Is crypto providing faster payment rails or better remittance services?

Claim Steel-Manned

Crypto can provide us with better payment rails i.e. a better Visa, Stripe etc. These payment rails would have reduced friction and costs resulting in a cheaper, faster, more efficient service. 

Blockchain-based payment rails can also facilitate faster, cheaper, and more efficient international remittances. People can send money abroad, eg from US dollars to Indian rupees using crypto.

Examples of the claim being made

BLOCKDATA. ‘Blockchain Is Disrupting the $700 Billion Remittance Industry’. Medium (blog), 7 March 2019.

[CMT, Bill Miller IV, CFA. ‘The Value Investor’s Case for... Bitcoin?!’ Miller Value Partners (blog), 8 September 2015:](https://millervalue.com/a-value-investors-case-for-bitcoin/

The open ledger combined with the complexity of transaction data makes Bitcoin a very secure method of payment... One of Bitcoin’s biggest advantages over other payment networks like Visa (V) and MasterCard (MA) is minimal transactions fees. While other payments networks typically charge the greater of ~3% and $0.15, Bitcoin’s transaction fee tends to be a negligible fraction of the transaction, if any at all. Lower transaction fees not only enable buyers and sellers to transact at prices that are better for both parties, but they could enable micropayments in markets that are not otherwise compatible with a $0.15 surcharge on low-price, low-margin goods and services.

Nakamoto, Satoshi. ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, n.d.

Roger Ver, an investor in Blockchain.info, quoted in COINTELEGRAPH. ‘Western Union Is Not yet Ready for Bitcoin International Transfer’. Cointelegraph, 1 November 2013:

I think we will know when bitcoin has reached prime time when it is transferring more value each day than Western Union or Money Gram... I think we may see that happen within another two years.

Evaluation: False (high confidence)

Since crypto assets cannot function as a currency, they are not useful in building payment rails or remittance services. Crypto assets can be used as an intermediate asset in which trades can be settled in, but this does not serve a technical of financial purpose; it simply introduces an unnecessary conversion step.

If a person wants to send money abroad, say from US dollars to Indian rupees, they would typically use a service like MoneyGram or WesternUnion. These services charge a transaction fee and do a direct swap of dollars to rupees from the reserves the company holds in both currencies.

If one postulates using a crypto asset or stablecoin as a means to do remittances then they are still faced with the last leg problem. Their relative in India still has to convert the crypto asset into the local currency to buy domestic goods and services since supermakets and stores don't accept crypto assets. So instead of a dollar-to-ruppee conversion we would hypothetically do a dollar-to-bitcoin-to-rupee conversion. This introduces price-risk, counterparty-risk and unnecessary conversion fees to accommodate the extraneous third exchange. This adds unnecessary complexity and is likely more expensive.

See industry analysts describe this proble in more depth: Does Bitcoin/Blockchain make sense for international money transfers?

References

  1. Plant, Luke. 2022. ‘The Technological Case against Bitcoin and Blockchain’. Luke Plant’s Home Page. 5 March 2022. https://lukeplant.me.uk/blog/posts/the-technological-case-against-bitcoin-and-blockchain/.
  2. White, Molly. 2022a. ‘Blockchain-Based Systems Are Not What They Say They Are’. Molly White (blog). 9 January 2022. https://blog.mollywhite.net/blockchains-are-not-what-they-say/.
  3. ———. 2022b. ‘Anonymous Cryptocurrency Wallets Are Not So Simple’. Molly White (blog). 12 February 2022. https://blog.mollywhite.net/anonymous-crypto-wallets/.
  4. ———. 2022c. ‘Cryptocurrency Off-Ramps, and the Shift towards Centralization’. Molly White. 12 February 2022. https://blog.mollywhite.net/off-ramps/.
  5. ———. 2022d. ‘Cryptocurrency’s Robinhood Effect’. Molly White. 17 February 2022. https://blog.mollywhite.net/cryptocurrencys-robinhood-effect/.
  6. Cembalest, Michael. 2022. ‘The Maltese Falcoin: On Cryptocurrencies and Blockchains’. https://privatebank.jpmorgan.com/content/dam/jpm-wm-aem/global/pb/en/insights/eye-on-the-market/the-maltese-falcoin.pdf.
  7. Weaver, Nicholas. 2018. Blockchains and Cryptocurrencies: Burn It With Fire. Berkeley School of Information. https://www.youtube.com/watch?v=xCHab0dNnj4.
  8. Steele, Graham. 2021. ‘The Miner of Last Resort: Digital Currency, Shadow Money and the Role of the Central Bank’. Technology and Government, Emerald Studies in Media and Communications, Forthcoming.
  9. Amato, Massimo, and Luca Fantacci. 2020. A Fistful of Bitcoins: The Risks and Opportunities of Virtual Currencies. Bocconi University Press. https://www.egeaeditore.it/ita/prodotti/economia/a-fistful-of-bitcoins.aspx.
  10. Krugman, Paul. 2018. ‘Transaction Costs and Tethers: Why I’m a Crypto Skeptic’. The New York Times 21.
  11. ———. 2021. ‘Technobabble, Libertarian Derp and Bitcoin’. The New York Times 21.
  12. Stinchcombe, Kai. 2017. ‘Ten Years In, Nobody Has Come Up With a Use for Blockchain’. Hackernoon. 22 December 2017. https://hackernoon.com/ten-years-in-nobody-has-come-up-with-a-use-case-for-blockchain-ee98c180100.
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