Are cryptocurrencies a good way to send money abroad?
The small central American nation of El Salvador doesn’t make international news very often.
Yet it grabbed the world’s attention in June 2021, when its government announced an ambitious plan to make Bitcoin legal tender, meaning the cryptocurrency will have to be accepted as payment for goods and services (unless a business is unable to obtain the technology needed for the transaction.) Bitcoin now looks set to become the country’s national currency.
El Salvador is making the move for a variety of reasons – not least the ambition of president Nayib Bukele to turn the country into a crypto investment hub.
But a primary consideration in popularising digital currencies was the amount of money El Salvador receives in remittances each year: an estimated $5.9 billion in 2020, almost a quarter of its GDP.
Bukele argues that Bitcoin will provide a new and more attractive avenue to send this money into El Salvador, which adopted the dollar after its currency collapsed in 2001, and open up financial services to the 70% of El Salvadoreans without bank accounts.
Money transfers cost average 7%
Although fees can be reduced by going through a money transfer company, sending money abroad can be a complicated, slow and costly process. The UN reported in 2019 that currency conversions and fees eat up 7% of the amount sent through remittances each year.
And remittance corridors aren’t created equal. In El Salvador the average cost is 3%. The world’s largest remittance flow is between the US and Mexico, where the average cost is 4.22% of the transaction. And senders paid an average 8.9% to send money into sub-Saharan Africa in the last quarter of 2019.
Do cryptocurrencies, which can be sent through the blockchain rather than any third party, offer a way to lower these costs?
How to send money abroad in cryptocurrency
Sending remittance payments in crypto, in simple terms, goes something like this:
What are the benefits of using cryptocurrency to make international money transfers?
After all this, you may find yourself asking: what’s the point?
MoneyTransfers.com asked the team at crypto exchange Paxful.
Artur Schaback, Paxful COO and co-founder, said the main benefits are usually cost, with crypto exchanges avoiding the high transaction fees and unfavourable exchange rates of some traditional providers; speed, because transactions can be done at any time on any day, and can take as little as a few minutes; and the access provided for people who may not have a bank account or may live in areas where payments are censored by governments or corporations.
“Sending a cross-border payment is not always easy, especially for people living in countries where there is low access to financial services or the government places restrictions on its citizens sending and receiving money,” Schaback explains.
Sending through crypto to markets such as Ethiopia, Schaback adds, can “heavily undercut what traditional services charge, as the seller can typically earn money by trading Bitcoin.”
Schaback believes economies are currently only scratching the surface when it comes to use of crypto. In higher-income economies, crypto is primarily seen as an investment asset.
Yet with financial education and more widespread adoption, he believes crypto exchanges will provide a way to complement the gaps in the current financial system.
In the case of El Salvador, recipients of remittances in Bitcoin should soon be able to hold onto those coins and spend them directly, without the need to exchange them back into fiat money.
“Cryptocurrency exchanges are certainly an interesting new way of transferring money abroad, and can be useful for sending money to countries that are difficult to transfer money to due to sanctions or their financial system, like Iran,” says Jonathan Merry, founder and CEO of MoneyTransfers.com.
“If the recipient has a specific reason for wanting the money they are owed in cryptocurrency then it’s clearly also a good option. Perhaps they want to invest in a currency anyway, or believe they can make a profit on the exchange.
“If both the parties in the exchange want to experiment with transferring money through crypto, and can afford to potentially take a loss on the transaction, there are secure ways to do so.
“But for the majority of transactions between easy-to-access markets, customers may wish to stick with traditional money transfer providers – at least until cryptocurrencies are more widely accepted as payment.”
The quality and costs of popular digital banks varies based on many factors, like location, laws and of course on what’s happening on the outside world – crypto having no small role on the banking evolution over the last years.