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How do cross-border payments work with crypto?


The relevant transactions are carried out via the blockchain, which makes banks virtually unnecessary as payments are often made considerably slower. Suppose you want to transfer an amount from Spain to Africa, what has often happened that you first have to convert the relevant fiat currency to a digital asset of your choice. For this, there are a wide variety of platforms that act as a middleman to help people make purchases through bank transfers and credit cards. This digital currency (crypto) can be stored in a secure crypto wallet  and when you want to transfer an amount to friends, they only have to give you the address of the relevant wallet, which is comparable to an account number of your bank.

These addresses often contain tens of characters, so it is very important that they are properly noted or that you link them to a scanable code. When the sent amount has arrived on the account of the recipient, he can convert the crypto into fiat and have it paid out or they convert it into a digital fiat variant such as a stable coin. Of course, simply holding the crypto in question for the long term is also an option.

Advantages of crypto compared to fiat

Simply put, crypto is cheaper and faster, but it also has the advantage and perhaps the disadvantage that it is somewhat easily traceable in order to prevent money laundering. Many people are very positive about this, given that it can be very expensive to transfer large amounts between different countries at the moment, so this makes crypto an attractive alternative.

Currently, the World Bank estimates that wire transfers through various fiat channels result in average fees of about 6.75%. For someone with a modest income, this can take up a significant portion of their income. While this is less than the 9.67% billed in 2009, there is still a long way to go. In early 2010, the G8 and G20 had set a target of reducing remittance costs to 5% and the United Nations Sustainable Development Goals also set a target of 3% by 2030.

To this end, cryptocurrencies can help to achieve these goals much faster. According to figures from Deloitte, blockchain has the potential to reduce transaction costs by 40% to 80%. But the benefits may not stop here. At this point, it can take 3-5 business days for funds to be processed through the old-fashioned fiat channels, so this is not ideal for someone who needs quick cash. However, certain blockchains allow payments to be received and confirmed within seconds.

These benefits don’t stop here either, because as Deloitte points out, blockchain transactions can contain a lot of data, meaning metadata can be sent from start to finish. All of this can help combat money laundering and terrorist financing, two areas of concern for regulators. Many crypto platforms have introduced KYC (Know Your Customer) checks to authenticate users as well.

A critical benefit that cryptocurrencies can provide is unlocking access to financial services for those without a bank account. Research shows that 80% of consumers in countries like Africa fall into this category, with a total of 1.7 billion people worldwide without a bank account. There may be several reasons for this, financial institutions may not operate in their geographic area, these services may be too expensive or consumers may lack confidence.

What are the disadvantages of using crypto?

Cryptocurrencies like Bitcoin are often criticized for being too volatile, and some say blockchain technology is too difficult for ordinary consumers to understand. It is important to note that there is one factor that will determine whether or not crypto-based cross-border payments are cheaper: it depends a lot on the digital asset being used.

Making transfers with Bitcoin and Ethereum can be very expensive, especially during peak hours. Ethereum has been overwhelmed on multiple occasions over the years by massive amounts of transaction volumes fueled by a rising demand for collectibles and decentralized financing. Addressing scalability issues will become critical as cryptocurrencies become more widely used for wire transfers.

Crypto only helps for financial inclusion, provided those who benefit most from remittances can be educated about how digital assets work and access smartphones with internet access so they can access their money. There are reasons to be optimistic here. As we mentioned before, 80% of consumers in sub-Saharan Africa do not have a bank, but 91% own a mobile phone, and incidentally, the adoption of smartphones is increasing. Mobile payments are also extremely popular on the continent, which means that the jump to crypto-based transactions may not be that big, but this could be different for the West as we are still used to the old system.

The latest regulatory challenge, industry executives have warned there will be more regulation of cryptocurrency, with the European Union recently announcing plans to monitor the market extensively in just four years. This does not necessarily mean that a ban on digital assets is iminent (except maybe for India, where a law is discussed these day to ban cryptocurrencies), many legislators have indeed recognized that they can have benefits in lowering the costs associated with cross-border payments. As a result, some are exploring whether they can and / or should launch their own central bank digital currency.

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