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For the thousands of crypto-first companies that have emerged over the past few years, the current crypto winter is an important test of their businesses.
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This has, inevitably, affected the bottom lines of space occupants. For example, Block subsidiary Cash App, which makes most of its money from a service that allows customers to buy, sell and send bitcoin, saw its revenue from bitcoin decline 35% between Q2 2021 and Q2 2022.
Meanwhile, the regulatory environment is becoming more challenging. The US is expected to reform regulations on crypto after the White House released a framework for the development of digital assets. Meanwhile, there are plans to increase the government’s capabilities to seize, freeze and recover crypto in the UK.
With little sign of the end of winter, many crypto players are looking for other ways to profit, including in the more traditional areas of finance. And one place with remarkable potential for crypto is cross-border payments.
Crypto in Cross-Border Payments: Not a Panacea
For a few years now, it has been claimed that crypto payments are cheaper, faster and generally better than traditional cross-border options. The reality is much more complex and far from clear.
While crypto payments are instant in theory, the process of setting up a transfer, moving it between wallets and converting it back to fiat can take time. In contrast, there is a wide range of traditional money transfer solutions that are immediate or near instant on most corridors.
Meanwhile, crypto being cheap in terms of cost is also disputed. When the cost of crypto goes up, the focus is usually on the cost of buying or selling crypto, which is usually very low. However, for money transfers, there is also the cost of moving crypto from one wallet to another, often a very high amount which is overlooked in many claims.
My own company’s research on the subject has shown that crypto-based cross-border transfers can be performed at a lower cost than traditional remittance or money transfer providers, this is only possible with a combination of a few companies, and some The price is for compared to traditional methods.
Beyond that, however, there are real benefits to crypto for payments – and these are what are earning it a place within the market.
Benefits of digital currencies for cross border transactions
While it is very challenging to determine the exact number to do so, we do know that cryptocurrencies like bitcoin are being used for remittances in some parts of the world, especially by people with volatile currencies or significant cross-border restrictions.
From a volatility point of view, this seems surprising — even the most volatile currencies are less volatile than cryptocurrencies like bitcoin and ether over a two-year period. However, when we look at volatility in the short term, there are windows where cryptocurrencies are less volatile than some fiat counterparts, such as the Sri Lankan rupee. As a result, crypto offers a relatively accessible option during these periods.
Beyond that, though, there are benefits for money transfer operators who are seeing some are starting to explore the technology. A good example of this is MoneyGram, which, along with its traditional remittance service, now offers a global crypto-to-cash network through a partnership with blockchain provider Stellar.
It sees it enable customers to buy the stablecoin USDC at its retail locations.
The project offers a new medium to access the crypto space—especially for those who do not have access to traditional banking facilities—but it also has an advantage for MoneyGram over traditional transactions: settlement.
When a traditional money transfer is sent, it will be ready for the recipient to collect from their local branch immediately, even if it is from the sender on the other side of the world. However, MoneyGram will see the settlement of the transaction—that is, money transferred from their account in the sending country to the recipient country to cover the amount paid—after some time.
Conversely, when a crypto money transfer occurs, the settlement is virtually instant—meaning that for the first time, when the company is paying its customer, it already has money in its account. This is convenient from an accounting standpoint, but it has significant implications for risk in cross-border transactions, particularly in areas of particular volatility.
It is these kinds of benefits that are ultimately going to make crypto a worthy addition to the cross-border payments space – not the promise of cheap, fast payments without a clear understanding of the true momentum and prices in the market. And for companies looking to diversify their crypto offerings, providing services to the payment space is a worthy area.
When it comes to currencies that have restrictions on transferring money from countries to countries, including major countries around the world such as Argentina, China, India or Nigeria, the reasons for using cryptocurrencies for cross-border transfers appear more obvious. These movements outside the traditional fiat currency segment pose a challenge to central banks in these countries who, by definition, prefer to have control over their currencies. However, central banks are exploring their own solutions to the issue.
Central Bank Digital Currencies: The Next Step?
While companies in the payments sector are exploring crypto for cross-border payments, central banks are also looking at their potential as central bank digital currencies (CBDCs). Importantly, these are not the same as normal crypto, but a digital version of traditional fiat currency – and while they often run on the blockchain, this is not necessary.
State-backed and operated by a country’s central bank, they have the ability to combat fraud and money laundering, as well as potentially increase financial inclusion. Depending on how they are set up, they can also have powerful benefits for cross-border payments, dramatically improving bank-access payments infrastructure, therefore increasing speed and reducing costs, notably. In areas of the world where cross-border payments through banks remain slow and costly.
Many central banks around the world are currently exploring CBDCs, although they take many forms. Some are developing wholesale CBDCs for sole use by financial institutions, which will be designed for interbank transactions and financial settlements. Others are developing a retail CBDC, which will be used by businesses and individuals in the same way that non-digital fiat currency is today, but with added transparency and inclusiveness benefits.
There are projects around the world that are exploring both versions, with most countries having some form of CBDC project. However, the number of CBDCs launched is extremely limited – largely for small countries where they address specific local problems – and interoperability projects to link CBDCs remain largely in the research stage.
While there are possibilities for CBDCs at some point in the future, they are not the answer to the current crypto winter, nor the immediate drawbacks of cross-border payments. We have a generation of developments within payments before CBDCs become the dominant model, and crypto can play a role in filling that gap.