Blockchain the future for remittance payments?

In countries suffering mass inflation or political instability, remittances are vital to the economy. Mainly due to the high costs associated with building and maintaining financial infrastructure like ATMS and banks, many families in developing nations depend on remittance payments to get by.

Platforms specializing in remittances, such as BitSpark and Bitpesa, use blockchain technology to ease the cost and difficulty of sending money across borders.

 Endearingly called "dollars wrapped with love" by economist Dilip Ratha, global remittances totaled $596 billion (€479 billion) in 2016 and are vital to the livelihood of millions.

Remittances are technically described as peer-to-peer transactions from  migrant workers to family or friends living in their home country. From Germany alone, over $23 billion was sent abroad in 2016, mainly to Turkey, Italy, Serbia and Montenegro.

 Research has found these payments are mainly used for basic expenses such as food, clothing, transportation and education, making them vital to the livelihood of those in developing nations.

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"There are millions of people who migrate each year. With the help of the family, they cross oceans, they cross deserts, they cross rivers, they cross mountains," says World Bank economist Dilip Ratha.

"They risk their lives to realize a dream, and that dream is as simple as having a decent job somewhere so they can send money home and help the family, which has helped them before."

How it works

In the olden days before Bitcoin and blockchain became household words, sending remittances involved using a bank or a specialized service like Western Union. The process works like this: the bank converts the local currency to dollars, transfers them to an account in the recipient's country and then converts them back into the local currency.

There is a loss through converting currencies this many times, not to mention fees and time spent waiting for transfer approvals. A study by the World Bank found that fees average 7.09 percent of the amount sent. By using Bitcoin to this transaction, blockchain platforms are able to reduce fees and transfer money more quickly. The World Bank also noted that cutting prices by 5 percent can save $16 billion a year.

Blockchain technology is the foundation for cryptocurrencies like Bitcoin. With blockchain, a tally of transactions are encrypted and stored in every participating account's ledger, in the form of blocks.

This means that a transaction cannot be altered without changing every single block, making Bitcoin impervious to fraud. The peer-to-peer network eliminates the need for a bank to keep track of the accounts. The decentralized nature of Bitcoin is the basis for much of its growing popularity.

Easing the burden of migration

As a self-titled "Blockchain Evangelist," American resident Jay Stark opts to use blockchain platforms over banks. He reasons "it's much easier than having to take time out of your day, go to a bank, sign documents, provide various forms of ID, making a pin, and only during the hours of 10 and 5 in the afternoon. You can basically download a bank on your phone and transact at any time across any time zone."

These tasks are further complicated for immigrants, where getting a bank account or proper identification involves more paperwork and bureaucracy than simply downloading an app. The UN reported that 258 million people now live in a country other than their birth country, a 49-percent increase from the year 2000.

Lorenzo Fioramonti, a political professor and director at the Center for the Study of Governance Innovation, notes that using cryptocurrencies "results in a transparent open-access registry of monetary flows which makes the intermediation of banking authorities unnecessary. Thus it challenges the conventional belief that money can only work through central planning."

In countries like Nigeria and Zimbabwe, government controls and a chronic shortage of dollars has kept these economies in financial crisis. And political instability and ultra-high inflation has many turning to Bitcoin as a safe alternative to securing and protecting financial assets.

Cryptocurrencies are still in the beginning stages of innovation, and companies have only just begun exploring their potential role in remittance payments. Fioramonti is optimistic this is only the beginning.

"In the near future, we will have a variety of money with different qualities and different purposes. This will make economies more resilient against shocks and will support more equitable and sustainable development, by putting users in the driver seat and reinforcing local economic development."