Main Takeaways
Digital assets are reshaping cross-border transactions, helping to mitigate issues like delays, service restrictions, and high fees seen in traditional systems.
Digital assets offer effective alternatives through their global, distributed transaction system, reduced costs, and faster transfers, although some limitations remain.
Roughly a quarter of the global adult population remains unbanked. Additionally, international remittances are a considerable part of many developing economies. These disparities make the pursuit of an improved payments system essential for a more equitable global monetary landscape.
Meet Amir. He is a migrant worker, sending money back home to his family overseas. However, banking regulations deny him a regular account, so bank transfers are not an option for him. In many countries, various requirements are in place – for example, a minimum income bar – that disqualify sizable groups of people from getting access to banking. And traditional remittance services? Their high fees eat away at his hard-earned income even further. Amir’s story is just a drop in the ocean, with millions worldwide sharing similar experiences as they are deprived of critical financial access. Globally, there have been an estimated 1.4 billion people who remain unbanked as of 2021, as per the most recent comprehensive estimate by the World Bank. This number is equal to roughly a quarter of the global adult population.
A new crop of fiat-based money transfer services have attempted to mitigate these problems, but substantial issues persist. Delays, service restrictions, and exorbitant fees continue to limit these systems. In the face of these structural challenges, digital assets have emerged as a potential beacon of hope. Leveraging the potential of blockchain technology, they are already redefining cross-border transactions, unbinding them from traditional constraints.
The International Payments Landscape
Transferring money domestically is usually simple enough: within most national financial systems, there is normally a sufficient range of banking, neobanking, fintech, and mobile payments services to cover the needs of the majority of the population. The task gets more complicated when you move across borders. Each country has its own payment systems, regulations, and technological infrastructure, making the international payment landscape difficult to standardize.
Traditionally, banks in different countries must have a direct relationship, which is generally more likely for currency pairs with high payment volumes. Where this isn’t the case, “correspondent” banks will serve as intermediaries to facilitate the transfer. The longer the chain of intermediaries, the longer the transaction will take, and the more it will cost as each party takes their fee.
Remittances play an important role in many economies worldwide, with over 70 countries relying on them for at least 4% of their GDP. Globally, remittances are a huge source of income, particularly for developing countries. However, global remittances cost an average of 6.2% of the amount sent. These disparities make the pursuit of an improved payments system essential for a more equitable monetary landscape. Blockchain and digital assets could be the solution, already driving massive efficiencies on this front.
The Blockchain Solution
Designed for a global, unified monetary system, cryptocurrencies bypass traditional borders and intermediaries through blockchain technology. Transactions are recorded on a single, distributed ledger, eliminating the need for separate ledgers, as used by banks. Transaction costs reduce drastically with crypto’s peer-to-peer (P2P) structure, which is void of intermediary charges, and payments reach their destination faster – usually in a matter of minutes rather than days.
Essentially, blockchain champions a globally coherent transaction system, mitigating conventional limitations. Relying on blockchains for cross-border payments can help overcome structural deficiencies and inefficiencies in the current system. As J.P. Morgan analysts point out, blockchain technology has the potential to underpin a financial infrastructure “that is able to support near-instantaneous transactions and automate complexity.”
Cryptocurrencies are already providing financial services to millions who lack access worldwide. This prominence is being seen by major financial institutions. In a research paper published last month, a group of IMF economists provided the latest big-picture overview of the extent to which bitcoin is used for cross-border transactions. They observe that such use is geographically widespread, while the magnitudes of bitcoin cross-border flows are sizable even on the scale of some countries’ GDP. They also provide evidence to suggest that off-chain bitcoin cross-border flows may be correlated with incentives to avoid capital flow restrictions.
The IMF analysis only considers bitcoin transactions, leaving out another important class of digital assets with immense transactional utility: stablecoins. Most often pegged to the U.S. dollar, these assets are widely used for both preserving value amid national currencies’ depreciation and facilitating cross-border transfers.
A recent report by blockchain analytics firm Chainalysis argues that stablecoins have already surpassed all other types of cryptocurrencies in usage. It also shows that the volume of fiat purchases of stablecoins has been going up steadily over the last year, including in countries that saw significant national currency declines and those with severe capital flow restrictions.
Limitations of crypto cross-border transactions
While blockchain technology brings numerous advantages to the table when it comes to cross-border payments, it’s not without its challenges. A primary concern is the price volatility associated with cryptocurrencies; however, the use of stablecoins can help mitigate this risk. The technical knowledge required to navigate blockchain technology also raises accessibility issues. It is a complex system that requires mastery to use effectively. Nevertheless, accessibility is one of the main concerns of the industry, and platforms such as Binance have emerged to help facilitate adoption for novice users.
Regulatory compliance is another major hurdle. The regulatory environment around blockchain and cryptocurrency is still developing and remains inconsistent across jurisdictions, which is especially relevant for cross-border transactions. Ensuring every transaction adheres to the rules of both the origin and destination jurisdictions is essential but can be challenging. In some cases, cryptocurrencies may not be an option at all.
Ultimately, while blockchain technology offers promising benefits for cross-border payments, current challenges must be tackled for it to flourish within the global financial ecosystem. These issues are high on the industry’s agenda, with developers working tirelessly to solve them. Given crypto’s early stage of development, such challenges will only become more manageable in the future.
Traversing Borders
For Amir, adopting cryptocurrencies through the convenience of dedicated mobile apps has transformed his remittance routine. Transaction fees, significantly reduced, ensure more of his money reaches his family faster. Similar stories involving Binance users arise throughout the world every day. A business owner is able to stay afloat when her bank closes, thanks to enabling P2P transactions with her overseas customers. A young father who doesn’t have access to traditional banking finds financial empowerment in crypto, allowing him to improve the well-being of his children.
Engaging in the digital-asset ecosystem grants these individuals a seat at the global economic table. These are real stories of financial empowerment that blockchain technology has helped facilitate, and countless more emerge each day. Cryptocurrencies are already having a tangible impact on the world, particularly for developing economies, nurturing a more equal and transparent monetary system, and use cases like international payments are a clear example of this. As we move to the next stage of the industry’s development, the revolutionary potential of blockchain technology will only continue to shine through.
Further Reading
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