Cryptocurrency and Remittances: Alternative or Additive?

The Global Response to Cryptocurrency and Remittances

Since Bitcoin’s creation, governments worldwide have been considering how to approach cryptocurrencies – whether to embrace, regulate, or prohibit them. The cryptocurrency market has experienced significant volatility, yet continues to attract increasing participation.

The Rise of Digital Platforms and Governmental Shifts

The pandemic accelerated the adoption of digital platforms across numerous sectors. Consequently, political leaders globally have begun initiatives to modernize their economies, mirroring this digital trend.

El Salvador's Pioneering Adoption of Bitcoin

El Salvador recently gained international attention as the first nation to declare Bitcoin as legal tender, a decision that sparked protests from its citizenry. The country’s president framed cryptocurrency as a direct competitor to traditional remittance services.

The Significance of Remittances in Global Economies

Remittances – funds sent by individuals to support their families and communities – represent a substantial portion of the GDP for many nations. In 2020, global remittances totaled approximately $700 billion, with $540 billion directed towards low- and middle-income countries, as reported by the World Bank.

El Salvador’s Remittance Landscape

El Salvador itself received close to $6 billion in remittances during that same period. Currently, cryptocurrencies account for less than 1% of the total volume of global cross-border remittances.

Can Cryptocurrency Truly Replace Remittances?

At present, cryptocurrency is not a viable replacement for traditional remittance services. The demand for specific payout methods varies by market, and many recipients still prefer cash, even with digital options available.

Challenges to Mainstream Cryptocurrency Adoption

While digital currencies offer an additive element, widespread adoption and the displacement of cash will require time and overcoming several obstacles. Many individuals receiving remittances lack the means to conduct digital transactions.

The Practicalities of Cryptocurrency Transfers

Currently, cryptocurrency transfers are not demonstrably cheaper, faster, or simpler than traditional cash transfers, especially when factoring in the complexities of currency conversion.

El Salvador’s Unique Context

Remittances constitute roughly a quarter of El Salvador’s GDP and benefit approximately 360,000 households. The process of buying and selling cryptocurrency is considerably more complex than using established remittance platforms.

The Need for Local Currency Conversion

In most cases, converting digital assets back into local currency is necessary to purchase goods and services. This presents a challenge for those relying on remittances for immediate, essential needs.

Remittance Usage: Basic Needs First

Recent surveys indicate that remittances are primarily used to cover fundamental expenses: food (73%), healthcare (59%), and housing (54%). Cryptocurrency’s volatility makes it an unreliable lifeline for individuals needing immediate financial stability.

Regulatory Uncertainty and Global Acceptance

Numerous countries, including the United States, have not yet established clear legal frameworks for cryptocurrency trading and payments. Despite the hype, widespread adoption for everyday transactions remains distant.

Inherent Challenges to Cryptocurrency as a Payment Method

For digital assets to become an effective form of cross-border payment, they must address existing limitations, including a lack of widespread utility, high exchange costs, complexity, price volatility, and limited access to and from local currencies.

The Future of Crypto and Cross-Border Payments

I believe that cryptocurrency and digital currencies have the potential to eventually streamline cross-border payments. I also find value in holding crypto as an investment. However, like all emerging technologies, digital assets face significant hurdles before becoming the standard for global remittances.

Disclosure

MoneyGram has established a partnership with Stellar, enabling digital wallets connected to the Stellar network to utilize MoneyGram’s global retail platform.