The transfer of value has always been an expensive and slow process. This is particularly true for cross-border payments. The blockchain is able to speed up and simplify this process – and also reduces the costs significantly.
What is blockchain?
Most parties in the financial sector already have a grasp of concepts such as bitcoins and other cryptocurrencies. These concepts work on the blockchain technology, which is a digital, distributed transaction ledger with identical copies maintained on each of the network’s members’ computers. All parties can review previous entries and record new ones. Transactions are grouped in blocks, recorded one after the other in a chain of blocks (the ‘blockchain’). The links between blocks and their content are protected by cryptography, so previous transactions cannot be destroyed or forged. This means that the ledger and the transaction network are trusted without a central authority – a ‘middleman’.
The blockchain can improve many processes within the financial sector, such as cross-border payments. The transfer of value has always been an expensive and slow process. This is particularly true for cross-border payments. For instance, if a person wants to transfer money from Europe to their family in the Philippines, who have an account with a local bank, it takes a number of banks (and currencies) before the money can be collected. Using services like Western Union for the same transaction is faster but very expensive.
Faster and more affordable
The blockchain can speed up and simplify this process, cutting out many of the traditional middlemen. At the same time, it makes money remittance more affordable. Until now, the costs of remittance were 5-20%. The blockchain reduces the costs to 2-3% of the total amount and provides guaranteed, real time transactions across borders.
A few hurdles
This is why the blockchain is gaining territory in the field of money remittance. Of course, there are a few hurdles to be taken. The most important one is lack of regulation for cryptocurrencies. If money is transferred from one country to another using blockchain wallets, and one of the wallet providers goes bankrupt or the wallet is attacked by hackers, the cryptocurrency stored will be lost and there is no central authority like a bank to reimburse the loss.
There is also the problem of exchanging the cryptocurrency back into locally accepted (fiat) money at the destination. This will often require the use of a cryptocurrency exchange where e.g. Bitcoin is traded for US dollars. Using such an exchange can add extra complexity and runs the risk of fluctuating exchange rates (which can be extreme for cryptocurrencies). Still, many people are willing to take these risks, as the benefits outweigh the drawbacks. Their numbers have the potential to go up once more beneficial regulations are developed.
When regulation has been implemented, the blockchain will also be an interesting option for corporate cross-border payments. As hard as it is for individual clients to lose their money when parties go bankrupt, it is even more disturbing for corporates transferring large amounts of money through cross-border payments. With the proper regulation, banks will be able to offer their corporate clients interesting propositions based on the blockchain. They are already building their understanding of blockchain technology and developing proofs of concept.
On a global scale, more and more countries are improving regulation in the field of cryptocurrency, as they acknowledge its importance for an innovative climate. Until now, Europe has been more conservative. For instance, only a few years ago, Dutch regulator DNB claimed that virtual currency is ‘no currency at all’, comparing bitcoins to the tulip bulb bubble that caused a huge collapse of the Dutch economy in the 17th century, when tulips became the new gold – for a while.
However, the benefits of cryptocurrencies and other blockchain applications have become clear in the last few years and both Fintech startups and banks are actively experimenting with the technology and pressing regulators for action. With even DNB itself experimenting internally to become more familiar with cryptocurrencies in the form of a ‘DNB-coin’, clearer rules for banks, corporates and individuals are only a matter of time.