Can the blockchain revolutionize international money transfers by bringing cryptocurrency mainstream?
Since bitcoin was created in 2009, it’s been touted as the future of the global financial industry. The jury’s still out on that, but bitcoin represents a wellspring of potential.
One reason is that bitcoin is completely digital. You can’t touch it like you can touch fiat currency — or government-issued money like US dollars, euros or Japanese yen. And in many ways, bitcoin offers advantages that fiat money doesn’t: It’s hard to send $10,000 in cash overseas, but you can send the equivalent amount in bitcoin in just minutes.
If bitcoin is an intriguing subject, so is the blockchain — a digital ledger that records every single bitcoin transaction. Without the blockchain, bitcoin wouldn’t be possible.
Both bitcoin and the blockchain offer tantalizing possibilities for international money transfers. But are they effective now, and will they ever catch on among the wider public?
The promise of cryptocurrency
Let’s talk about what makes cryptocurrency so unique — and so promising.
Consider a fiat currency like the US dollar. It’s printed by the US Treasury Department and distributed by banks like the Federal Reserve. If for some reason these institutions decided to stop issuing currency, we couldn’t obtain any new dollars.
Cryptocurrency is different. It’s decentralized, meaning it’s not controlled by governments or banks. That means anyone in the world is free to buy and sell cryptocurrency like bitcoin.
Also consider the notion of storing your money in a bank. At some level, you need to trust that the bank has safeguarded your money and that you can withdraw your funds at any time.
In contrast, cryptocurrency was created so you wouldn’t have to trust any central institution. To make this possible, cryptocurrency uses blockchain technology.The bitcoin blockchain, for example, records every bitcoin transaction ever made. Each trade is publicly displayed for the world to see. Nobody owns the blockchain, and bitcoin’s software is open source, with a source code that’s publicly accessible for inspection, modification or enhancement.
Because bitcoin’s existence doesn’t depend on a central authority, it can theoretically be moved around the world more easily than fiat currency. But “theoretically” is key: In the real world of international money transfers, bitcoin has encountered many challenges that keep it from becoming the universal standard.
Are bitcoin and the blockchain effective for money transfers?
Compared to existing money transfer options, bitcoin is typically more complicated, slower and more expensive. That’s a triple disadvantage against traditional methods like banks and wire services.
Consider these negatives of bitcoin-based overseas money transfers.
- Bitcoin comes with a learning curve. The cryptocurrency isn’t as simple to understand as regular cash. Also, if you want to use bitcoin to convert one fiat currency to another, you have to manage the entire process yourself. (A money transfer provider will do that for you as part of its service.)
- It’s quick to transfer bitcoin, but your overall fiat-to-fiat transfers will be slowed by financial institutions. Bitcoin transfers themselves are quite fast. The problem is that if you’re making a bitcoin money transfer that involves fiat currency at any point, you’ll probably have to use a bank transfer. That instantly eliminates bitcoin as the fastest option for a fiat transfer. If speed is what you’re after, you could skip bitcoin entirely and just send a wire transfer through your bank.
- Exchange rates often make currency conversion expensive — and bitcoin exposes you to them twice. Let’s say you’re converting US dollars to euros. Normally you’ll lose money on the exchange rate once, getting a slightly worse rate when converting dollars to euros. But when you convert through bitcoins, you lose money on both the dollar-to-bitcoin and bitcoin-to-euro conversions.
For more detailed explanations about these issues, read our article on bitcoin transfers vs. traditional money transfers.
The potential is out there
Right now, bitcoin isn’t a superior option for fiat-to-fiat money transfers. It’s simply too unwieldy for consumer remittances. But along with the blockchain, it’s quietly working behind the scenes to spark a revolution in the money transfer industry.
As we’ve just discussed, cryptocurrency is decentralized — they don’t rely on governments or financial institutions to exist. That’s a critical advantage, as it means blockchain transactions can fluidly bypass the web of financial middlemen built up over decades.
Innovative startups and financial institutions are taking note, leveraging the blockchain for big wins. Payment app Circle, for example, uses the technology to move money swiftly around the world and create savings for its customers. You don’t have to work with cryptocurrency at all — Circle manages them in its backend processes while you deal exclusively with fiat. Crucially, using the blockchain allows Circle to charge no fees for depositing, sending, receiving or withdrawing money. And it allows Circle to charge a minuscule 0.25% to 0.5% markup on the exchange rate.
You can only use Circle for US dollars, euros or British pounds. Also, you have to wait a few days for withdrawals to your debit card or bank account. But Circle raises tantalizing possibilities for the future of cryptocurrency. Will its competitors keep up?
The blockchain is catching on
As it turns out, the blockchain is being embraced enthusiastically by the financial industry. Many banks are aware that they need to evolve with the changing times — especially when they’re being assaulted by scrappy startups hoping to bring them down.
The blockchain allows banks to upgrade inefficient processes that infuriate customers today. Transactions are expensive, but the blockchain makes them cheaper by cutting out intermediary banking costs. Sending money can be slow, but the blockchain can complete transfers in minutes. Consumers long for confirmation that their remittances are successful, but the blockchain can unequivocally confirm delivery each and every time.
Clearly, the blockchain brings many advantages that will simply be too good to pass up. Financial institutions are well aware of that: According to a recent report from IBM, 15% of banks will be using the blockchain in 2017. Furthermore, IBM expects about two-thirds of banks to be implementing the technology within just four years.
In time, cryptocurrency and the blockchain may have an invisible hand in virtually all of our financial transactions. They’ll serve as the unsung heroes in the fiat system we’ve grown to trust. But are they destined for more?
What’s next for the blockchain?
The blockchain wasn’t originally envisioned to play second fiddle to a fiat system. It was created to take over entirely.
It’s plausible to imagine a far future where this will happen, but this won’t be the case anytime soon. Instead, blockchain technology will continue to grow slowly and steadily in the public’s consciousness.
First, it’ll overhaul the financial industry, as it’s doing now. It’s improving money transfers in every way, and soon it’ll be indispensable for nearly every remittance company in the world.
Next, more money transfer providers will offer seamless cryptocurrency-to-fiat conversions — cheap ones too. Many existing cryptocurrency platforms let you convert digital currencies to fiat (and vice versa), but they’re often expensive. Other platforms like Circle are content to use bitcoin just to streamline fiat transactions. In time, providers may offer low-cost remittances in both cryptocurrency and fiat — like digital bazaars for any currency you could imagine.
Finally, more and more merchants will start accepting cryptocurrency as payment. This is when the blockchain will begin acquiring mainstream relevance. The process may be arduous, but it’s not much different than a company like Apple coaxing retailers to accept Apple Pay. Merchants need to be convinced of the benefits of cryptocurrency before they’ll adopt new forms of money. Either that, or cryptocurrency needs to become as widespread as credit cards, at which time retailers will have no choice but to keep up.
If this future comes into existence, it’ll have great implications for currency — fiat, digital or otherwise. Sending money back to family overseas would be as easy as giving cash to a friend. And numbers on a smartphone would be as spendable as coins in our pockets. If we achieve that reality, we may finally see the cryptocurrency revolution we’ve long been promised.