Can Bitcoin Challenge Western Union? Watch El Salvador

Bitcoin’s original use as a peer-to-peer money transfer payment system is often neglected in the media in favour of Bitcoin’s dramatic price gyrations. But El Salvador’s rollout of Bitcoin as a legal currency for remittance as well spending and saving is a great example of how Bitcoin is evolving as a means of money transfer – and its progress will be fascinating to observe.

Living in Australia where virtually the entire eligible population is banked, it’s easy to forget that around 25 per cent of the world’s population is unbanked. In some countries, the figure is considerably higher … Egypt 67 per cent, Philippines 66 per cent and Mexico 63 per cent are examples. Even China and India have around 20 per cent of their population unbanked.

Such countries are also often the recipients of material remittance inflows. According to a World Bank report, the top five remittance recipients in 2020 were India, China, Mexico, the Philippines, and Egypt. The top five as a proportion of their GDP were Tonga, Lebanon, Kyrgyz Republic, Tajikstan and El Salvador. The total global remittance inflows for 2020 are estimated to be $US702 billion, with $US540 billion going to “low and middle income” countries.

Remittances are a lifeline for people living in recipient countries. The International Fund for Agricultural Development (IFAD) recognises around 200 million foreign workers sending remittances back home to some 800 million family members worldwide. Global remittance flows are three times greater than official financial assistance and financial investment, and some 70 nations rely on remittances making up more than 4 per cent of their GDP.

Given the size of the remittance flows to peoples who are materially unbanked, it’s no surprise that remittance fees are expensive. IFAD estimates that the average cost of global remittances from exchange rate conversion and transaction fees are around 7 per cent, with fees in some lower volume corridors being up to 30 per cent of the remittance value.

While competition amongst remittance service providers creates pressure on margins, they’re all still using traditional banking rails or expensive agency networks for fulfilment. This limits the extent to which fees are likely to be reduced.

This is where Bitcoin potentially comes in.

El Salvador’s “Chivo” wallet is using the Lightning network to facilitate low-cost Bitcoin flows from expatriates to residents with a USD account immediately available for residents to convert their Bitcoin and eliminate the exchange risk if they wish.

Using Bitcoin as a transport layer for remittance can work if both the sender and recipient can exchange cash for Bitcoin and vice versa. This allows the sender to convert cash to Bitcoin, and the recipient to convert the received Bitcoin to cash. While this involves two conversions (one for the sender and another for the recipient), the transfer cost itself is negligible if the second layer Lightning network is used (and inexpensive on the main “chain” depending on the Bitcoin network congestion at the time). Importantly, the settlement time is virtually instant using Lightning or minutes on the main chain.

The process would work like this:

1. Alan in Australia buys some Bitcoin using AUD using his account on any exchange where he has an account.
2. He then uses the exchange to send Bitcoin to the wallet address provided by his friend Jose in (name your country). This could be an address on an exchange where Jose has an account, or Jose’s own personal hardware wallet.
3. Once Jose’s address receives the Bitcoin (second or minutes), Jose can elect to convert the received Bitcoin back to local currency at his exchange or retain the Bitcoin. By selling for cash immediately, Jose can eliminate the exchange rate risk there and then. By keeping it in Bitcoin, Jose can bet on price appreciation. Either way, the choice is Jose’s at the time of receiving the Bitcoin.

For El Salvadorans, Bitcoin offers the potential for low-cost and fast remittances, and a hedge against inflationary pressures on the US dollar (legal tender in El Salvador and the main currency used). The state estimates that it could save $US400 million annually by moving remittance flows from traditional service providers to the Bitcoin network. This is around 7 per cent of the estimated $US6 billion sent into El Salvador every year.

If using Bitcoin as both a transport and settlement layer for remittances really does deliver material cost savings, speed and usability advantages, then the obvious question begs …how much of a threat does Bitcoin represent to the established players?

Should the likes of Western Union, MoneyGram, Visa, MasterCard and Paypal etc be worried about losing money flows to Bitcoin? What about the financial institutions whose settlement arrangements underpin traditional remittance flows?

Bitcoin’s use case as a transport and settlement solution to address real-world problems like remittances may prove to be just as important as its store-of-value properties. As its utility for remittances and other money transfer flows continues to expand and become more visible, so is its price likely to follow, due to its fixed supply schedule.

While other crypto can also be used for transmitting value over the Internet, none are as decentralised as the Bitcoin network or have the level of adoption. Supporters of other cryptos such as Litecoin or Bitcoin Cash argue that Bitcoin has design flaws that limit its effectiveness for being a medium of exchange. But the ongoing Bitcoin network enhancements and second layer solutions are likely to address those concerns. No other crypto is likely to be adopted as legal currency by a nation state or as a corporate or treasury reserve as much as Bitcoin for the foreseeable future.

Investors in businesses leveraged to remittance flows may be wise to watch this space closely.