How do crypto cross-border payments work?
These transactions are executed using blockchains — eliminating the need for banks, who often slow payments down substantially.
Let’s imagine that you’re in Spain but want to send funds to Africa. The first step involves converting fiat currency into a digital asset of your choice. A wide range of websites and platforms exist that serve as an “on-ramp” — meaning purchases can be made using bank transfers and credit cards.
This cryptocurrency can be held in a secure wallet. When it’s time to make a transfer to your friends, they can give you the address for their wallet — comparable to the account number you’d get at an old-fashioned bank. These addresses can contain dozens of characters, so transcribing them carefully is crucial.
Once funds have arrived in an account, the recipient has several choices. They can either convert the crypto to fiat and withdraw it, or swap it for a less volatile digital asset such as a stablecoin.
What advantages does crypto offer over fiat?
It’s cheaper and faster… and could also help clamp down on money laundering.
There’s a lot of excitement surrounding how crypto could transform cross-border payments as we know it — making remittances, where workers in foreign countries send funds to their loved ones back home, much less expensive.
At present, the World Bank estimates that remittances sent through fiat channels result in average fees of 6.75%. For someone on a modest income, this can take a substantial chunk out of their earnings. Although this is less than the 9.67% charged in 2009, there’s still a long way to go. In the early 2010s, the G8 and the G20 set a target of slashing remittance costs to 5% — and the United Nations’ Sustainable Development Goals also set a target of 3% by 2030.
Cryptocurrencies could help these goals be realized much faster. According to figures from Deloitte, blockchain has the potential to reduce transaction costs by 40% to 80%. But the advantages may not end here. Currently, it can take three to five business days for funds to clear through old-fashioned wire networks — not ideal for someone who needs money in a hurry. But on certain blockchains, it’s possible for payments to be confirmed in seconds.
The advantages may not end here. As Deloitte notes, blockchain transactions can be data rich — meaning that metadata can be transmitted from end to end. All of this can help clamp down on money laundering and terrorist financing, two areas of concern for regulators. Many crypto platforms have introduced Know Your Customer checks to verify users, too.
One crucial benefit that cryptocurrencies can offer is unlocking access to financial services for the unbanked. Research suggests that 80% of consumers in sub-Saharan Africa fall into this category — and worldwide, a total of 1.7 billion people don’t have a bank account. There can be a multitude of reasons for this. Financial institutions may not operate in their geographic area, these services could be too expensive, or consumers may have a lack of trust.
How much money is sent around the world using crypto?
Digital assets have a modest market share of overall cross-border payments — but demand is growing.
According to Juniper Research, international digital remittances are set to surge to $525 billion by 2024… a 102% rise from where they were in 2019. This figure includes fintech platforms that solely deal in flat.
“Utilizing a blockchain-powered network, operators can offer their users a much faster, cheaper and more transparent service,” the authors said.
This view has been echoed by BlockData, which recently revealed that blockchain-based transactions are typically 388 times faster and 127 times cheaper than traditional remittances.
It’s a fast-moving industry, and it’s difficult to put an exact number on the volumes of cross-border payments made using crypto. However, figures from Clovr showed that 15% of those who made remittances from the U.S. in 2017 used a digital asset such as Bitcoin — making it more popular than prepaid cards, checks and cash. When it comes to business-to-business payments made via blockchain, this figure stood at $171 billion in 2019, but Juniper Research estimates that this will exceed $4.4 trillion in just four years’ time.
What are the downsides to using crypto?
The likes of Bitcoin often get criticized for being too volatile, and some say blockchain technology is too difficult for everyday consumers to understand.
It’s important to note that there’s one factor that will determine whether or not crypto-based cross-border payments are cheaper: the digital asset that’s being used.
Making transfers using Bitcoin and Ether can be expensive, especially during times of peak demand. Ethereum has been overwhelmed by transaction volumes on multiple occasions over the years — fueled by a rise in demand for collectible cats and decentralized finance. Addressing scalability concerns is going to be crucial if cryptocurrencies are going to be used more widely for remittances. Ripple, which doesn’t have a blockchain, offers solutions that are designed to make cross-border payments less expensive through the XRP asset. Several banks are already on board, and Ripple claims that it can process 50,000 transactions per second.
Crypto will only help to solve financial inclusion provided that those who stand to benefit most from remittances can be educated about how digital assets work, and have access to internet-enabled smartphones so they can access their funds. There are reasons to be optimistic here. As we mentioned earlier, 80% of consumers in sub-Saharan Africa are unbanked, yet 91% own a mobile phone — and smartphone adoption is rising. On the continent, mobile payments are also exceedingly popular, meaning that the leap to crypto-based transactions may not be a big one.
The final challenge concerns regulation. Industry executives have warned that more crypto regulation is coming, with the European Union recently announcing plans to comprehensively monitor the market in just four years’ time. This doesn’t necessarily mean that a ban on digital assets is on the horizon — indeed, many lawmakers have acknowledged that they can have advantages in reducing the costs associated with cross-border payments. As a result, some are exploring whether they should launch their own central bank digital currency.
CHANGELLY Partnership material