1. 0.25 CPD Hours

ESG Series - Social Part 3: Remittances

Learning Outcomes

In this session, you will learn about:

  • The size and scope of the World remittance market
  • Bitcoin’s Lightning Network as a remittance solution
  • Current barriers preventing further adoption of Bitcoin as a remittance solution

Introduction


One of the most socially compelling use-cases for Bitcoin is its potential to transform the remittance market, which involves the payment of money from one party to another, usually across borders. Whilst the cost of remittances has trended gradually downward, it is still relatively high compared to domestic bank transfer fees, particularly for smaller transfers of money. With the power of Bitcoin’s layer 2 protocols, chiefly the Lightning Network, the cost of remittances can be reduced to negligible amounts, allowing one to send and receive money almost instantly. This presents significant potential cost savings for the millions of people who send and receive remittances that would otherwise have to relinquish some of their money as a fee for traditional money transfer providers.

The Remittance Market


In 2021, the World Bank projected that US$589 billion would be sent around the world as remittances, up 7.3% from the previous year. This means that remittance flows to low- to middle-income countries (excluding China) are expected to surpass foreign direct investment for the second consecutive year. These flows are relied upon heavily by several developing economies, such as El Salvador, where the size of remittances reaches around 26% of GDP. Ultimately however, remittances matter most at the individual level. They are a crucial source of income and even a lifeline for many households, allowing them to spend money on essential items such as food and shelter.

Overwhelmingly, the most pressing concern for those sending and receiving remittances are the fees. The world average is still more than double that of the United Nations’ Sustainable Development Target of 3%. These fees are charged by service providers such as banks, money transfer operators (MTOs), mobile operators and post offices. These middle-men process the transfers and at varying costs that typically decrease as the size of the transaction increases. That is, whilst it costs the world on average 6.28% to send $200, it is significantly less - 4.21% - to send $500. The fees charged on smaller transfers can therefore be very high, and exchange rates add more uncertainty to the cost. Consequently, households experiencing economic hardship and which rely so heavily on remittances, lose out on essential funds.

Despite pressure from the UN, not every remittance corridor is made equal. Where you send money to and from is a key factor in determining the price you pay. Consider Nigeria for example, the largest recipient of remittances in Sub-Saharan Africa; whilst Nigerian diaspora living in the United States pay an average of just under 4% to send $200 to Nigeria, those living in Cameroon have to pay over 12%. Reducing costs for such expensive corridors is unfortunately a complex problem. Despite the global decrease in costs, these regional disparities have persisted due to the lack of competition, overhead costs, and regulatory requirements.

Beyond the cost of remittances, there are several other disadvantages of sending money through international money transfer providers. Currently, the largest player in the market is Western Union, with over 500,000 locations worldwide, followed closely by its rival, Moneygram. The company offers its customers the option to send money by phone, through its website and in person. However, customers are often constrained by the business hours of their stores and banks. Moreover, the settlement times are often lengthy and uncertain, ranging from a few days to even weeks. This tends to vary between the method of transfer as well as the recipient’s location, as the transaction must go through numerous intermediaries before it can appear on the other side.

Remittance via Bitcoin


With two pressing issues, cost and settlement time, there is a clear need to revolutionise the existing remittance market. Without the friction of intermediaries, Bitcoin seems like it would provide the ideal solution. However, ‘on-chain’ peer-to-peer transactions on Bitcoin are not always a viable method of transfer, particularly for smaller amounts, especially during times of high network congestion. It is only when Bitcoin is used in conjunction with the Lightning Network, that it is realistically able to overcome these hurdles and be used as a tool to remit on a peer-to-peer basis. Use of regulated custodial platforms where platform users can send funds to each other “off-chain” can also assist with transaction speed and cost, privacy and security trade-offs aside.

The Role of Bitcoin’s Layer 2 Protocol (Lightning Network)


The launch of the Lightning Network in 2018 marked a significant step in Bitcoin’s transactional capabilities. Before its release, Bitcoin’s network struggled with a scalability problem. Due to the blockchain’s limited capacity, it can only process up to 7 transactions per second, which means increasing demand for on-chain transactions leads to rising fees and longer transfer times.

Each “transaction” on the Bitcoin base-layer can be better described as a “settlement”. A traditional example of settlement is how banks tally and aggregate millions of interbank transactions, and settle with other banks and financial institutions at the end of the day. Just as Visa and Mastercard act as transaction layers to the broader financial settlement network, The Lightning Network is the transaction layer to Bitcoin’s settlement network.

This decentralised layer anchored to Bitcoin allows for theoretically infinite transactions per second, at barely any cost. This allows the Bitcoin-Lightning Network stack to be used to remit funds. Instead of having to wait for several days with uncertainty, the transaction is secure and instant. More importantly however, money transfer providers can’t compare with fees of only a few cents or less. No matter what remittance corridor you are sending from, fees will remain indiscriminate and low.

What This Looks Like


To access the Lightning Network to send remittances, one needs a lightning wallet. There are a myriad of wallets available to use through a web app, desktop app and mobile app including Zap, Ride-The-Lightning, Lightning App, Wallet of Satoshi, Phoenix, Muun and more. Whilst each wallet may offer different features and trade-offs such as added passcode/biometric security or the ability to buy bitcoin natively on the app, they are all viable methods of low-cost remittance.

Most wallets available as a mobile app are simple in design, allowing you to connect to a bank account in order to purchase bitcoin to send to another wallet. By just scanning the QR code associated with the recipient wallet, you can send Bitcoin between wallets instantly and at fees as low as just a cent.

Aside from the lightning wallets previously mentioned, there have been other recent innovations specifically aimed at facilitating remittances such as Strike and El Salvador’s Chivo wallet. Developed by the CEO of Zap, Strike aims to offer superior international payments and differentiates itself from typical lightning wallets as it can transfer fiat currency seamlessly. The Strike app allows its users to work with what they are used to - fiat currency - and combines it with the power of Bitcoin and the Lightning Network. Users can connect a bank account and transfer money into the app, where it can then be immediately converted into Bitcoin at no added cost outside a small spread. The remitted bitcoin is then sent via the Lightning Network, where the receiver will be credited with fiat currency, rather than Bitcoin, at nearly zero cost. Whilst Strike has previously only been available for the United States, El Salvador and most recently, Argentina, a global version has been announced and will likely become more widely available soon, helping connect remittance corridors worldwide.

The Chivo wallet on the other hand, was made by the El Salvadoran government alongside their decision to make Bitcoin legal tender in September 2021, which aimed at helping its citizens save on remittance costs. Though not compulsory, the wallet is free for Salvadorans to transact with and according to the country’s president, Nayib Bukele, is used to send a few million dollars worth of remittances daily. However, there are still technical issues and valid concerns raised by citizens regarding the government’s role, specifically their power over the wallet. To ensure Salvadorans can use it safely and reliably, these will need to be addressed. Of course, citizens are not confined to just the Chivo wallet, and also are free to use an alternative if they wish to do so. Nonetheless, the creation of El Salvador’s very own wallet with an intention to facilitate remittances showcases the persisting demand for lower fees within remittance-reliant economies and highlights one of Bitcoin’s many use-cases.

What’s Stopping Additional Adoption?


One of the main sources of hesitancy for Bitcoin’s use in the context of remittances is its perception, specifically its volatility. Undoubtedly, Bitcoin has demonstrated price volatility but that does not necessarily negate its uses and capabilities. In many cases, Bitcoin’s perception has impeded its adoption, as many people focus exclusively on its price action, when price is just one element of Bitcoin. As we have touched upon earlier, the Lightning Network can currently be utilised in a few different ways and through many platforms: all instant, at negligible cost and all relatively accessible. With a lightning wallet, one can send Bitcoin in an instant where its receiver can immediately exchange it if they want to, implying that its daily, or even hourly price movement, is an unlikely risk to remittance. Volatility is less of a concern with its real capability as a remittance tool and more so a concern that manifests in people’s attitudes which may hence slow its adoption.

What is likely to affect usability in the short-term however, is a lack of interoperability between certain wallets or applications, as well as the fact that many communities still prefer to work in cash - even receiving their remittances this way. For example, the Chivo wallet is only available for Salvadorans to use. Furthermore, the wallet itself has experienced various technical issues such as delays in transactions with other Bitcoin wallets, which makes it difficult for people to fully utilise it not only for cross border transactions, but within the country itself as well.

Additionally, the Lightning Network essentially offers a digital solution only, and even though applications such as Strike are allowing people to work with familiar fiat currencies, its service is strictly digital, and physical cash is not an option. We’ve discussed the topic of financial accessibility in Part II of this series, Diversity and Inclusion, which details this perspective further. The rapid adoption of smartphones, the internet and the ongoing digital payments revolution means that even rural communities and unbanked people will likely replace physical cash with digital alternatives over time as their preferred method of payment.

Conclusion


Bitcoin and the Lightning Network are offering solutions to the two biggest challenges facing the remittance market; cost and transfer times. Whilst traditional money transfer providers charge varying fees depending on factors such as the amount being transferred, the method of payment or remittance corridor, Bitcoin and its layer 2 protocol’s capabilities allows people to remit at negligible cost and in an instant, regardless of when or where the payment is sent. As new innovations enter the market, much like lightning wallets and Strike, the cost savings that Bitcoin offers will soon be hard to ignore in the remittance market.

Note: This activity meets the guidelines for qualifying CPD, and has been accredited for continuing professional development by the Financial Planning Association of Australia (FPA). This does not constitute FPA's endorsement of the activity.


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