and transaction goes through from one system to another. This adds time delays and high transaction fees, especially when sending funds to developing nations with poor IT based banking infrastructure. There are separate settlement and clearance hubs. Even the ledgers of each bank are completely different.
Blockchain solves this issue, as each blockchain based remittance product align itself with one particular blockchain network and that blockchain network has its own global currency (Eg: Bitcoin Blockchain network uses bitcoin currency for remittance). All the hubs have the same role and equal authority, which keeps friction at a minimum and reduces complexity.
Blockchain networks for remittance
Ripple is another such blockchain network designed for the sole purpose of international payments or remittance. The native cryptocurrency of this network is called ‘ripples’ and abbreviated as XRP.
Ripple is an all-in-one solution for real-time gross settlement system, currency exchange and remittance network with better governance than Bitcoin’s network, faster confirmation times, and lower transaction fees.
Signaling another move by a cryptocurrency on a blockchain network tackling the remittance space outside of Ripple, Ethereum, and Bitcoin, IBM recently partnered with another cryptocurrency called as Stellar to provide cross border payments.
Blockchain is not going to fit for every need and use case, however impactful the technology may be. That being said, it has the potential to cause major disruption and replace all the intermediaries for the use cases where it is applicable, such as remittance.
For the remittance market, the major benefits of Blockchain solution are:
- Save time and costs: Transactions are instant with relatively low transaction cost no matter the size of the transaction.
- Immutable audit trail of all transactions: Blockchain transactions are tamper proof and stored for ever, satisfying government regulations in this space.
- Privacy and security of data: Blockchain is one of the most secure technologies available, keeping the identity of sender and receiver fully pseudonymous.
- Transparency: Blockchain’s design is fully transparent, where each transaction is fully auditable.
Today, we have non-blockchain based remittance products which addresses some of these points, specifically the transfer being immediate. However, the backend systems and processes are pretty much still the same, leading still to the susceptibility of data breaches and a single point of failure.
As governments continue to tackle issues of transparency and money laundering internationally, and as banks look to streamline their international payments systems, blockchain stands out as a solution to all the challenges incumbents and governments are currently facing.
Image credit: Wikimedia Commons
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