How can Bitcoin be Used for Remittances?
Attorney Brock Cusick describes the promise Bitcoin holds for hardworking, driven individuals who work overseas from their families: reduced fees for sending money home, security, simplicity and speed.
Remittances are funds that workers in one nation send back to families in their countries of origin. In the global competition between States for the supply of labor, the ability to remit earnings and support families “back home” is a mandatory feature for any advanced economy. The more efficiently a nation supports remittances, the better able it is to compete for the global supply of workers willing to emigrate for work.
The World Bank estimated total remittances to developing countries in 2014 to be $435 billion, of which 7.9% (or $34 billion) is collected in fees by traditional money transmitting businesses for the service of moving money from one jurisdiction to another and converting between currencies. There is great deal of variance in fees by jurisdiction however, from less than 1% between Singapore and Malaysia, to over 20% among certain African jurisdictions.
The remittances market has proven over years to be a difficult one for new entrants to compete in due to the need to have a large network of banking relationships in multiple jurisdictions, and to have local presence in many markets. This has led to a rather stable market (Western Union has been around since the 1850s) with stably high fees and limited innovation.
Very recently however a new technology, Bitcoin, has come along which has the potential to shake up the remittances market considerably, putting more money in the pockets of workers and their families, while also making the jurisdictions that support Bitcoin’s use more competitive at attracting the global labor supply.
WHAT IS BITCOIN?
Bitcoin is a new technology invented by a pseudonymous software developer who went by the name Satoshi Nakamoto. We don’t know who Nakamoto is in real life, but as Bitcoin is open source software that thousands of other programmers have reviewed and verified, it doesn’t really matter who he was. Explaining what Bitcoin is and how it works is sort of tricky however because it has no direct historical analogue; any simple analogy will always fall short in conveying understanding. Therefore I hope you will bear with me as I explain it.
Bitcoin is a digital protocol for exchanging certain kinds of messages, the same way that Hypertext Transfer Protocol (HTTP) is a protocol for transmitting web pages and Simple Mail Transfer Protocol (SMTP) is a protocol for sending email. The Bitcoin protocol was initially described by Nakamoto in 2009, and all software implementations of Bitcoin today (of which there are several) adhere to this protocol, though in a slightly evolved state since then.
The purpose of the Bitcoin protocol is to allow a network of computers, operated by users who are unknown to each other, connecting over the Internet, to cooperatively maintain and verify the accuracy of a shared database called a “blockchain”. The blockchain itself can be thought of a ledger, such a bank or stock exchange might maintain, which tracks the ownership of “bitcoins”, a digital unit which exists solely on the Bitcoin blockchain.
Each bitcoin (note the lower-case ‘b’. ‘bitcoins’ means the currency, while capitalized ‘Bitcoin’ means the protocol) is probably most usefully thought of as a bearer certificate with a series of endorsements on it noting any changes in the bitcoin’s ownership from its original minting by the Bitcoin network of computers to the present day. When a user of the Bitcoin software wishes to convey his bitcoins to a new owner, the conveyor digitally signs the bitcoin, much like you would endorse a check, and the receivor of the bitcoin then also signs the bitcoin in such a way that the network can will recognize his signature (and no one else’s) later when he wishes to convey the bitcoins to someone else in turn. In this way, ownership of bitcoins can be transferred over the Internet, from one computer or mobile device to another, without going through a financial intermediary such a bank or traditional money transmitter business.
So to recap, Bitcoin is an open source protocol and software package for maintaining the blockchain, a global distributed ledger of transactions in and the current ownership of bitcoins.
Double Spending and Market Prices
Ultimately bitcoins are just digital files, like a Word document or MP3 music file. Like any other digital file, you can make copies of it. If I conveyed a bitcoin to you, you could make millions of copies of that file.
But would that mean you could copy and paste your way to riches by making millions of new bitcoins? No, it does not. Each bitcoin has a unique identifier, and the blockchain, maintained by the global network of computers running the Bitcoin software, will only recognize the most recent valid version of that particular bitcoin which the network is aware of. If you did have millions of copies of a bitcoin on your computer, but you then conveyed any one of them to another person over the Bitcoin network, it would have the effect of rendering all the copies worthless because the Bitcoin network would no longer recognize them as the most recent valid version of that unique bitcoin.
Bitcoins thus cannot be “double spent”. Once conveyed to another person, and that conveyance is validated by the global Bitcoin network, and the original conveyor can not convey the same bitcoin to again anyone else. It is provably controlled by the receivor.
The Bitcoin network’s ability to mint a limited number of bitcoins, and prevent their being double-spent, means that there is functionally a limited supply of bitcoins. And according to the laws of economics, any time a limited supply meets any sort of demand, a market arises and a market price is discovered. As of the time of this writing there are about 13.5 million unique bitcoins outstanding and the market price is about $375 per bitcoin.
Bitcoin and Remittances
Returning to our topic of remittances, the value of the Bitcoin network is that bitcoins can travel around the world nearly as easily as an email or Skype call. Any two users with the appropriate software on their computers, tablets, or smartphones can send bitcoins to each other for no or a minimal fee. The current fee charged by the Bitcoin network can be as little as zero, but also has a fixed maximum fee of 0.0001 bitcoin per transaction, or about 4 US cents. With smartphones in emerging markets selling for as little as $35 US, this means that even very poor citizens in developing nations can receive bitcoins directly from their relatives working abroad without paying the fees associated with traditional money transmitter businesses.
Of course, bitcoins cannot be spent just anywhere. American companies like Coinbase and Bitpay are working to expand the network of businesses that accept bitcoins, but for the present it is likely that the immigrant worker will first have to convert his local income into bitcoins, then send them to the relatives back home, and lastly the relatives who receive the bitcoins will sell them to convert them into local currency. Each step in this process will have associated fees, but even in total, these fees can be less than the cost of using a traditional money service business. Further, it is safe to assume that costs will fall over time, even as the process gets easier and more user friendly.
The Benefits of Open Networks and Competition
What really sets Bitcoin apart from any financial protocol that has come before it is that it is an open network. Unlike being a bank, anyone who downloads the Bitcoin software can participate in bitcoin markets. This makes for a very competitive environment, which only produces benefits for consumers.
The magic of competition means the cost of converting bitcoins into a given currency falls with the number of brokers in that market. In a jurisdiction with only one bitcoin buyer, they can name their price. But as mentioned above, anyone can download the software and get into the business of buying and selling bitcoins, so there is never just one broker for long. In the most mature markets competition has driven the cost to less than 1%, and the American company Circle has begun offering conversion between bitcoins and US dollars for free. Companies like Bitspark further simplify the process by taking cash and handling the bitcoin aspects for those customers without the necessary technology or skills.
The price of converting bitcoins to local currencies in developing markets is also becoming quickly competitive, and in Mexico (for example) the conversion rate can be less than 1%. If we imagine an example where a nurse in Texas wants to send $100 to her mother in Guadalajara, the total cost in bitcoin would be the cost of conversion from US dollars to bitcoins (free), the bitcoin transaction fee to send the bitcoins to her mother’s phone (0.04 cents) and then the conversion fee her mother pays to convert the bitcoins into Mexican peso ($1), for total of $1.04. By comparison, Western Union’s fees for sending money to Mexico start at $4.99 and only go up from there.
The Groundwork has Been Laid
The popularity of Bitcoin as a medium of exchange and as speculative investment in developed countries has the beneficial side effect of creating a liquid market in a unique digital commodity. Companies in America and abroad are moving quickly to take advantage of this to serve the remittances market. This initial groundwork of liquidity and service companies points to a bright future of lower costs and greater convenience, putting billions of dollars directly into the pockets of the working poor here and abroad.
Brock Cusick is an attorney at Deutsche Bank AG. The views shared here don’t necessarily represent Deutsche Bank’s positions, strategies or opinions. http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1288990760745/MigrationandDevelopmentBrief23.pdf  https://remittanceprices.worldbank.org/sites/default/files/rpw_report_september_2014.pdf  https://bitcoin.org/bitcoin.pdf  https://blockchain.info/charts/total-bitcoins  https://zeroblock.com/  https://www.coinbase.com/  https://bitpay.com/  https://www.circle.com/en  https://bitspark.io/