To say that bitcoin and blockchain are popular right now would be an understatement.
The cryptocurrency, along with the technology it’s built on, have generated plenty of headlines in recent months – and more are sure to follow. Research indicates that bitcoin will become the sixth largest global reserve currency by 2030. For the banking and payments industries, it’s an opportunity that simply can’t be passed up.
Global banks are investing in blockchain startups while bigger players, such as Goldman Sachs, are taking a closer look at the technology’s benefits. The same goes for remittance companies hoping to get in on the action. But despite the fact that bitcoin and blockchain could potentially introduce a faster, cheaper way to transfer money across borders, adoption by regulated financial institutions is stagnant.
Here’s a look at how bitcoin and blockchain can transform the way we send money, as well as what’s standing in the way of implementation.
The power of bitcoin
Blockchain enables bitcoin through its revolutionary technology that enables the digital transfer of assets. Bitcoin is one of those potential assets, vying to stick around as a new type of currency. If bitcoin were to catch on as a mainstream currency, it could replace the remittance industry rather than aid it. After all, there would no longer be a need for currency conversion, and the blockchain would make it easy to send money around the world in just seconds.
Such a scenario, however, remains a long shot. Awareness of bitcoin has soared, yet only about one percent of U.S. consumers have ever owned virtual currency and even fewer have used bitcoin to buy goods or services. Volatility – or lack thereof – is a big reason why. Citizens in developed countries rarely have to worry about significant swings in the value of their currency, thereby rendering highly volatile alternative currencies unappealing.
Still, the promise of bitcoin (and other digital currencies) can be realized by financial services companies today. For the first time, the banking system has a competitor in the ability to hold and move value, and the market is positioned to benefit from the impact of competition.
What’s slowing adoption
Bitcoin is designed to be outside of government control, but that doesn’t mean it will escape regulation. As mainstream adoption nears, government’s incentive to intervene will skyrocket.
Governments typically control currencies. The dollar, for example, is a powerful asset for the U.S. government. Banks all over the world maintain a reserve of U.S. dollars. Even international agreements that don’t involve U.S. companies are often denominated in U.S. dollars.
Bitcoin represents a competitor to fiat currencies, and as adoption grows so too does the potential for governments to protect themselves against competition. While governments would struggle to eliminate bitcoin, the digital currency faces potential restrictions from just about any government that chooses to regulate it. We’re already seeing this in China, where the three largest bitcoin exchanges have all stopped local trading following pressure from the Chinese government.
The current regulatory structure in the U.S. is already causing huge barriers for financial institutions as they begin working with bitcoin. There’s no getting around it – bitcoin offers new know your customer (KYC) challenges. Any company looking to work with bitcoin must understand the distributed ledger technology sufficiently to fight money laundering, terrorist financing and basic KYC requirements. This can be done by applying the same compliance principles that help ensure Bank Secretary Act (BSA) and anti-money laundering law (AML) compliance, but each company must build the institutional knowledge to appropriately apply such principles.
When it comes to blockchain, success doesn’t hinge on a particular coin. Though bitcoin adoption may help drive interest in blockchain, such a domino effect isn’t necessarily specific to bitcoin. Other cryptocurrencies, like ethereum or litecoin, have the potential to deliver similar results. At its core, blockchain offers remittance companies the opportunity create a real-time settlement network that’s not only coin agnostic but also faster and less expensive.
Perhaps even more importantly, blockchain removes some financial intermediaries and introduces competition that elevates the industry. Ripple’s rivalry with Swift is the latest example of how blockchain can give smaller companies a shot at success and push industry stalwarts to innovate. While Swift is the current standard for international wires, Ripple isn’t far behind thanks in large part to blockchain technology. Likewise, Swift has increased its investment in technology and faster payments as competitors like Ripple emerge. This increased competition can go a long way toward benefiting remittance businesses and, ultimately, their customers.
The challenges ahead
While interest in blockchain is there, continued investment in the technology will largely depend on trust. On the surface, smart contracts – which consist of self-executing protocols that are stored on the blockchain for all to see – may appear to be a perfect fit for international trade. After all, who wouldn’t want to choose a smart contract that pays suppliers after goods have been delivered? In addition to cutting costs from international trade, such an option is also a significant upgrade over a standby letter of credit or putting money in escrow.
But here’s the catch – both parties would have to trust the blockchain, along with the digital currencies associated with it. And considering the absence of trust already tied to international trade and cryptocurrencies, getting everyone on the same page is often easier said than done.
In addition to establishing trust, attention should be diverted toward two key factors – technology and regulation. As it currently stands, few remittance companies have the infrastructure needed to implement blockchain. In fact, some industry stalwarts would require a complete overhaul of their underlying settlement system.
To ensure regulation conditions are met, innovators will have to work closely with officials to monitor whether blockchain reduces fraud and improves AML efforts. Although blockchain technology can aid regulatory efforts, implementation is a different story.
It’s no surprise bitcoin and blockchain have seemingly dominated the remittance news cycle. From cutting costs to boosting competition, the cryptocurrency and back-end technology can benefit both businesses as well as their customers. Before that happens, however, potential roadblocks – including regulatory uncertainty, security and lack of trust – must first be addressed.
Josh Gordon-Blake, VP of Global Partnerships at Pangea Money Transfer
Image Credit: Geralt / Pixabay