Future of Cross-Border Payments: Blockchain Remittance Explained
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Remittance is a term you would hear a lot in today’s global economy. The remittance economy refers to cross-border payment transactions between a migrant worker to the home country. It drives the financial flow in many developing nations.
Remittance is primarily linked to centralized institutions like banks and currency exchanges. Blockchain-based remittance service can be one of the alternative. In this guide, Liquid explains everything you should know about international payments via blockchain remittance options.
Blockchain-based Remittance Service
Blockchain remittance is a financial solution that incorporates blockchain technology into the various needs of the remittance economy. It means service providers can use blockchain-powered payment solutions to send and receive money between two individuals, probably located in two countries.
Unlike conventional channels for remittance, blockchain remittance does not rely on centralized authorities like payment systems, foreign exchange, or banks. Instead, the transaction takes place between sender and receiver. A mobile wallet/bank app and the blockchain network are the only mediators.
Due to these characteristics, blockchain remittance can offer improved speed and lower transaction fees. It is also considered an ideal solution to facilitate international money transfers. To understand the importance of blockchain remittance using a peer-to-peer distributed ledger, one must understand the deficiencies with the current remittance channels.
The Problems with the Current Remittance Channels
Here are some reasons people need an alternative to the conventional remittance channels.
- They Are Slow
Conventional remittance channels lack modern infrastructure. A standard remittance transaction would take up to 5 days in most cases. Nobody is willing to endure a long wait to receive money from overseas.
Even as the remittance economy is expected to surpass trillions of dollars in 2022, conventional channels have not changed. Multiple mediators and verification processes in traditional remittance channels cause slow transactions.
- They Are Expensive
Unlike domestic fund transfers, remittance channels incur substantial transaction fees. According to The World Bank, the global average transaction fee for sending $200 to another country is 7%. Meaning, the remittance platforms may charge up to $14 for processing $200 remittance from another country. One reason behind this high cost is multiple mediators.
- They Are Not Standardized
The lack of standardization is a noticeable issue with the current remittance platforms. Sometimes, a single transaction uses multiple global standards like SWIFT and EDIFACT before reaching the recipient's bank account.
The lack of standardization also causes some issues from a logistical standpoint, apart from increasing the transaction fees. Experts have also noticed that the transactions through these channels are not transparent enough.
What Does Blockchain Remittance Solve?
As we said, blockchain remittance can solve many of the issues we mentioned above. More importantly, the blockchain-based remittance system will set forth an adequate standard for the years to come. Adaptation and scalability are two inherent qualities of blockchain technology.
Blockchain remittance eliminates multiple mediators from the equation. Blockchain technology will be a sole mediator in the transaction, except for the mobile wallet or bank the customers use.
Such a new design will reduce the transaction costs and time constraints of remittance transactions. A remittance transaction will reach the recipient in minutes or even seconds. Since the transaction does not involve any middlemen, the transaction fees will also be minimal.
Blockchain remittance uses the core principles of cryptography for verification and security. All the transactions done through blockchain will stay on a public ledger while ensuring maximum privacy to people (or entities) involved. Blockchain technology uses algorithms to prevent any form of manipulating data as well. In short, transactions through blockchain remittance will be secure, privacy-friendly, and verifiable for the most part.
Unlike conventional remittance channels, blockchain remittance is accessible to people in so many different ways. A mobile app to process blockchain remittance online is a fine example. ATMs can facilitate blockchain remittance in remote areas lacking internet facilities. There are also many other scenarios where we can use blockchain technology’s versatility and flexibility.
Examples of Blockchain Remittance
Stellar, the crypto platform for financial services, is an example of how blockchain can assist the remittance industry. Users can trade between fiat currencies and crypto, courtesy of Stellar Lumens (XLM) tokens.
Coins.ph is another crucial name since it allows users to process international remittance and other everyday transactions using cryptocurrencies. These are just a few examples of projects in blockchain remittance.
Limitations of Blockchain Remittance
Blockchain remittance must address the following issues to become the straightforward and cost-effective alternative to conventional remittance.
- Since blockchain remittance uses cryptocurrency, the ambiguity of regulations will be a significant issue. It becomes a bigger threat since financial institutions are part of conventional remittance.
- The reliance on cryptocurrency also means the impact of its volatility. Even though experts suggest stablecoins as the solution, these coins may not be as popular as volatile cryptocurrencies.
- Even though ATMs in remote locations are a solution, blockchain remittance needs an active internet connection for almost everything. This reliance could be a problem in many parts of the world.
- Blockchain remittance platforms use cryptocurrencies or bridge tokens. So, customers still have to use their bank accounts to get the cryptocurrency in the first place, which is inconvenient.
Stablecoins and Blockchain Remittance
Stablecoins pegged to fiat currencies can accelerate blockchain remittance to become more stable and accessible. Most importantly, customers do not have to worry about inflation since a coin’s value is pegged to the fiat currency. Liquid supports a variety of fiat-backed stablecoins such as GYEN, ZUSD, XSGD, USDT, USDC, IDRT that could be part of blockchain remittance as an alternative to fiat currencies. Users can swap any stablecoins to another on Liquid using our Quick Exchange tool.
Stablecoin remittance has certain advantages over traditional remittance like improved security, lower settlement period, and low transaction fees. However, we should note that stablecoin remittance is in relatively nascent stages.
The Bottom Line
Do you want to send money overseas? Blockchain remittance is poised to eliminate the limitations of conventional remittance channels in the near future. Due to the rising popularity of cryptocurrencies, more people are likely to use blockchain remittance platforms.
Many countries are devising a better regulatory framework for crypto transactions, instilling user trust and confidence in these platforms.