Bitcoin could one day offer a simple, safe and affordable way to send money across international borders.
In September 2015, Commonwealth Bank, Westpac alongside Barclays, Credit Suisse and J.P. Morgan participated in the international R3 project with a financial innovation company, Ripple Labs. The R3 project is focused on creating a distributed ledger technology that works much in the same way as the ‘blockchain’ structure on which all Bitcoin transactions are based. The aim of the project was to help the banks transfer funds to one another at a lower cost.
In the same month, the big four banks also suddenly withdrew banking services from several Australian Bitcoin companies. Although this move was linked to tighten anti-money laundering and counter-terrorism financing rules, it also prompted speculation that the banks were trying to gain the upper hand on it’s potential future rivals.
Coupled with the findings of a senate inquiry earlier in 2015 that found that Bitcoin should be treated as a regular currency, these signs point to Bitcoin being an important player in financial transactions of the future.
But what sort of impact will Bitcoin have on global finance and will it one day represent a safe and effective international transfer option? Let’s take a closer look.
What is Bitcoin?
Bitcoin is a form of digital currency that was established in 2008. Commonly referred to as the currency of the Internet, it is based on a peer-to-peer network that allows users to pay others using a digital unit of exchange called Bitcoins. These Bitcoins are stored in the user’s digital wallet.
This alternative payment system removes the need for a centralised authority and instead uses a public ledger known as the ‘blockchain’. This contains all processed Bitcoin transactions and allows new transactions to be verified and a user’s wallet to calculate its spendable balance.
Just like any other currency, the value of Bitcoin is determined by supply and demand, and in its early years it has been known to fluctuate wildly in value. At the time of writing, 1 Bitcoin was worth $553 Australian Dollars. But if you wind back the clock just a little, after hovering around the $140-$150 AUD mark in September and October of 2013, by December the value of 1 Bitcoin had climbed above $1,362.
The impact of Bitcoin
In the early years of its existence, Bitcoin came in for criticism from several quarters due to a range of factors. In some cases, it has received bad press for making it possible for people to anonymously purchase illegal goods online. Its volatility, as demonstrated above, has also been criticised, while others have pointed to the lack of regulation of Bitcoin as grounds for concern. It could lead to money laundering and even the financing of terrorism.
Every new technology is bound to attract its share of criticism. Despite its detractors, Bitcoin does have many potential benefits for a range of people. It has been lauded by international migrants from companies such as the Philippines and India because it offers an affordable way to send money home to their families while working overseas.
Bitcoin’s benefits include low transfer fees, protection against identity theft and the control they allow users to have over their own money. The Australian Digital Currency Commerce Association (ADCCA) estimates that around 7 per cent of the world’s $5 billion worth of bitcoin is in circulation in Australia.
Could bitcoin soon offer a safer and more effective way to transfer money around the world?
The involvement of Commonwealth Bank and Westpac in the R3 project shows that the banks are aware that Bitcoin offers plenty of potential benefits for digital commerce. “The development of the blockchain will certainly have a very interesting and potentially disruptive impact on financial services,” Westpac chief executive Brian Hartzer said at the time.
There are also hundreds of other open-source blockchain experiments underway around the world, as financial institutions search for ways to streamline and simplify payments infrastructure. With lower fees on overseas transfers, fast processing of transactions and the ability to cut out the middle man, Bitcoin represents an exciting opportunity for international money transfers.
However, any transition to Bitcoin payments among banks and other established financial institutions is likely to be a slow one. Not only is much of the technology still in development, but regulators in Australia and around the world are still catching up with the many implications of digital currencies. As research such as the R3 project continues around the world, finding a way to transform the international money transfer market is going to take some time – but the interest shown by large global banks indicates the possibilities.
In the meantime, the way we send money overseas will remain the same. While there is the option of sending a telegraphic transfer via your bank, specialist online money transfer companies still offer a cost-effective solution. It offers better exchange rates and charge minimal transaction fees compared to the banks, so it’s definitely worth considering when you need to send money abroad.