Who is best positioned to disrupt the money-transfer market using Bitcoin?
Cryptocurrency
Asked by Question Bot01/May/20151 answer
1 Answer
F
Faisal Khan
Answered 01/May/2015
There are no easy answers to this question. It would be highly speculative (at best) to try to name a company that would possibly dominate the space in Bitcoin Remittances.
However, before I attempt to give an answer, here is something you need to know.
Below is a diagram of a traditional remittance model (cross-border transfer)
Just to explain the diagram, the left-side is the "Sender" (or Remitter) and the right-side is the "Receiver" (or Beneficiary). This diagram is how a typical remittance corridor looks like.
The Central Bank (and/or the Financial Regulator - if separate) grants a license to a Money Transfer Operator (MTO), which (assuming) has some sort of an Agent network where people come and pay money to send (or receive).
The MTO works with a Remitting Bank and a Settlement Bank (not necessarily both, they can be the same one). The receiving bank is responsible for amassing the funds into the MTO's Banking Account (a Nostro account).
The FX portion of the receiving country is provided by the Settlement Bank on the receive side to the Remitting Bank on the Send side. This is now even more so because of the Dodd-Frank Act (Sec 1072).
In plain English, the FX Rate between US$ and Pakistan Rupees (as per example above) has to be provided by a Bank in Pakistan to the US Bank or MTO's Bank before a Rate can be setup by the MTO that has to transmit the money.
Both sides of the cross-border are governed by the KYC/AML rules.
So the flow of funds would be something like this:
Now if Bitcoin is introduced into the equation, then the system would look something like this:
Since Bitcoin is an additional layer, and to be in compliant with the Dodd-Frank Act, (assuming the US-Pakistan example), then the first question is:
Looks pretty simple, the issue here is - Who in Pakistan accepting Bitcoins and giving the US Dollar equivalent to the Pakistan Government (Banking Channel)?
How are these Bitcoins amassed by whomsoever the organization is, how are they getting the Dollars channeled into Pakistan without being hit for double-taxation, or forcibly being classified as escrow remittance ? (Many countries simply do not understand or even allow escrow remittances). In most countries, pre-funding is required, how are those rates fixed in?
What if during the transfer the 1BTC fell from 1,000 US$ down to 850 US$ - who takes this hit? How can this pricing mechanism that has to be locked in at the time of transfer be guaranteed across the ocean to the liquidity or market marker in the beneficiary country that is handling Bitcoins-US Dollar conversions?
Needless to say, there are solutions to this, however, that is something I personally don't want to cite in public. Whomsoever cracks this problem easily and across-the-board for various emerging markets (read: countries), would very likely have a successful run.
The AML/KYC issue will remain, regardless. The more mature model would be to have a matching database that would link the Bitcoin address and map it to an existing bank account (in the receiving country).
The regulatory licensing issue would be a hurdle. Many companies in the Bitcoin space don't have the license to do nationwide transactions (where a Money Transmitter license) is required. Very few are actually pursing this (think CoinX - my bet would be on them if they were to enter this market). Others are simply agents for their upstream processors or have a waiver because of the nationwide bank that they are using, who are exempted.
I believe each country will have a distinctive (geographically positioned) player who will service some very specific remittance corridors.
Despite all the hoo-hah, there is a huge deficit of options on how to buy or sell bitcoins in emerging markets. Whilst I may instantly get money from my family in the US, what am I going to do with those coins? How to I get the native currency (which is what i want) if there are no established players who are not charging a huge premium on the conversions (kinda defeats the whole purpose of using bitcoins if the transaction costs will be equal, higher or marginally lower than the traditional models).
The disruption will only come when liquidity on a banking level and on the grass-root level is available for exchanging (trading) of Bitcoins in the beneficiary countries.
However, before I attempt to give an answer, here is something you need to know.
Below is a diagram of a traditional remittance model (cross-border transfer)
Just to explain the diagram, the left-side is the "Sender" (or Remitter) and the right-side is the "Receiver" (or Beneficiary). This diagram is how a typical remittance corridor looks like.
The Central Bank (and/or the Financial Regulator - if separate) grants a license to a Money Transfer Operator (MTO), which (assuming) has some sort of an Agent network where people come and pay money to send (or receive).
The MTO works with a Remitting Bank and a Settlement Bank (not necessarily both, they can be the same one). The receiving bank is responsible for amassing the funds into the MTO's Banking Account (a Nostro account).
The FX portion of the receiving country is provided by the Settlement Bank on the receive side to the Remitting Bank on the Send side. This is now even more so because of the Dodd-Frank Act (Sec 1072).
In plain English, the FX Rate between US$ and Pakistan Rupees (as per example above) has to be provided by a Bank in Pakistan to the US Bank or MTO's Bank before a Rate can be setup by the MTO that has to transmit the money.
Both sides of the cross-border are governed by the KYC/AML rules.
So the flow of funds would be something like this:
- Remitter walks up to an Agent to send US$ 1,000
- Agent has the Rate displayed as provided by the MTO for how many Rupees you can get from 1 US$
- The Rate to the MTO was provided by the Settlement Bank in Pakistan
- The MTO and the Remitting Bank setup their margin on this rate before quoting it to the Agent.
- Once the money is accepted, it is aggregated (lets assume everything is aggregated) and send to the Remitting Bank.
- The Remitting Bank then channels the money (in US$ form - minus its fees, etc.) to the Receiving Bank in Pakistan.
- The Receiving Bank (can also be the same as the Settlement Bank) then provides this money to the settlement bank in Pakistan Rupees (based on the agreed rate earlier on, at which the transaction was booked).
- The Settlement Bank then disburses the remittance out either via the Agent network or direct account debit.
Now if Bitcoin is introduced into the equation, then the system would look something like this:
Since Bitcoin is an additional layer, and to be in compliant with the Dodd-Frank Act, (assuming the US-Pakistan example), then the first question is:
- Who sets up the FX rate? The Bank in Pakistan will only provide the FX rate for US$/PKR. It does not have any mechanism to provide a rate that is tied and locked in for the day to Bitcoin?
- Who provides the liquidity on both ends to ensure that enough Bitcoins are available. Granted this may not be a problem on the Send side in the US, but what about the receive side? Who will change the Bitcoins into USD?
- The whole purpose of Governments accepting remittances is so that the national reserves get shored up, i.e. their Dollar (or Euro or British Pound) reserves increase for Payments the government has to be abroad in other currencies periodically.
- Let us assume for simplistic purposes, that 1 BTC = 1 US$ and 1US$ = 100 Pakistan Rupees.
- Then a transaction of $1000 from US to Pakistan would be something like: 1,000 US$ -> 1 BTC (US Side) -> 1 BTC (Pakistan Side) -> 1,000 US$ -> 100,000 Pakistan Rupees.
Looks pretty simple, the issue here is - Who in Pakistan accepting Bitcoins and giving the US Dollar equivalent to the Pakistan Government (Banking Channel)?
How are these Bitcoins amassed by whomsoever the organization is, how are they getting the Dollars channeled into Pakistan without being hit for double-taxation, or forcibly being classified as escrow remittance ? (Many countries simply do not understand or even allow escrow remittances). In most countries, pre-funding is required, how are those rates fixed in?
What if during the transfer the 1BTC fell from 1,000 US$ down to 850 US$ - who takes this hit? How can this pricing mechanism that has to be locked in at the time of transfer be guaranteed across the ocean to the liquidity or market marker in the beneficiary country that is handling Bitcoins-US Dollar conversions?
Needless to say, there are solutions to this, however, that is something I personally don't want to cite in public. Whomsoever cracks this problem easily and across-the-board for various emerging markets (read: countries), would very likely have a successful run.
The AML/KYC issue will remain, regardless. The more mature model would be to have a matching database that would link the Bitcoin address and map it to an existing bank account (in the receiving country).
The regulatory licensing issue would be a hurdle. Many companies in the Bitcoin space don't have the license to do nationwide transactions (where a Money Transmitter license) is required. Very few are actually pursing this (think CoinX - my bet would be on them if they were to enter this market). Others are simply agents for their upstream processors or have a waiver because of the nationwide bank that they are using, who are exempted.
I believe each country will have a distinctive (geographically positioned) player who will service some very specific remittance corridors.
Despite all the hoo-hah, there is a huge deficit of options on how to buy or sell bitcoins in emerging markets. Whilst I may instantly get money from my family in the US, what am I going to do with those coins? How to I get the native currency (which is what i want) if there are no established players who are not charging a huge premium on the conversions (kinda defeats the whole purpose of using bitcoins if the transaction costs will be equal, higher or marginally lower than the traditional models).
The disruption will only come when liquidity on a banking level and on the grass-root level is available for exchanging (trading) of Bitcoins in the beneficiary countries.