The digital currency industry is facing a crypto winter, but payments may be a potential source of … [+]
For the thousands of crypto-first companies that have sprung up over the past few years, the current crypto winter is a significant test of their businesses.
Bitcoin BTC , the bellwether for cryptocurrency as a whole, took an initial tumble in May from upwards of $40,000 to around $30,000, before dropping to prices of around $20,000 in June, where it has more-or-less stayed ever since. Trading volumes have followed: leading exchange Coinbase COIN reported a 53% year-on-year drop in volumes in Q2 2022, with a similar reduction likely in Q3.
This has, inevitably, impacted the bottom lines of those in the space. For example, Block subsidiary Cash App, which makes much of its money from a service allowing customers to buy, sell and send bitcoin, saw its revenue from bitcoin shrink by 35% between Q2 2021 and Q2 2022.
Meanwhile, the regulatory environment is becoming more challenging. The US is expected to ramp up regulations on crypto following the release of a framework for the development of digital assets by the White House. Meanwhile, in the UK there are plans to increase the capabilities of the government to seize, freeze and recover crypto.
With little sign of winter’s end, many crypto players are looking to other avenues for profit, including in more traditional areas of finance. And one space with notable potential for crypto is cross-border payments.
For some years now, there has been an ongoing claim that crypto payments are cheaper, faster and just generally better than traditional cross-border alternatives. The reality is considerably more complicated and far from clear-cut.
While in theory crypto payments are instant, the process of setting up a transfer, moving it between wallets and converting it back into fiat can add time. By contrast, there are a wide range of conventional money transfer solutions that are also instant or near instant on the majority of corridors.
Meanwhile, crypto being cheaper in terms of cost is also disputable. When the cost of crypto is raised, the focus is generally on the cost of purchasing or selling crypto, which is typically very low. However, for money transfers, there is also the cost of moving the crypto from one wallet to another, often a much higher amount that is disregarded in many claims.
My own company’s research on this subject has shown that while crypto-based cross-border transfers can be made at a lower cost than through conventional remittance or money transfer providers, this is only possible with certain combinations of companies, and for some the price is comparable to traditional methods.
However, beyond this, there are genuine benefits of crypto for payments – and it is these that are earning it a place within the market.
While it is very challenging to determine the precise numbers doing so, we know that cryptocurrencies such as bitcoin are being used by people for remittances in parts of the world with particularly volatile currencies or those with significant cross-border restrictions.
On first glance on the volatility point, this seems surprising—even the most volatile currencies are less volatile than cryptocurrencies such as bitcoin and ether over a two-year period. However, when we look at the volatility over shorter periods of time, there are windows where cryptocurrencies are less volatile than certain fiat counterparts, such as the Sri Lankan rupee. As a result, crypto provides a relatively accessible alternative during these periods.
Beyond this, however, there are benefits for money transfer operators that are seeing some begin to explore the technology. One good example of this is MoneyGram, which now, alongside its conventional remittance service, offers a global crypto-to-cash network through a partnership with the blockchain provider Stellar XLM .
This sees it enable customers at its retail locations to buy the stablecoin USDC USDC for cash, which can then be sent and converted back into cash at other locations around the world. The result is a system that customers can use to send money via crypto, or alternatively buy crypto via cash as they can instead convert the USDC into any other cryptocurrency of their choice.
The project provides a novel means to access the crypto space—particularly for those who lack access to traditional banking facilities—but it also has a benefit for MoneyGram over conventional transactions: settlement.
When a traditional money transfer is sent, it will be ready for the recipient to collect immediately from their local branch, even if it is on the other side of the world from the sender. However, MoneyGram will see the settlement of the transaction—that is, the money moved from their account in the sending country to that in the recipient country to cover the amount paid out—some time later.
By contrast, when a crypto money transfer occurs, the settlement truly is instant—meaning that for the first time, when the company is paying out to its customer, it already has the money in its account. This is convenient from an accounting point of view, but it has significant implications for risk in cross-border transactions, particularly across areas of particular volatility.
It is these types of benefits that are ultimately going to make crypto a worthy addition to the cross-border payments space—not promises of cheaper, faster payments without a clear sense of the genuine speeds and prices in the market. And for companies looking to diversify their crypto offerings, providing services to the payments space is a worthy area to explore.
When it comes to currencies that have restrictions on moving the money out of the country, including major countries across the globe such as Argentina, China, India or Nigeria, the reasons to use cryptocurrency for cross-border transfers appear more obvious. These movements outside of the traditional fiat currency segment are a challenge for the central banks in these countries that by definition like to keep control over their currencies. However, central banks are exploring their own solutions to this issue.
While companies in the payments space are exploring crypto for cross-border payments, central banks are also looking at their potential in the form of central bank digital currencies (CBDCs). Crucially, these are not the same as normal crypto, but are a digital version of traditional fiat currency—and while they are often run on blockchain, this is not essential.
State-backed and run by a nation’s central bank, they have the potential to combat fraud and money laundering, as well as potentially increasing financial inclusion. Depending on how they are set up, they could also have powerful benefits for cross-border payments, dramatically improving the bank-accessed payments infrastructure, therefore increasing speeds and lowering costs, particularly in areas of the world where cross-border payments via banks remain slow and expensive.
Many central banks around the world are currently exploring CBDCs, however they take several forms. Some are developing wholesale CBDCs for sole use by financial institutions, which would be designed for interbank transactions and financial settlement. Others are developing retail CBDCs, which would be used by businesses and individuals in much the same way as non-digital fiat currency is today, but with added transparency and inclusion benefits.
There are projects around the world exploring both versions, with the majority of nations having a CBDC project in some form or another. However, the number of launched CBDCs remains extremely limited—largely to smaller countries where they solve specific local problems—and interoperability projects to connect CBDCs remain largely at the research phase.
While there is potential for CBDCs at some point in the future, they are not the answer to the current crypto winter, nor the immediate shortcomings of cross-border payments. We have a generation of development within payments before CBDCs can become the dominant model, and crypto may play a role in filling that gap.
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Administraroot
