News | October 01, 2021, 14:14 PM | The content is supplied by a Guest author
Remittances are a major component of the global economy. In 2020, the total remittances to low and middle-income countries declined by just 1.6% despite the Covid-19 pandemic. In total, these countries received more than $540 billion in 2020 and the amount is set to rise in 2021.
Disruption of remittances industry
The remittances industry has faced substantial disruption in the past few decades. For example, technology has enabled people to use wire transfers completely online. One does not need to visit a local bank branch to complete the transaction. Another area of disruption is the rising number of technology-enabled money transfer companies. Companies like Wise, PaySend, and Remitly have disrupted the industry by removing some of the previous barriers and focusing on transparency. Meanwhile, money transfer comparison companies have come up to help consumers find the overall price of sending money in bulk.
Cryptocurrencies and remittances
At the same time, cryptocurrencies have also helped to disrupt remittances. For starters, cryptocurrencies are products built using blockchain and decentralized ledger technology. Unlike fiat currencies like the US dollar and the euro, cryptocurrencies do not have a centralized authority like a central bank.
Instead, new coins are minted using a proof-of-work (PoW) and proof-of-stake (PoS) technology. In a PoW mechanism, users create new currencies by solving complex mathematical calculations using high-powered computers. In a PoS process, new cryptocurrencies are developed using validators from around the world. Cryptocurrencies hope to solve several challenges, including remittances. The most prominent cryptocurrencies that aim to address the industry directly are Ripple (XRP) and Stellar (XLM).
Ripple and remittances
Ripple is a leading blockchain project whose native token is the XRP. Developed by Ripple Labs, Ripple partners with banks and other fintech companies to offer its services. Its core product is known as the On-Demand Liquidity (ODL). The product leverages the technology offered by XRP to deliver instant cross-border payments without the need for pre-funding. XRP acts as the bridge between the two currencies.
In the past few years, the number of companies embracing the power of Ripple and XRP has increased substantially. Some of them are Azimo, SBI Holdings, Santander, TransferGo, Ria Money Transfer, and Tranglo among others. So, should I buy XRP? While Ripple’s technology works, the platform faces a key challenge considering that the Securities and Exchange Commission (SEC) has sued the company. The case has been dragging in court this year and there is uncertainty about when the verdict will come out.
XRP is currently the sixth biggest cryptocurrency in the world with a market capitalization of more than $62 billion. It has become a popular digital currency even though most exchanges have barred it because of the SEC lawsuit. Therefore, there is a likelihood that the XRP will see more demand if the company and the SEC win or settle the suit.
XRP transactions are also relatively cheaper than those of highly congested cryptocurrencies like Bitcoin. For example, Bitcoin has an average transfer fee of more than $20, making it relatively higher than that of XRP. Other cryptocurrencies like XLM, ADA, and Polkadot have substantially low transaction fees.
Are cryptocurrencies a better alternative?
Recent surveys show that the number of people using cryptocurrencies to send money abroad has increased substantially. Many of them prefer using cryptocurrencies for several reasons, including privacy and lower fees. They are also ideal options for sending money in hard-to-reach countries like Iran, Cuba, and Venezuela.
However, one of the biggest risks for using cryptocurrencies in remittances is volatility. Digital currencies like Bitcoin and Litecoin are widely known for their volatility. Indeed, it is not uncommon for their prices to drop or rise by more than 5% within a few hours. This challenge is being solved by stablecoins like USD Coin and Tether that are backed by fiat currencies. Another risk is related to regulations. Many countries are currently assessing the industry and coming up with regulations. China has taken a proactive role in all this. Recently, the government announced that all cryptocurrency transactions were illegal in the country.
CBDCs, DeFi and remittances
Another key blockchain-enabled service that could change remittances is known as the Central Bank Digital Currencies (CBDCs). CBDCs are digital currencies that are being built by central banks. Several key central banks like the People’s Bank of China (PBOC), European Central Bank (ECB), and Riksbank in Sweden are all developing a digital version of their currencies. China has already started testing its currency.
Analysts believe that these CBDCs will have a positive impact on remittances. In a recent report, the Bank of International Settlement (BIS) said that these currencies will deliver “faster, more transparent, cheaper, and more inclusive cross-border payment services.” Still, it is relatively early to tell whether these CBDCs will work on a global scale since most of them are being tested locally. China is using local companies like Ant Financial to test the system. For the currencies to work, the BIS report recommended that interoperability will be key.
Another section of cryptocurrencies that could redefine remittances is decentralized finance (DeFi). DeFi is an industry that is removing barriers that exist in traditional finance. For example, instead of using a centralized finance company like Wise, one can use one that is run autonomously.
Cryptocurrencies are slowly changing different areas of traditional finance. For example, DEXes like Uniswap and PancakeSwap have become popular alternatives to centralized entities like Coinbase and Binance. Similarly, blockchain projects like Ripple and Stellar are changing how people send money across different countries.