Financial inclusion remains one of the main global issues, as more than two billion people remain locked out of the financial sector.
The potential benefits of financial inclusion are poverty alleviation and enhanced productivity of individuals and small-scale entrepreneurs. Financial inclusion also reduces tax evasion and money laundering.
In many developing countries, international remittances are the important source of national and family income. Globally, more than $400 billion of annual remittances to developing countries are officially recorded. Extrapolated to the global remittance market, about $30 billion are paid in transaction fees per year. The average costs of a $200 remittance is about $16 (eight per cent), which is far higher than the three per cent target proposed by the Sustainable Development Goal (SDG).
Decreasing the transaction costs of remittances is not easy, not least due to burdensome regulatory requirements like customer identification (know your customer or KYC) on both sides of the transaction.
Blockchain technology offers great potential to make remittances more efficient and less expensive.
Obtaining a digital identity with verifiable data through the blockchain is a far better proposition than consolidating market share in the heavily fragmented remittance business. Also, transmitting money on the blockchain eliminates the need for remittance companies (money service businesses or MSBs).
De-risking
In recent years, remittance companies have been challenged by de-risking in the banking sector.
Increasingly, the banks have become risk-averse and hesitant to offer banking services to MSBs, fearing that they may be violating international rules on anti-money laundering (AML) and combating of financing of terrorism (CFT). Ultimately, without access to correspondent banking services, MSBs are unable to function.
The blockchain can prove to be highly beneficial as it provides the opportunity to issue immutable digital identities (IDs) to senders and recipients of remittances. Such IDs would give comfort to the correspondent banks that the MSBs are following the international AML/CFT provisions.
However, blockchain technology remains in an early stage of development. Scalability remains one of the biggest problems. This is because it requires every node in the network to process all transactions. Similarly, each of these nodes maintain a copy of the transaction. The higher the amount of information in the chain, the slower it gets, as the bandwidth requirements for each node increases. A possible answer to these challenges could be a closed (permissioned) system with only a few nodes and thus lower operational costs.
Recently, several providers have emerged that transmit remittances using blockchain technology. On the side of the sender, they convert fiat currency into a digital token. Then, they transmit the digital token through the blockchain to the recipient where it is converted back into local currency.
The advantage of using a digital token is that there is no need for a central entity like a conventional MSB and the fees they charge.
The disadvantage is that there are two conversions required (from dollars into digital token and from digital tokens into euros, for example), often leading to transaction costs that are often more expensive than traditional channels. Read more here on how Bitlumens provides a solution to this.
The future of remittances is upon us
Blockchain technology has been tipped to disrupt dozens, if not hundreds, of industries in the coming years. All evidence points to remittances being one of them.
The technology might not be perfect yet, but Bitlumens is one of the companies aiming to improve it.
Doing so could help families in developing countries keep hold of a higher proportion of the remittances sent to them.
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