There’s a lot of rhetoric about bitcoin and its impact on the $430 billion international remittance industry. One of the cryptocurrency’s most obvious uses is, after all, sending money across the planet with roughly the same effort as sending an email.
The potential effect on emerging markets — savings in aggregate that are larger than most countries’ education budgets — cannot be overstated. But beyond all the pontificating there is still the practical implementation that has yet to be sorted out.
Our startup is a homespun company operating out of the Philippines, which is the third-largest receiver of remittances in the world. The numbers are compelling: $26 billion received in 2013, an estimated $27.5 billion in 2014, and consistent growth of about $1 billion to $2 billion annually. Mexico is right behind with $23 billion received in 2013, although it has been declining in volume since the US housing market crash several years ago.
Although similar in volume, Mexico and the Philippines couldn’t be more different from a remittance standpoint. The United States is the single-largest source of remittances for both countries, but for Mexico it accounts for 98 percent of the total volume, whereas with the Philippines it accounts for a little over 30 percent.
A closer inspection also seems to indicate that the nearly US$10 billion in volume from the Philippines being attributed to the U.S. isn’t coming from the U.S. at all. In reality, a significant (although hitherto unknown) amount is simply funds being routed via nostro bank accounts from the Middle East, which hosts over 2.5 million Filipinos. Additionally, there are 40 other countries currently hosting at least 10,000 Filipinos respectively, an international pageantry which also includes Canada, Malaysia, Australia, Japan and the United Kingdom.
It’s accurate to say then that Mexico relies on a singular remittance corridor with the United States, while the Philippines is dependent upon multiple corridors with multiple countries, a circumstance which more closely echoes the two largest remittance countries, India and China ($71 billion and $64 billion, respectively).
Let’s preface this rest of this discussion with the statement that it is simply not possible for a small bitcoin startup to singlehandedly overthrow Western Union, MoneyGram or even, Remitly, at this stage. It is however possible to provide a very compelling alternative to a small subsection of their customers. “Narrow your focus to the smallest possible problem you can solve,” as the oft-quoted startup saying goes.
Additionally, let’s accept the fact that bitcoin as a currency is pretty terrible at the moment (Bitreserve notwithstanding), and focus instead on what it’s good at: instant settlement. Also, let’s assume that your average startup doesn’t have the resources to open overseas offices in multiple countries or to obtain all the necessary legal and regulatory requirements for operating in those countries.
Lastly, let’s also make the very reasonable assumption that most migrant workers (i.e. the most consistent remitters) don’t care about cryptocurrency or the blockchain or the coming financial revolution, but will naturally go to a service if it saves them money.
Given those parameters, what kind of bitcoin remittance business can we build?
We like to refer to services like Rebit in the Philippines, ArtaBit in Indonesia, and BitPesa in Africa as “last-mile” bitcoin remittance services. These services accept bitcoin from overseas, convert it into pesos, dinars or shillings, then deliver those funds to the final beneficiary via a variety of domestic transfer methods. The beneficiary doesn’t need to know that those funds were ever transmitted via bitcoin, they only know that the sender had to spend a little less money while doing so. There’s no volatility risk as the recipient never touches bitcoin; all risk is managed by the service.
By specializing on just the last mile, there’s an invitation for other bitcoin entrepreneurs from other countries to form informal corridors. A customer in Hong Kong needs to convert their HKD into BTC before sending it to the last-mile service, and one could make a reasonably profitable business out of performing that service for them.
Indeed, this is already happening organically. The “on-ramp” company (Bitspark in Hong Kong and Align Commerce in the U.S. as early examples) accepts local fiat currency at the till, and converts that cash into bitcoin on the back-end before transmitting the funds to the off-ramps in the Philippines, Indonesia, or elsewhere.
On the surface, it doesn’t seem like a very exciting premise for a “financial revolution,” but let’s think about what’s actually happening here. Small businesses that have no formal partnerships, binding contracts, or even lines of credit between them, are settling cross-border payments in real-time on behalf of their customers. This has never been possible before without a centralized intermediary (traditionally: ACH, SWIFT, or PayPal sort of).
When you describe it that way, the process seems straightforward. Most traditional bankers immediately understand the concept of “HKD -> BTC -> PHP,” because currently the standard workflow is “HKD -> USD -> PHP.” On paper, we’ve really just replaced the dollar with its more nimble, modern counterpart.
In practice, however, there’s a lot more to it than that.
At their core, all bitcoin remittance startups are brokerages.
Operating as on-ramps, they must have access to large amounts of bitcoin that they can purchase in real time. Buying bitcoin on-demand is the only way to reduce volatility risk, as holding the cryptocurrency has not proven to be a financially sound strategy over these past 12 months.
Access to an exchange with locally available pay-in methods and low trading fees is key here. In the U.S., Coinbase and Circle are at the top of the list. In Europe, Bitstamp and Kraken. In Australia, Coinjar and Independent Reserve. In Singapore, Itbit. In the Middle East, Igot. The list goes on.
Operating as off-ramps, the startups need to have enough buyers for the bitcoin they receive in order to raise sufficient fiat to make payouts to their customers’ beneficiaries. If bitcoin’s price were trending upwards, this would be a simple game of buying low and selling high, but the movement over the past year has been in the other direction.
With remittance volumes in the low hundred BTCs daily, a single broker with good connections can often sell over-the-counter quickly enough to turn a small profit, or at least break even. As the service volume grows however, automation in the form of trading bots that interact with the international exchanges will be necessary to keep ahead of volatility.
It’s a lot harder to be the off-ramp, in most cases. It’s basic migration theory all over again: on-ramps tend to exist in countries with better banking infrastructure and deeper bitcoin liquidity, while off-ramps tend to be in countries where the bitcoin community is in its infancy. This isn’t a problem so much as a massive opportunity, and if one has the stomach for it, operating as a last-mile remittance service is where the largest growth spurts will be observed. It’s only natural. Between the two of them, the Philippines and Indonesia receive remittances from over 50 different jurisdictions. As each new inward corridor comes online, the incoming bitcoin volume spikes.
Additionally, the off-ramps need to be connected to the various domestic remittance methods in their respective countries. In the Philippines, there are more pawnshops than ATMs, and as such, pawnshops are more frequently used as cash-out methods than banks. In Indonesia, a combination of banks and the post office appear to be the preferred strategies.
In India, the extremely popular (and completely informal) money transfer system of hawala implies that your cash pickup point could be anything from a jewelry store to a travel agency. It’ll be interesting to observe whether fledgling bitcoin remittance businesses in India choose to model their approach after the hawala brokers or use the formal routes provided by the banks and the post office.
In most countries, a business engaging in remittance activities will be categorised as a “Money Transfer Operator” and required to obtain a license as such. The costs of these licenses tend to vary wildly from country to country. In the US, hardly any bitcoin companies have ever managed to obtain licensing that covers all 50 states; it’s prohibitive enough (anecdotally, in the low millions of dollars) that startups like CoinX mention their license status very prominently on their website. Around the world, the range is from tens of thousand dollars in some ASEAN countries, all the way up to $1-2 million in the Middle East.
Every country has a slightly different approach to Anti-Money Laundering (AML) policies and Know-Your-Customer (KYC) requirements, and the costs of complying with these laws will have an impact on end-user pricing. A handful of companies provide KYC-as-a-service at fairly reasonable costs (IdentityMind is one that focuses on bitcoin startups), which alleviates that overhead somewhat. Some countries have stricter KYC requirements than others however, so it will be necessary to verify a startup’s compliance with the local AML council.
We’re currently at the starting line of a marathon that includes $42 billion in global savings at its end.
Imagine if every country had one of these loosely coupled but fully interoperable bitcoin remittance brokerages, each one acting as both an on-ramp and an off-ramp onto the global network. It’s hawala, writ large and thoroughly rebooted.
No centralized intermediary needs to exist in order to make this happen; each business is autonomous and settles all debts with bitcoin in real time. It may not be enough to overthrow Western Union, but I wager it’ll be enough to get its attention.
The potential effect on emerging markets […]