For thousands of crypto companies that have been created in recent years, the current crypto winter is a major challenge for their business.
Bitcoin
This will inevitably affect the bottom line for those in the space. For example, the Block Cash app, which makes most of its money from a service that allows customers to buy, sell and send bitcoin, saw its bitcoin revenue drop by 35 percent between the second quarter of 2021 and the second quarter of 2022.
At the same time, the regulatory environment is becoming more demanding. The US is expected to strengthen crypto regulations after the White House released a framework for developing digital assets. Meanwhile, in the UK there are plans to increase the government's ability to seize, block and recover cryptocurrencies.
With the end of winter hardly in sight, many cryptocurrency players are looking for other ways to make money, even in traditional financial areas. And one area with great potential for cryptocurrencies is cross-border payments.
Cryptocurrencies in cross-border payments: there is no panacea.
For several years, crypto payments have been said to be cheaper, faster, and generally better than traditional cross-border options. The reality is very complicated and unclear.
Although crypto payments are theoretically instant, the process of setting up a transfer, switching between wallets, and converting to fiat can take time. In contrast, there is a wide range of traditional money transfer solutions available from most brokers that are live or live.
Meanwhile, it is questionable whether cryptocurrencies are cheap in terms of value. When the price of cryptocurrencies increases, the focus is usually on buying or selling cryptocurrencies, which are usually very low. However, when it comes to money transfers, there is also the cost of moving crypto from one wallet to another, an often high amount that many claims ignore.
My company's research on the subject has shown that while cryptocurrency-based cross-border transfers can be made at a lower cost than traditional money transfer or remittance providers, only with certain combinations of companies, and for some, the Cost is comparable to traditional. Methods.
Beyond that, though, there are real benefits of cryptocurrencies for payments, and that's what earns them a place in the market.
Advantages of digital currencies for cross-border transactions
While exact numbers are difficult to confirm, we do know that people use cryptocurrencies like Bitcoin to move around the world in particularly volatile currencies or significant cross-border transactions.
At first glance, the volatility effect may seem surprising: even the most volatile currencies are more volatile than cryptocurrencies like Bitcoin and Ether over a two-year period. However, if we look at volatility over shorter timeframes, there are windows where currencies are less volatile than their fiat counterparts, such as the Sri Lankan rupee. As a result, cryptocurrencies offer a relatively affordable option in these times.
Beyond that, however, there are benefits for money transfer companies that are starting to explore the technology. A good example of this is MoneyGram, which is now partnering with blockchain provider Stellar to offer a global crypto-to-cash network alongside its traditional remittance services.
This means that customers can buy USDC stablecoins in stores.
The project offers a new entry point into the crypto space, especially for those without access to traditional banking institutions, but it also has MoneyGram's advantage over traditional transactions: settlement.
When sending a traditional money transfer, even if the recipient is on the other side of the world from the sender, the recipient can immediately take it to their local branch. However, MoneyGram considers the transaction settlement, which is money transferred from your account in the sending country to payment in the destination country, after a certain period of time.
On the other hand, processing the cryptocurrency transfer is really fast, which means that the money is already in the account when the company pays its customers for the first time. This is profitable from an accounting perspective, but has significant risk implications for cross-border transactions, particularly in volatile areas.
It is these kinds of advantages that ultimately qualify cryptocurrencies as a cross-border payment space, rather than promises of fast and cheap payments without understanding the true speed and value of the market. And for companies looking to diversify their cryptocurrency offerings, offering payment services is an important area to explore.
When it comes to currencies that have restrictions on transferring money abroad, including major countries like Argentina, China, India, or Nigeria, the reasons for using crypto for cross-border transfers seem even clearer. These moves out of the traditional fiat currency class present a challenge to the central banks of these countries, which by definition want to control their currencies. However, central banks are looking for their own solution to this problem.
Central bank digital currencies: the next step?
As payment companies explore cryptocurrencies for cross-border payments, central banks are also exploring the potential of central bank digital currencies (CBDCs). Basically, it is not the same as a regular cryptocurrency, but a digital version of a traditional fiat currency, and although it often works on the blockchain, it is not strictly necessary.
Funded by the state and managed by a country's central bank, they have the potential to combat fraud and money laundering and improve financial inclusion. Depending on their structure, they can greatly improve the payment infrastructure available to banks, especially in areas of the world where cross-border payments take place, and reduce the costs of cross-border payments. Banks may still be slow and expensive.
CBDCs are being studied by many central banks around the world, but they take different forms. Some are establishing wholesale CBCs for the exclusive use of financial institutions designed for banking and financial transactions. Others are developing retail CBCCs for businesses and individuals similar to today's non-digital fiat currencies, but with added benefits in terms of transparency and inclusion.
There are projects around the world studying both versions, and most countries have a CBDC project in one form or another. However, the number of pilot CBCCs is extremely limited, mainly in small countries where they address specific environmental problems, and interoperable projects to link CBCCs are still under study.
While they have potential for CBCCs at some point in the future, they are not the answer to the current crypto winter or the immediate shortcomings of cross-border payments. We have advances in payments before the CDC becomes the main model and before cryptocurrencies play a role in closing this gap.