Last updated on July 18th, 2024 at 06:08 am
Digital technology revolutionized modern finance, and recently, blockchain technology has become a big part of it. Many people think of cryptocurrencies when they hear “blockchain”— yes, it’s true that’s the underlying tech that powers them. But it can do more than just that. In fact, blockchain technology is a game-changer for global remittances.
Fundamentally, blockchain is a type of technology that facilitates recording and sharing data across many locations. Traditional money transfers through banks can be complex, costly, and slow, not to mention sending money from one country to another. It is wickedly slow. You’ll know this if you have dealt with Western Union and even the Postal system before.
However, blockchain simplifies and speeds up these transactions, making them more secure, cheaper, and transparent. The technology is essentially the next stage of the revolution digital technology has been staging in finance.
In this article, we’ll cover the basics of how blockchain is used for payment processing, money transfers, and global remittances using real-life examples. We’ll also discuss the pros and cons of the technology in this process. Let’s get started!
How Does Blockchain Facilitate Remittances and International Trade
Remittances, money sent by migrant workers to their families in their home countries, play a crucial role in many economies, especially in developing nations. These funds have been directly linked to helping boost economic activity in the countries.
According to the World Bank, remittance flows to Sub-Saharan Africa increased by 1.9% to $54 billion in 2023, driven by significant growth in Mozambique (48.5%), Rwanda (16.8%), and Ethiopia (16%). Nigeria, which accounts for 38% of the region’s remittances, saw a 2% growth, while Ghana and Kenya experienced gains of 5.6% and 3.8%, respectively. Notably, pan-African credit rating agency Agusto & Co reportedly predicts that foreign exchange remittances to Nigeria will rise to about $26 billion by 2025.
However, traditional remittance methods can be inefficient and costly. Migrants often face challenges, such as high fees, when sending money back home. Blockchain-based payment platforms offer a solution to these challenges. They use decentralized digital ledgers to process transactions quickly and securely. With blockchain, cross-border transfers can be completed in minutes or even seconds, without the need for intermediaries.
Unlike traditional finance systems, blockchain platforms eliminate intermediaries, reducing fees and increasing efficiency. This makes it easier and more affordable for migrants to send money to their families abroad.
Use Cases of Blockchain in Money Transfer, Payment and Remittance
There are many institutions and projects that are leveraging blockchain to build better solutions for payment, remittance, and money transfers globally. Some of these popular use cases include the following.
Fnality
Fnality is a blockchain-based payment system designed by a London-based fintech of the same name. The product helps streamline cross-border remittance by providing real-time settlement and reducing reliance on intermediaries. Fnality created a decentralized network for direct transactions between participants, cutting down on processing times and costs.
In December 2023, Fnality made history by completing the world’s first blockchain payments at the Bank of England using an “Omnibus Account,” which pools participants’ funds to encourage payment innovation.
According to Fnality UK CEO Angus Fletcher, the focus in 2024 is on scaling operations and exploring new market use cases. Also, Fnality plans to expand its participant banks and roll out services such as digital securities settlement, intraday repos, and quick currency exchanges.
XRP Ledger (Ripple)
The XRP Ledger (XRPL), a product of Ripple Labs, the creator of the XRP token, is another blockchain-based solution used for money transfer, remittances and international trade.
It is widely popular among banks and money transfer services for its instantaneous transaction speeds, scalability, and low operation costs.
Major financial institutions like Santander, Standard Chartered, and American Express, and many DeFi protocols used the blockchain solution power offerings to customers including remittance and cross-border payment services.
XRPL is also used for asset tokenization. It enables a straightforward and seamless process for turning real estate or art into digital tokens on the blockchain.
JP Morgan’s Onyx
JPMorgan stands out among traditional financial institutions for its proactive exploration of blockchain and related technologies to enhance its operations. It introduced Onyx as a group of blockchain-based solutions in 2020 to offer alternative payment systems that facilitate transactions around the clock for its institutional clients, improve transaction settlement processes, and minimize its operation costs.
Notably, the bank’s Interbank Information Network (IIN), now branded as Liink, uses blockchain for cross-border payments. The primary users of IIN are financial institutions that engage in international banking and payments. According to the bank, the platform has participants comprising more than 400 financial institutions and corporates, including 27 of the world’s top 50 banks, across 78 markets.
CBDCs, Blockchain, and International Trade
Solutions like that of Fnality, Ripple’s XRP Ledger, and JP Morgan’s Onyx show how blockchain can revolutionize remittances and international trade with cost-effective solutions. Government authorities have noticed these systems and are trying to adopt them. They aim to either compete with private firms or apply the systems themselves. The development of Central Bank Digital Currencies (CBDCs) powered platforms for cross-border transactions highlights this. Right now, 19 G20 countries are working on developing these digital currencies.
International financial regulators in countries like Russia and Hong Kong are exploring how these blockchain-powered platforms can facilitate international trade. For instance, SWIFT recently completed a beta test of its CBDC interlinking solution. Three central banks, including those in Hong Kong and Kazakhstan, are trying it out by adding it to their existing systems. This new system will help different countries’ digital currencies work together smoothly, avoiding problems as more countries create their CBDCs.
Also, the Bank for International Settlements (BIS) has introduced Agora, a platform to connect central bankers and experts from different countries to discuss how CBDCs can and should be used. Agora is bringing together seven central banks: the Bank of France, Bank of Japan, Bank of Korea, Bank of Mexico, Swiss National Bank, Bank of England, and Federal Reserve Bank of New York.
What are the Pros of Using Blockchain In Money Transfer, Payment and Remittance?
For individuals trading goods or sending money to another country, the benefits of using blockchain for payment processing and money transfers include the following:
1. Faster Settlements
Due to multiple intermediaries and regulatory requirements, traditional transactions can take days to settle. Blockchain-based money transfers, especially those using cryptocurrencies, can happen almost instantly.
Imagine Alice sending money to Bob in minutes. Here’s how: Alice creates a digital transaction on the blockchain, checked by network nodes, not a bank. This happens all the time, so no delays. Blockchain transactions are secure, so Bob gets the money quickly. This speed helps with remittances and trade, making things faster and cheaper.
2. Financial Inclusion
Blockchain helps people who don’t have bank accounts, especially those living in remote areas. Regular banks need lots of paperwork, making it hard for some people to use them.
However, with blockchain, you only need an internet connection and a device like a smartphone. This makes it easier for people to send and receive money, pay for things, and be part of the global economy. It helps everyone access financial services, regardless of where they live.
3. Transparency
Every transaction on a blockchain is available to all network participants, ensuring real-time transparency. This means all parties can verify blockchain money transfer details without intermediaries.
Such transparency assures both the sender and recipient, reducing the risk of fraud and ensuring compliance with regulations in international trade.
4. Decentralization
Sending money across borders or trading goods usually involves banks and other intermediaries. Blockchain eliminates these middlemen, streamlining transactions and reducing costs and delays.
Instead of relying on a central authority, blockchain uses network nodes to verify and record transactions, making trades and money transfers with blockchain faster and cheaper.
5. Security and Efficiency
In addition to making transactions transparent, blockchain secures each transaction by linking it to previous ones and encrypting the details. This makes it almost impossible to alter past transactions without changing subsequent ones, and thus preserving the integrity of the transaction history and reducing the risk of fraud.
Another feature of blockchains is smart contracts. These are automated agreements written in computer code that execute terms once certain conditions are met. They can be used to automate customs checks, payments, and shipment tracking tasks in international trade. This automation reduces manual work, saves time, and minimizes errors.
Cons of Using Blockchain Technology in Payment, Remittance, and Transfer Systems
While the benefits of using blockchain for payment processing and money transfers are clear, there are also some significant drawbacks to consider:
1. Regulatory Challenges
Different countries have varying regulations regarding blockchain, making the legal status unclear. This uncertainty can make it difficult for businesses and individuals to navigate and comply with the law.
For instance, ensuring compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations can be complex. Blockchain’s decentralized nature makes it challenging to verify users’ identities, which is necessary for preventing illegal activities.
However, with government authorities’s increasing interest in the technology, there seems to be concerted efforts to develop regulations that clearly account for these complexities. The European Union’s Markets in Crypto-Assets (MiCA) regulation is an example. The regulation provides a clear framework for crypto-asset transactions within the region, making cross-border transactions more straightforward. Notably, it implements stringent AML and KYC requirements for crypto transactions, ensuring a higher level of security and trust within the EU’s crypto market
2. Scalability
Considering the size and volume of transactions that happen globally, blockchain-based technologies still have some catching up to do. Current blockchain networks can struggle with high volumes of transactions. It often leads to congestion and slower processing times. This limitation can impact the efficiency of money transfers, especially during peak times.
On the other end, Proof-of-work blockchains, like Bitcoin, consume significant energy, raising environmental concerns. The high energy usage of these networks can contribute to carbon emissions and other environmental impacts, which in turn limits their potential to scale.
3. Volatility
Currently, cryptocurrencies are more volatile than regular currencies. They often experience significant fluctuations in value, making them unreliable for everyday transactions. This volatility can lead to financial instability for users who rely on these digital currencies for money transfers and payments.
Not all merchants and financial institutions accept cryptocurrencies, limiting their usability. The limited acceptance of digital currencies can make it difficult for users to find places to spend or exchange their crypto assets.
4. Security Concerns
Blockchain transactions are irreversible, meaning users cannot reverse mistaken or fraudulent transactions. This lack of recourse can be a significant drawback for users who accidentally send money to the wrong address or fall victim to scams.
While blockchain is secure, the surrounding ecosystem, including wallets and exchanges, can be vulnerable to hacking and fraud. Users must remain vigilant and take steps to protect their digital assets, which can be challenging and stressful.
Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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