One of the most routinely cited use cases for bitcoin is in the international remittance market – the financial sector worth over $500bn a year that specializes in facilitating transactions across borders at a markup that reduces the total money sent by 9% on average.
Given the high cost the remittance services, it’s no surprise that many in the bitcoin industry take its potential in the space for granted. After all, its underlying technology offers anyone the ability to conduct low-cost, peer-to-peer payments without restriction.
Due to the power of the technology, it can sound like the traditional remittance market is already dead in the water. However, what’s not often considered is that the technology might not be allowed to reach its full potential.
According to Andrew Brown, head of compliance at cross-border payments specialist Earthport, the current high fees in the traditional remittance market aren’t just imposed by greedy service providers.
Brown believes much of these charges come from the added costs of compliance and regulation, costs that won’t just disappear when bitcoin businesses enter the market. His prediction in light of this estimation is grim:
“By the time all those obligations have been applied, I don’t think any apparent advantage [for bitcoin] will be left.”
Although Brown doesn’t specialize in digital currency, testimonials from bitcoin entrepreneurs in the field suggest similar difficulties, if less dire, conclusions.
Tomas Alvarez, CEO of bitcoin remittance startup Coincove, for example, was forced back to the drawing board on his bitcoin remittance plans after being regulated out of the US market.
Explains Alvarez:
“We were banking on bitcoin being unregulated, allowing us to build, test and validate before regulations were enacted in our target countries. Unfortunately, the US beat us by a few months and effectively declared bitcoin as money, making it prohibitive for a startup to get licenses.”
As Alvarez’s story shows, bitcoin businesses are potentially facing a long, uphill battle on the remittance front.
The high cost of failure
Perhaps most notable of Brown’s concerns was that current regulation poses a formidable barrier even to new traditional remittance businesses. For example, Brown notes that the banking networks that service remittance providers are increasingly deciding not to serve aspiring entrants.
Brown cautioned that bitcoin can’t be seen as the “weak leak” when it comes to money laundering, a criticism that has been prevalent of bitcoin among law enforcement officials:
“There is so much invested by governments, international bodies and law enforcement agencies in the regulatory framework around trying to prevent organized crime […] No government is going to suddenly leave open a back door to let some murky waters in.”
Brown also discussed how banks are pulling back from servicing accounts for cash remittances due to heavy fines, in particular he noted that the UK to Somalia service has badly impacted the Somalian communities.
The catch-22 inherent in the current system was perhaps summed up by Forbes, when it wrote:
“Essentially, we can have a banking system with the current rules and regulations about money laundering or we can have a banking system that can handle remittances into Somalia. But what we cannot have is both: for the regulations are too expensive to allow the sending of small remittances into Somalia.”
Mexico, one of the markets in which Coincove is working, for example, has very strict AML guidelines due to the local drug trade, and high penalties for non-compliance. But, Alvarez said that he believes Coincove can adapt around this challenge, saying:
“We believe that as long as we start developing our own AML and KYC framework from this early stage, we will be well-prepared if and when the Mexican government decides to regulate bitcoin.”
Coincove is not considered a money business in Mexico, but it is following the guidelines as a preemptive measure, Alvarez says. Due to these steps, he says his group is now working with domestic payment processors and banks.
Juan Llanos, a risk and compliance expert who serves on the Bitcoin Foundation‘s regulatory affairs committee, however, notes that compliance is different from the risk of money laundering.
He told CoinDesk: “You can be non-compliant and still have low money-laundering risk because of the nature and size of your business.”
Regulatory uncertainty
The foremost reason Brown suggests bitcoin remittance businesses will struggle is because of the different ways digital currencies are being approached by regulators. He noted that in China its use is severely restricted, while in Norway it’s treated as an asset.
Due to these differences, Brown says, regulators will not provide bitcoin remittance businesses with the free reign they may need to innovate.
Alvarez echoed this danger. Coincove is now operating in Latin America, due in part to its slow response on digital currency regulation, providing it exactly this testing ground.
“Given the uncertainties around the state of bitcoin in most countries at this point, it’s probably wise to start off with jurisdictions that you are familiar with.”
However, as an early market entrant, he sees an opportunity to influence regulation through eventual dialogue in these countries.
Brown acknowledged that companies that facilitate remittances between certain lucrative markets may be the most likely to take hold, provided the legislative framework is complementary, and so far Coincove provides evidence to this claim.
However, as Alvarez indicates, it still finds itself locked out of the US, the largest sender of remittances, so such arrangements are inherently limiting to the expansion of his business.
Bank ‘discrimination’
Llanos was more optimistic than Brown, noting that technology always outpaces regulation and that, although there will be challenges ahead, bitcoin can find a way to overcome them.
Still, he mentioned similar challenges to those cited up by Brown, indicating that both Western Union and a new bitcoin remittance startup with no customers and no volume, would still be expected to meet the same licensing and anti-money laundering requirements.
Said Llanos:
“Granted, each is supposed to be treated differently by virtue of the basic and highly-touted ‘risk-based approach’ principle, but that doesn’t necessarily happen. The reality is that regulators and bankers more often than not expect 100% compliance without regard to the likelihood and impact of the risks, the size of the businesses or the reach of a product.”
With the right know-how and resources, he says, licensing can be achieved, but the inability to obtain banking services is yet another hurdle. However, Llanos suggested that the entire financial industry – from remittance to prepaid card providers, is facing these challenges:
“There are very few, too few, banks who are willing to consider opening an account [in these cases]. The regulatory pressures they themselves are under and the business case do not always justify taking the risk of banking this class of business. It’s really incredible, but an entire industry class is being discriminated against, just by virtue of the nature of the business.”
Furthermore, even once banks get on board, liquidity is another obstacle – due in part to the nature of the markets in which remittance businesses operate. Llanos explained:
“Because buyers of digital currency are so few in the biggest payout jurisdictions – Mexico, India, the Philippines, Africa – this is bound to continue to be a big roadblock for some time.”
What lies ahead
Of course, given that bitcoin can be transmitted freely by users without boundaries, it remains unclear exactly what function bitcoin remittance businesses would provide consumers.
Alvarez, however, disagrees with this notion. He believes bitcoin remittance companies will be essential, especially in the early stages, as there is very little overlap between his target market and current bitcoin users.
“From the insights that we gathered about remittance senders and receivers, we can foresee that bitcoin may not be a technology that they’d directly want to interact with for many years to come – many of them don’t even feel comfortable with traditional banking systems or credit/debit card services.”
Alvarez concluded:
“In this sense, I believe that the main value added by remittance businesses would be empathy: developing a product with a deep understanding of the unique needs and desires of the specific market that is remittance senders.”
As for when Alvarez may be able to reach such a goal in a cost-effective manner, Llanos says that is a matter bitcoin’s proponents will ultimately decide.
“The industry needs to band together, speak up and invest in formal and informal efforts to influence policymakers, legislators and regulators to really pay attention to the issues and effect the necessary changes. […] The Bitcoin Foundation also has committees working on these issues and many other groups are forming worldwide with the same goals.”
Even though he supports this burgeoning industry, Llanos questions whether more traditional remittance businesses based on bitcoin will be necessary given the technology’s ability:
“I see the evolution of remittances from the regulated intermediaries of today to truly peer-to-peer remittances happening very soon.”
Remittance image via Shutterstock