In the midst of a crypto winter, cross-border payments are a potential lifeline
The digital currency industry is facing a crypto winter, but payments could be a potential source of … [+]
For the thousands of crypto-first companies that have emerged in recent years, the current crypto winter is a significant test of their businesses.
Bitcoin
This has inevitably affected the bottom lines of those in the room. For example, Block subsidiary Cash App, which makes much of its money from a service that allows customers to buy, sell and send bitcoin, saw its bitcoin revenue shrink by 35% between Q2 2021 and Q2 2022.
At the same time, the regulatory environment is becoming more challenging. The US is expected to increase regulations on crypto following the release of a framework for the development of digital assets by the White House. Meanwhile, in the UK there are plans to increase the government’s ability to seize, freeze and recover crypto.
With little sign of winter’s end, many crypto players are looking to other opportunities for profit, including in more traditional areas of finance. And one area of remarkable potential for crypto is cross-border payments.
Crypto in cross-border payments: Not a panacea
For a few years now, there has been a claim that crypto payments are cheaper, faster and just generally better than traditional cross-border alternatives. The reality is considerably more complicated and far from clear-cut.
While crypto payments are in theory instantaneous, the process of setting up a transfer, moving it between wallets and converting it back to fiat can add time. In contrast, there is a wide range of conventional money transfer solutions that are also immediate or almost immediate in most corridors.
Meanwhile, it can also be argued that crypto is cheaper in terms of costs. When the price of crypto is increased, the focus is generally on the cost of buying or selling crypto, which is usually very low. But for money transfers, there is also the cost of moving the crypto from one wallet to another, often a much higher amount that is ignored in many requirements.
My own firm’s research on this topic has shown that while crypto-based cross-border transfers can be made at a lower cost than through conventional remittance or remittance providers, this is only possible with certain combinations of companies, and for some the price is comparable to traditional methods.
But beyond this, there are genuine benefits to crypto for payments – and these are what give it a place in the market.
The benefits of digital currencies for cross-border transactions
Although it is very challenging to determine the exact numbers that do, we do know that cryptocurrencies like bitcoin are used by people to transfer money in parts of the world with particularly volatile currencies or those with significant cross-border restrictions.
At first glance at the volatility point, this seems surprising – even the most volatile currencies are less volatile than cryptocurrencies such as bitcoin and ether over a two-year period. However, when we look at volatility over shorter time periods, there are windows where cryptocurrencies are less volatile than certain fiat counterparts, such as the Sri Lankan rupee. As a result, crypto provides a relatively accessible alternative during these periods.
Beyond this, however, there are benefits for money transfer operators who are seeing some people start to explore the technology. A good example of this is MoneyGram, which now, alongside its conventional money transfer service, offers a global crypto-to-cash network through a partnership with blockchain provider Stellar
This enables customers at their outlets to buy stablecoin USDC
The project provides a new way to access the crypto space – especially for those who lack access to traditional banking facilities – but it also has an advantage for MoneyGram over conventional transactions: settlement.
When a traditional money transfer is sent, it will be ready for the recipient to collect immediately from their local branch, even if it is on the other side of the world from the sender. However, MoneyGram will see the settlement of the transaction – that is, the money is moved from their account in the sender’s country to the one in the recipient’s country to cover the amount paid out – some time later.
In contrast, when a cryptocurrency transfer occurs, the settlement is truly instantaneous – meaning that for the first time, when the company pays out to the customer, it already has the money in its account. This is convenient from an accounting point of view, but it has significant implications for risk in cross-border transactions, especially across areas of particular volatility.
It’s these kinds of benefits that will ultimately make crypto a worthy addition to cross-border payments – not promises of cheaper, faster payments without a clear sense of the genuine speeds and prices in the market. And for companies looking to diversify their crypto offerings, offering services to the payments space is a worthy area to explore.
When it comes to currencies that have restrictions on moving the money out of the country, including large countries across the globe such as Argentina, China, India or Nigeria, the reasons for using cryptocurrency for cross-border transfers seem more obvious. These movements outside the traditional fiat currency segment are a challenge for the central banks of these countries who, by definition, like to retain control over their currencies. However, central banks are exploring their own solutions to this problem.
Central bank digital currencies: The next step?
While companies in the payments space are exploring crypto for cross-border payments, central banks are also looking at their potential in the form of central bank digital currencies (CBDCs). Crucially, these are not the same as regular crypto, but are a digital version of traditional fiat currency – and although they are often run on the blockchain, this is not decisive.
State-backed and run by a nation’s central bank, they have the potential to combat fraud and money laundering, as well as potentially increase financial inclusion. Depending on how they are set up, they can also have powerful benefits for cross-border payments, dramatically improving the payment infrastructure for bank access, thereby increasing speeds and lowering costs, especially in areas of the world where cross-border payments via banks are still slow and expensive.
Many central banks around the world are currently exploring CBDCs, but they take several forms. Some are developing wholesale CBDCs for the exclusive use of financial institutions, which will be designed for interbank transactions and financial settlement. Others are developing retail CBDCs, which will be used by businesses and individuals in much the same way that non-digital fiat currency is today, but with added transparency and inclusion benefits.
There are projects around the world exploring both versions, with the majority of nations having a CBDC project in one form or another. However, the number of launched CBDCs is extremely limited – mainly to smaller countries where they solve specific local problems – and interoperability projects to connect CBDCs remain largely in the research phase.
While there is potential for CBDCs at some point in the future, they are not the answer to the current crypto winter, nor the immediate shortcomings of cross-border payments. We have a generation of development in payments before CBDC can become the dominant model, and crypto can play a role in filling that gap.
