Attitudes towards cryptocurrencies are changing across the globe as crypto enthusiasts start to realize its potential across a myriad of applications. One such application is its role in global remittances, where those bullish on the value of crypto see it potentially usurping the role of traditional money transfer providers, writes Kate Anderson.
While the emergence of digital remittances has bolstered the international money transfer market, it is still imperfect. Online money transfer providers have given those looking to send money abroad an alternative to their local bank. But the sector is still plagued by high fees and lengthy delivery times.
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Finding a cheaper and faster method to remit money has therefore become key for countries that rely on these funds to pay for essential services. In Finder’s Cryptocurrency Adoption Index, 9 out of the top 10 countries most reliant on remittances ranked highly in terms of crypto-positivity. But while there are potential benefits to using cryptocurrency for remittances, there are still significant risks involved.
Crypto's Role In Remittances
Cryptocurrencies being used for remittances are nothing new. The decentralized nature of blockchain technology has attracted users looking for more reasonable exchange rates and cross-border payments free of third-party intermediaries. And crypto exchanges have responded by expanding into this new area. For example, Coinbase launched a pilot in February 2022 that let users send crypto remittances to beneficiaries in Mexico. Additionally, several blockchain start-ups that facilitate Bitcoin remittances have emerged in recent years including the likes of Satoshi Citadel Industries, AZA Group and Bitso.
And there is fertile ground for such services in countries where a high percentage of their GDP is made up of remittances. The Philippines, where remittances account for 9.7% of GDP, ranked fifth in terms of positivity towards cryptocurrency adoption. Meanwhile, in Nigeria, where 4% of its GDP is made up of remittances, 87% of Internet users think investing in cryptocurrency is a good idea. The correlation between those nations that heavily rely on money sent from overseas and a positive attitude toward digital currencies indicates that there is strong demand for crypto remittance services in these markets.
Why Crypto Remittances Have Gained Traction
One of the major issues for people sending remittances overseas is the high costs involved. Fees can add up quickly and eat into the total amount of money being sent abroad due to the number of parties involved in the process. Data from the World Bank suggests fees average 5–7% of the total transaction, depending on the method used. For recipients who rely on these funds for their living expenses, transfer costs can significantly reduce how much money they receive.
The emergence of cryptocurrencies and the continued steps towards mass global adoption have created new routes that look to rival those of more traditional financial services. As with most things, when there is demand, someone will cater to it. And due to existing issues with the global remittance market, it’s no surprise countries where large numbers of people depend on money sent from overseas are beginning to look for alternative methods.
One of the biggest perceived advantages of using digital currencies for remittances is reduced transaction costs. Lower fees combined with fewer parties involved can keep costs lower than some traditional money transfer services. Cryptocurrency also lends itself to larger transactions, as there tends to be higher maximums for how much you can send. Meanwhile, some developing nations have seen an advantage in using cryptocurrency to hedge against high inflation or combat a weak local currency. For example, El Salvador adopted Bitcoin as legal tender in 2021.
Will Crypto Usurp Traditional Remittances?
It is unlikely that using digital currencies for remittances will usurp traditional money transfers in the near future, but there are advantages working in its favor. Cheaper fees, faster transaction times and access to markets that can be difficult to send to all stand out. The concept has definitely taken hold in countries that do not trust their government or financial institutions. Those countries with high levels of perceived corruption appear to view cryptocurrencies more favorably. Digital currencies appear to be more appealing in regions that have low trust in established financial institutions.
However, one of the biggest blockers for crypto remittances usurping traditional money services is significant restrictions on digital currencies in certain markets. For example, in India, where remittances account for 3.2% of GDP, the government has actively discouraged crypto trading by imposing a stiff levy on transactions. As a cash-dependent country, India has recognised how cryptocurrencies stand to make transactions more efficient. But it’s also concerned about the risks of money laundering, terrorist financing and price volatility. As a result, it has introduced a steep tax rate to discourage trades.
There is also a stumbling block in knowledge gaps surrounding cryptocurrency transfers. In order to take advantage of crypto remittances, users need to have a relatively sophisticated understanding of how the process works. Similarly, recipients will need access to a working device and an Internet connection. There is no facility to send cash for pick-up or for home delivery, meaning this form of remittance will not suit a significant number of people who receive money from overseas.
Better Success In Crypto Positive Countries
For those countries that already have high levels of cryptocurrency adoption, we are likely to see the trend towards crypto remittances growing. A predisposition towards viewing cryptocurrencies as a tool that can circumvent some of the constraints and high costs of traditional money transfer services will support the expansion of the market.
However, crypto is a fast-moving market and regulations in individual markets are constantly evolving. Users could easily find that over the coming years, increased regulations imposed by key nations start to work against the perceived advantages of using cryptocurrency for remittances.
About The Author
Kate Anderson is a writer at Finder who specialises in money transfers. She has previously written for The Motley Fool UK and Fitch Solutions, where she covered a wide range of personal finance topics and kept a close eye on market trends. Kate has a Bachelor of Arts in Modern History from the University of East Anglia.