One of the finance facets that remained stable during the COVID-19 pandemic was the remittance industry. Worldbank’s data showed that the remittance market reached USD540 billion in 2020, just 1.6% shy of the previous year’s number. According to Allied Market research, the global remittances market could reach over USD930 billion in 2026 with a compound annual growth rate of 3.9%. Key to this resilience is the growing adoption of digital currencies.
Bridging the inequality gap
According to this publication released by Asian Development Bank (ADB) titled COVID-19 Impact on International Migration, Remittances and Recipient Households in Developing Asia, lockdowns have forced overseas workers to look for digital alternatives to send money home. However, ADB noted that barriers, such as costly fees, exist.
To this end, International Monetary Fund managing director Kristalina Georgieva, in her opening remarks at iLab Spring Meetings Virtual Workshop in April 2021, said the world “is witnessing a revolution in digital money that could make remittances easier, faster and cheaper”. She added: “New forms of digital money could provide… a boost to the vital lifelines that remittances provide to the poor and to developing economies”.
The pandemic has revealed one of the biggest threats of inequality: vulnerable people with no banking access are denied basic access to financial services. Cryptocurrency remittance and a decentralised financial system can be the innovative solution.
An article published by Reuters noted that there is a fundamental difference between sending money home with Bitcoin and sending via bank transaction. When the beneficiary country has lower Bitcoin demands compared to the sending country, remittance receivers can end up getting more than the amount sent. Without incurring traditional bank fees, remittance businesses reduce their overheads and can possibly charge consumers up to 75% less, the article added.
In an increasingly saturated global remittance market, digital currencies are suddenly key to growth.
Eyeing the lucrative crypto submarket
El Salvador, for example, is adopting Bitcoin as its second local currency alongside the US dollar to facilitate remittances. As remittances made up 24% of the country’s GDP in 2020, ease of transfers through cryptocurrency could boost the country’s economy - more money could be sent into the country quickly and reliably.
In the Philippines, Tranglo, powered by enterprise blockchain solutions provider Ripple, has launched an On-Demand Liquidity (ODL) service on RippleNet in the 3rd largest remittance market in the world. ODL is a payout service that leverages the digital asset XRP to eliminate the need for pre-funded accounts.
However, experts have warned countries, institutions and businesses to find a collective way to handle its volatility or see its momentum curtailed.
Adequate controls to mitigate crypto risks
In May 2021, for example, news of Tesla no longer accepting bitcoin as payment caused the value of digital currencies to plunge. This came after months of record climbs, thanks to a series of tweets by Tesla’s Elon Musk.
Perhaps the answer lies in stablecoins and central bank digital currencies (CBDCs). These fiat-backed (stable coins) assets or central bank-backed (CBDCs) ones allow for regulatory controls in a space where oversight is often a challenge. Fiat-backed digital currencies are also usually pegged to a stable currency like USD, which helps to mitigate volatility.
Something for every business
Digital currency clearly has something to offer everyone, especially emerging countries where remittance is one of the economic pillars and the underbanked community is still dominant. The key to widespread adoption is to ensure cryptocurrency-driven payments are safe, competitive and adequately integrated to drive down the costs.
For remittance businesses that find their margins thinning, embracing digital currencies may be the sensible next step.