‘Great things are not done by impulse, but by a series of small things brought together.’ Vincent Van Gough
Like the old adage that it was not the prospectors but those selling them pickaxes and shovels that prospered in the Goldrush Bitcoin’s value might be seen to lie not so much in its speculative value but in the disruptive innovation it brings.
At Bitcoin’s heart lies the blockchain, an online, decentralised, user-managed ledger that records all transactions. The blockchain allows for secure and anonymous peer to peer transfers and has the potential to circumvent traditional middlemen and deliver savings of time and money for the customer.
Remittances are a platform that the blockchain has the potential to disrupt, the opportunity to return value to the customer being considerable. The World Bank estimated global remittances in 2011 totalled over $500bn, approximately $400bn of this going to developing countries. Remittances from the UK were estimated at $23.1bn making it the third largest source after the US ($120bn) and Canada ($23.3bn). In the same year India was the top recipient, receiving $63.8bn followed by China ($40.48bn), Mexico ($23.59bn), Philippines ($22.97bn) and Nigeria ($20.62bn).
Remittance platforms are a mixture of the formal and informal, ranging from cash transported across borders by friends and family and hawala brokers to banks and money transfer operators (MTO’s). These platforms are by no means fool proof and are often loaded with inefficiency. Bank transfers are not universal in their coverage, Barclays, the last major UK bank providing remittance services to Somalia announced last year its intent to shut down the accounts of those money transfer businesses registered with it due to concerns over money laundering and terrorist financing. This impacted on the $162m sent from the UK to Somalia each year, the majority of which goes to covering basic household expenses such as food, education and medicine. Many African countries also restrict remittances being paid into banks and instead contract with MTO’s to operate on their behalf creating a restricted market which does not benefit the customer.
The cost of remittances via a MTO from the UK varies per destination country, typically 6 – 11% of the total amount going to the provider. In an industry where transactions from host countries total hundreds of millions of pounds per annum the opportunities to improve the welfare of recipients by reducing transaction costs via a disruptive platform are significant.
So, where does the blockchain feature? Digital wallets enabled by the blockchain allow almost instantaneous peer to peer Bitcoin/digital currency transactions at little or no cost. With the recent introduction of wallets with currency conversion functions there suddenly exists the opportunity for secure and anonymous remittances in the currency of ones choosing, all that is required is for the sender and receiver to have a smart phone with a customised digital wallet downloaded. The cost and features of the transaction can be set by the wallet provider, the opportunity existing to shave percentage points of current transaction costs.
An alternate means of transmission is via Bitcoin ATM’s, ATM’s configured to ‘vend’ Bitcoin direct rather than have one purchase it via an exchange, Though small in number they are rapidly gaining traction in the US and Europe, manufacturers such as Lamassu proposing the provision of transmission and currency conversion functionality. Such functionality would allow one to insert or ‘bank’ cash into an ATM in country A and a recipient to securely withdraw the funds in the currency of their choosing in country B.
Concerns around remittances being used for terrorist financing or other criminal activities would require any wallet or ATM provider to register with the relevant financial regulators and their users required to complete Know Your Customer checks before transmissions could take place but this need not be overly onerous for either party with the appropriate guidance and processes built into the operating platform.
Yee Kok Siong observes that the blockchain is a disruptive tool that has the potential to return current charges to those who need them most while allowing a healthy margin for the wallet/ATM provider due to the economies of scale involved.