Remittances and cryptocurrencies post COVID-19 | Terence Zimwara
Cryptocurrencies like Bitcoin and their underlying technology (or infrastructure) known as the blockchain have faced resistance from many quarters for years. Bitcoin is blamed for aiding terrorists and money launders.
Bitcoin is also blamed for making the movement of illicit funds much easier and since Bitcoin is nothing without the blockchain, it means the perception extends to both.
Despite the opposition and the negative perception, this financial technology has been a success and the year 2020 marks its 11th anniversary. It is this resilience in the face of sustained opposition that has inspired others to create cryptocurrencies of their own.
Today, many different cryptocurrencies have emerged that exhibit the same resilience if not better.
Indeed, over the last few years, cryptocurrencies have demonstrated that they are far more efficient and effective for cross border remittances than traditional corridors.
Cryptocurrencies cost-effective options
Cryptocurrencies like Ripple’s XRP and Ethereum are much faster and cheaper when sending funds across borders. Ripple’s XRP takes about 3.6 seconds to transfer $100 from Europe to Africa (or anyway on this planet) and the average cost for this transaction is $0.0004. Ethereum or ETH takes slightly longer, about 93 seconds and at an average cost of 17 cents. Of course, one will need to the respective crypto wallets to be able to receive.
These figures may appear surreal but this what some early adopters of the digital alternatives have become accustomed to.
Unfortunately, it has had to take the effects of the COVID-19 global pandemic to force influential bodies to have a serious relook at the blockchain as a potential solution to the problem of high remittances costs.
Take a recent report by the World Bank for instance. In this report, the World Bank is predicting that global remittances will fall sharply in 2020 due to the effects of the COVID-19 global pandemic. Remittances have become an important source of income for many families in Africa and Asia where opportunities remain limited.
The World Bank report is painting a gloomy picture for remittances for the rest of 2020 although there is optimism for a quick but small recovery will be seen in the following year.
The reports states:
“(While) remittances to Sub-Saharan Africa registered a small decline of 0.5 per cent to $48 billion in 2019, due to the COVID-19 crisis, remittance flows to the region are expected to decline by 23.1 per cent to reach $37 billion in 2020, while recovery of 4 per cent is expected in 2021.
“The anticipated decline can be attributed to a combination of factors driven by the Coronavirus outbreak in key destinations where African migrants reside including in the EU area, the United States, the Middle East, and China. These large economies host a large share of Sub-Saharan African migrants and combined, are a source of close to a quarter of total remittances sent to the region.”
For Sub-Saharan Africa, this will be a huge blow because remittances, which are an important income source, are already costly to the sender.
According to the World Bank, sending $200 in remittances to the region costs 8.9 per cent ($17.80) on average in the first quarter of 2020, a modest decrease compared with the average cost of 9.25 per cent ($18.50) a year before.
Traditional corridors costlier
The most expensive corridors are observed in the Southern African region, with costs as high as 20 per cent. At the other end of the spectrum, the less expensive corridors had average costs of less than 3.6 per cent.
A combination of lower remittances and higher costs means a recipient in Sub-Sahara African will get less than would a recipient in cheaper regions.
So while proponents of the blockchain technology have been arguing for years for the use of this innovation in lowering remittance costs, it seems it has taken COVID-19 virus related events for mainstream organizations to seriously consider this.
Many governments and multilateral institutions already recognize the importance of this income stream in fighting poverty. One of the UN’s Sustainable Development Goals (SDGs), 10 C aims to reduce the cost of sending money across borders to less than 3% and to eliminate remittances corridors with costs higher than 5% by 2030.
Some of these organizations like OECD now believe the blockchain technology can a vehicle to achieve this (SDG 10 C) and that is why it is now studying or exploring this potential.
Through its Development Co-operation Directorate (DCD), the OECD developed a working paper that provides an overview of diverse perspectives on the intersection of the blockchain technology and remittances by exploring the opportunities and challenges of this technology for reducing remittances cost.
In its assessment, the DCD (as expected) is quick to point out ongoing concerns about some of the challenges posed by the mainly private blockchain-based currencies like Bitcoin and Monero.
However, the document which was released in April 2020, does highlight the fact that it is the blockchain technology which promises to transform the financial landscape. The blockchain is expected to challenge traditional business models by addressing some of the typical shortcomings including access, speed, transparency and transaction cost.
Faced with extraordinary challenges posed by COVID-19, mainstream development organizations as well as governments should seriously consider working to see better adoption of the blockchain. In any case, it is the only technology that has been proven to be ready.
Governments, particularly those in Sub-Saharan Africa, that are most likely to be affected by the drop in remittances must take heed of some of the recommendations made by DCD.
DCD is encouraging policymakers to act as catalysts in shaping a ‘favourable’ ecosystem for the deployment of blockchain technology by advocating pilots, innovation hubs and sandboxes, for setting regulatory standards that can be applied on a global scale.
In the final analysis, the blockchain and cryptocurrencies can no longer be seen as peripheral solutions. African countries, where the number of use cases for this fintech is much higher, should naturally take the lead in the adoption of the innovation. Laws or regulations that are designed to impede the growth of the space must be replaced with ones that encourage new players to come in.
Africa has long been complaining of an unfair playing field and the blockchain has the potential of levelling that field. Africa leaders must have the presence of mind to see this and seize the once in a lifetime opportunity by surging ahead with the technology.
It remains to be seen if they are going to take heed this time.
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