LONDON (Reuters) – El Salvador may advertise the use of bitcoin to help its citizens living abroad send funds home, but the largest remittance firms are wary of offering cryptocurrency services.
A move that could be a harbinger of cryptocurrency becoming a more popular way to send money across borders, El Salvador on Wednesday became the first country to accept Bitcoin as a parallel legal tender.
President Naib Bukele has demonstrated the potential of bitcoin as a remittance currency for Salvadorans abroad.
But despite the potential long-term risk to their businesses if such activities escalate, few of the traditional remittance companies that send most of the cross-border transfers are active.
Any attempt to break into cryptocurrency can be a double-edged sword, lowering the fees that form the backbone of their business.
“For Western Union and some other remittance providers, keep in mind that most remittances go from developed markets to emerging markets primarily to people – families and friends – who handle cash,” said Kenneth Sukhoski, USA. Payments and Fintech Analyst at Autonomous Research.
“Since bitcoin has not been adopted or widely accepted, these remittance providers will continue to be relevant for years to come,” he added.
Suhoska estimates that less than 1% of global cross-border remittances are currently in cryptocurrency. But in the future, cryptocurrency is expected to account for most of the more than $ 500 billion in global annual remittances.
However, Bitcoin theoretically offers a fast and cheap way to send money across borders without relying on traditional money transfer channels.
Last month, MoneyGram International, one of the earliest money transfer companies, said it would allow customers to buy and sell bitcoins for cash at 12,000 U.S. retail locations through a partnership with Coinme, the largest licensed U.S. cryptocurrency exchange.
“We have built a bridge to connect bitcoin and other digital currencies with local fiat currencies,” MoneyGram said in an email statement to Reuters. “As the popularity of cryptocurrencies and digital currencies grows, the main obstacle to further growth is turning on / off the switch to local fiat currencies.”
Western Union, the largest money transfer company, has tested the use of bitcoins and cryptocurrencies in the past and has not found a good “use case” with significant cost savings, Suhoska said.
Western Union and other major players including Wise, WorldRemit, Remitly, Xoom and Ria Money Transfer did not respond to requests for comment.
The remittance industry has successfully transitioned from physical point of sale to online transfers in recent years, a trend accelerated by the COVID-19 pandemic.
International mobile money transfers grew 65% in 2020 to $ 12 billion.
But any transition from digital to cryptocurrencies can be more challenging.
“It’s really hard for me to imagine how they would compete unless they really cut their price — you can’t compete for free,” said Ray Yousef, CEO of Paxful, a crypto platform popular in Africa that aims to compete with traditional money transfer firms.
Remittance companies are already under pressure to lower fees, which, according to a World Bank report, averaged 6.5% in the fourth quarter of 2020, more than double the United Nations Sustainable Development Goal by 2030 for translation fees.
In contrast, the fees for transferring bitcoins in Nigeria, for example, are typically around 2% -2.5%.
The increase in regulatory costs associated with efforts to combat money laundering and terrorist financing is another burden on traditional remittance firms.
Western Union’s annual compliance costs have risen to nearly $ 200 million from about $ 100 million a decade ago, Sukhoski said.
Bitcoin is likely to exacerbate this burden.
Bitcoin’s potential for anonymous transactions has long worried regulators, who fear it could contribute to money laundering and terrorist financing. Many crypto companies have stepped up compliance steps, such as requesting a user ID, but this is an expensive process.
“Bitcoin has been used in a lot of clandestine transactions,” Sukhoski said.
Reporting by Tom Aronold and Tom Wilson; Edited by Aurora Ellis