As the demand for goods and services increases globally and the need for convenience grows, so does the demand for more payment options. Statistics show that 58% of multinational companies use at least one type of cryptocurrency, and 56% of these companies use at least one blockchain network daily.
Cryptocurrencies offer a secure, fast, and transparent method for businesses to both receive and send payments, potentially saving them up to 75% and completing transactions 96% faster.
This article comprehensively examines how cryptocurrencies can help with cross-border payments and the benefits and drawbacks of using them.
How Do Crypto Cross-Border Payments Work?
Blockchains allow for fast, efficient financial transactions without the need for banks.
Consider the following scenario: a person in the United States wishes to send money to someone in Germany.
The sender can begin by exchanging their fiat currency for a digital asset of their choice, which can be easily purchased on various websites and platforms via bank transfers or credit card payments. To keep their cryptocurrency safe, the sender can store it in a digital wallet.
When it’s time to transfer the funds, the recipient simply provides the sender with the address for their wallet, similar to the account number provided by a traditional bank. However, it’s important to be careful, as the wallet addresses can be rather lengthy.
Once the funds arrive in the recipient’s account, they can either convert the cryptocurrency to fiat and withdraw it or exchange it for a less volatile digital asset such as a stablecoin.
It is evident that cryptocurrency is gaining popularity among global users and has the potential to become a prominent method of cross-border business payments. 37% of multinational corporations already use cryptocurrencies or blockchain technology for cross-border payments.
As the adoption of cryptocurrency increases, it is likely to become a primary payment option for businesses.
Advantages of Crypto Cross-Border Payments
Cross-border payments are not only cheaper and faster, but they can also help prevent money laundering. The use of cryptocurrency in these payments can potentially revolutionize how people send money to loved ones in other countries.
According to the World Bank, the average fee for cross-border payments made through traditional channels is currently 6.75%. This can be a significant burden for those living on a low income. While this fee is lower than the 9.67% charged in 2009, there is still room for improvement.
The G8 and G20 have set a goal of reducing remittance costs to 5% by the early 2010s, while the United Nations has set a target of 3% by 2030. Cryptocurrencies can potentially accelerate attaining these goals, as they can reduce transaction costs by as much as 80%.
Also, traditional wire networks can take three to five business days to clear funds, which can be inconvenient for those who need money quickly. However, on certain blockchains, payments can be confirmed in seconds.
According to Deloitte, the data-rich nature of blockchain transactions allows for the transmission of metadata from end to end, which can help reduce money laundering and terrorist financing. Many cryptocurrency platforms have also implemented “Know Your Customer” checks to verify users.
One of the most important ways cryptocurrencies can make a difference is by enabling people who do not have bank accounts to access financial services.
Research shows that 80% of consumers in sub-Saharan Africa do not have bank accounts, and there are 1.7 billion people worldwide who are in the same situation. This may be due to a scarcity of financial institutions in the region, the high cost of these services, or a lack of trust in them.
Cryptocurrency Has Remittance Potential
The use of cryptocurrency in the remittance industry is on the rise, thanks to the efforts of startups like BitPesa and Coinbase.
BitPesa allows users to send and receive remittances in five African currencies using cryptocurrency and has grown its customer base from 6,000 in 2017 to over 26,000 today.
Coinbase also offers international money transfers using a range of cryptocurrencies, with the added benefit of instant transfers and low to no fees.
Ripple, which has long been involved in the remittance industry, has identified Asia as a key growth market. However, the company is currently embroiled in a lawsuit with the US Securities and Exchange Commission, which has disrupted its partnership with MoneyGram.
There have also been reports of unofficial cross-border transfer services using cryptocurrency and messaging apps like WhatsApp.
While established players like Western Union and MoneyGram have dabbled in cryptocurrency, they have yet to significantly impact the remittance industry.
Mainstream Crypto Adoption Remains Difficult
Despite the potential of cryptocurrency, there are still challenges to overcome, including technological regulations and the ability to handle large amounts of transactions.
Furthermore, despite understanding the importance of cryptocurrency to their customers, financial institutions have been slow to adopt it.
For businesses considering accepting cryptocurrency as a payment method, particularly for cross-border transactions, it is important to stay informed about the evolution of cryptocurrency and carefully consider the pros and cons.
Benefits of Crypto Cross-Border Payments
They do not require expensive or complex technology or hardware
All you need is an internet-connected computer or mobile device to start exchanging cryptocurrencies.
However, suppose you want to accept cryptocurrency as payment in a physical location or on an online e-commerce platform. In that case, you may need POS hardware, a plugin, or other software to process the payments. Also, you’ll need a cryptocurrency wallet if you want to hold and store cryptocurrency.
Lower transaction fees
Companies often complain about high credit card processing fees, which can be anywhere from nearly 3% to slightly more than 5%. Cryptocurrency exchanges, on the other hand, process, convert, and store digital currency for individuals or businesses for flat fees or other charges that are typically less than 1%.
Also, in direct peer-to-peer transactions with no third party involved, there are no fees at all.
They can help prevent chargebacks
It’s estimated that global chargebacks will reach at least $117.47 billion in 2023. However, since no third party is involved in cryptocurrency transactions, they are irreversible. Only the party receiving the funds can request a refund.
Drawbacks of Crypto Cross-Border Payments
They are prone to volatility
Cryptocurrencies are prone to volatility as their value is dependent on market demand. This lack of stability can be a major concern for businesses trying to price their goods or process returns. Also, since cryptocurrencies are currently treated as stocks, any appreciation is subject to capital gains taxes.
They can be hacked
While the blockchain’s transaction records are secure, cryptocurrency exchanges and individual wallets can be vulnerable to attacks. If a hacker gains access to a user’s private key, they may be able to steal digital assets. It’s important to note that cryptocurrency balances are not government-insured, which means the government is not obligated to assist individuals in recovering their funds in the event of a hack.
Currency conversion fees could be expensive
Cryptocurrencies can offer significant fee savings when compared to traditional card processing. However, it’s important to consider currency conversion fees, as they may cancel out any savings if conversion rates are high.
- The payments industry is constantly looking for new ways to enhance the user experience and make cross-border money transfers faster, safer, and more transparent. Adding cryptocurrency to traditional clearing rails is one way to improve technology. Another option is to develop new solutions, such as real-time payments and wallets.
- Cryptocurrencies are driving digital trends and will most likely continue to do so. This wave has resulted in payment method innovations and the rise of a variety of non-bank payment providers.
- The payments landscape is evolving rapidly with the advent of digital currencies and blockchains, which allow for lightning-fast money transfers. However, with opportunity comes risk. The right solutions must be used to ensure smooth, secure transfers and payments.
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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