BLOCKCHAIN AND BITCOIN: DISRUPTING GLOBAL REMITTANCE PAYMENTS IN THE DIGITAL AGE
The practice where foreign workers send money to an individual or organization in their home country is known as a remittance. Remittances are fairly common as immigrants routinely send money back to family members as a form of support. In fact, technology companies like, PayPal, Abra, Align Commerce, and many non-U.S. companies are already aiming to dominate the remittance market,[1] specifically by using blockchain technology and Bitcoin or other cryptocurrencies to make cross border capital transfers more efficient. Traditionally, money transfer companies like Western Union and MoneyGram serve as intermediaries between consumers who wish to send money from a sender in one country to a recipient in another country. Currently, the growing industry is a $500 billion market,[2] where, traditional brick and mortar remitters like Western Union and MoneyGram are able to charge significant transaction fees.
Prior to the advent of blockchain, costs related to verifying the transaction, including the identities of the sender and recipient, calculating exchange rates, converting the currency, and settling on a transfer method were all assessed and passed on the consumer in the form of fees.[3] But that may be changing. In some instances, traditional remitters could charge $12 on a $200 transfer; the use of block chain technology and Bitcoin can reduce the charge to $6, nearly a 50% decrease in fees.[4] In fact, some estimate the average remitter fee at 10% of the cost of the transaction, where blockchain technology could reduce the fee down to 1% using a blockchain based remittance system.[5]
Remittance startups are utilizing block chain technology and Bitcoin, specifically its distributed ledger as a verification, encryption and cryptocurrency system to lower the transaction costs between sender and recipient. In fact, block chain can be used by a money services business to verify the identity of the sender and recipient, and the transaction, generally, using block chain’s distributed ledger. Block chain’s distributed ledger records all transactions and constantly updates in real time, where the structure of the system can constantly verify each transaction without the backing of a central bank or government—its mass appeal.[6] In lowering transaction costs, money service businesses then convert funds sent from a sender in Bitcoin to the recipient in the recipient’s local currency, without the traditional costs associated with capital transfers across borders.
Enter the Dodd Frank Act for Consumer Protection, particularly, the Electronic Funds Transfer Act (EFTA), more specifically, Regulation E, which governs money services businesses similar to PayPal, and other remitters. Primarily, Regulation E serves as a consumer protection regulation and establishes the basic rights, liabilities, and responsibilities for consumers that use electronic funds transfers.[7] In part, Regulation E limits consumer liability for unauthorized electronic funds transfers. Therefore, money services like PayPal may be unclear as to what extent it needs to comply with Regulation E because of the regulation’s consumer protection provisions.[8]
Companies like PayPal suggest that their business practices do not expose it to the requirements of Regulation E.[9] Still, Money service businesses acknowledge that changes to its practices related to Regulation E could require significant costs that could harm its overall business.[10] Further, remitters, senders and recipients are likely subject to anti-money laundering and anti-terrorism regulations under the Bank Secrecy Act.
Still, blockchain and cryptocurrencies enable access to capital for individuals and entrepreneurs outside the traditional banking system. In the developing world, senders and recipients who depend on remittances and may not have access to traditional banking may find block chain and cryptocurrencies revolutionary. In lowering transaction cost and efficiently validating the transaction, blockchain has the potential to quickly enable capital flows across boundaries, without the high cost of using a traditional remittance service like Western Union or MoneyGram and is outside of the traditional banking system.
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[2] https://qz.com/775159/theres-a-500-billion-remittance-market-and-bitcoin-startups-want-in-on-it/
[4] https://qz.com/775159/theres-a-500-billion-remittance-market-and-bitcoin-startups-want-in-on-it/; see also, https://www.cfapubs.org/doi/pdf/10.2469/cp.v32.n3.5
[5] Id.
[9] Id. at 103-104.
[10] Id. at 92.