Governments around the world have been looking at adopting, regulating and even banning cryptocurrencies since the inception of Bitcoin. Ever since, the crypto ecosystem has been a rocket ship ride to the moon and back (multiple times). Today, it seems that more people than ever have hopped on for the ride.
We’ve also seen a massive shift toward digital platforms across all industries as a result of the pandemic. Political leaders globally have followed suit by taking steps to move their economies in the same direction.
One of the most recent examples is El Salvador, which made headlines by becoming the first country to adopt Bitcoin as legal tender (a move that has since been protested by its citizens). In the initial announcement, the country's president directly connected crypto as a competitor to remittances, noting this would increase the amount of money low-income families in El Salvador receive from remittances by the "equivalent of billions of dollars every year."
To be an effective form of cross-border payment flows, digital assets must overcome innate challenges that already dampen their adoption ability regardless of a cross-border use case.
Remittances — the act of individuals sending money to support their families and communities back home — make up a significant component of GDP for many countries. In fact, global remittances totaled roughly $700 billion in 2020, $540 billion of which is noted to have been sent to low- and middle-income countries, according to the World Bank. El Salvador received nearly $6 billion of that. Cryptocurrencies, on the other hand, are estimated to currently make up less than 1% of the volume of global cross-border remittances.
Is cryptocurrency an effective replacement for remittances? No, at least not yet.
The demand for each of our services is a market-specific story, and it’s not uncommon for recipients to still pick up cash despite having real-time digital and cash pay-out options available. This is not surprising, as many individuals who receive remittances have little or no ability to pay for goods and services digitally. Instead, they use retail, bank and other physical locations in the MoneyGram network to access the funds they need.
Digital currencies are certainly an additive factor, and crypto will no doubt have an impact in the years to come. But it will take time, and there are several headwinds to mainstream adoption and displacing cash for the millions of families who continue to rely on it.
For one, cryptocurrency transfers, quite frankly, currently aren’t a cheaper, faster or easier alternative than cash, particularly considering the complexities of converting crypto to/from local currencies.
Specific to El Salvador, remittances accounted for around a quarter of the country's GDP and benefit approximately 360,000 households. We know that buying and selling crypto is a much more complicated process than transferring and accepting money via a remittance platform. It is highly unlikely that all of those households are going to learn and adapt to an entirely new payment system soon.
Additionally, to buy goods or services with crypto, the digital asset needs to be converted back into local currency in almost all circumstances. That’s tough for the millions of people who rely on remittances for quick access to funds for essential daily needs.
A recent customer survey found that senders are mainly transferring money to cover the costs for the very basics of survival and well-being, primarily for food (73%), healthcare (59%) and housing (54%). Crypto is simply not ready to be the lifeline that so many of these individuals depend on for immediacy. Crypto can be particularly volatile compared to most local currencies, so we cannot rely on it as a safe haven for those who are depending on $20 to be $20 by the time it reaches them. Look no further than Bitcoin’s price history.
Lastly, many countries have yet to recognize or provide legal pathways for cryptocurrency trading/payments, including the United States. The hype makes it seem as if we’ll be paying in Bitcoin for our holiday presents in 2022, but there are dozens on the other side of the aisle taking the opposite approach.
To be an effective form of cross-border payment flows, digital assets must overcome innate challenges that already dampen their adoption ability regardless of a cross-border use case, including lack of utility, expense of exchanges, complexity, volatility, and limited on and off-ramps to local currencies.
I do believe crypto and digital currencies can eventually help streamline cross-border payments. Personally, I also have a great time "holding" crypto as an investment and being a part of this emerging industry. However, like most new technologies, digital assets still have their fair share of obstacles to address before they become the norm in global remittances.
Disclosure: MoneyGram has embarked on a partnership with Stellar that allows digital wallets connected to the Stellar network to access MoneyGram's global retail platform.