Closing The Circle: Bitcoin And Remittances

A very well written post appeared on Medium’s blog regarding remittances and Bitcoin. The article entitled “Bitcoin Doesn’t Make Remittances Cheaper” caused quite a stir within the cryptocurrency crowd on September 6. The writer “CryptoNight” explains throughout his paper his 18-month experience with Bitcoin remittance service Rebit.ph. CryptoNight believes his organization is one to look at when investigating this payment processing platform saying:

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“We didn’t invent the concept of using Bitcoin as a remittance medium, but we were certainly one of its most successful examples.” — CryptoNight, former member of Rebit

The process of remittances is the transfer of funds by a foreign worker to friends or family members to his or her home region. Money sent from home from migrants is one of the largest financial industries servicing developing countries. Currently, two gigantic businesses rule this payment system; Western Union, (WU) and MoneyGram. The World Bank reports that the average cost for using WU is roughly 7.99% and up to 12% of the money sent. Cross-border transactions are expected to peak at USD $608 Billion by the end of 2015.

Now most of us would like to believe that bitcoin’s fees of 1% or less would be very beneficial to migrants sending money to family members. Some even think that the remittance industry involving cryptocurrencies will be the tipping point for mass adoption. CryptoNight explains that due to the “first and last mile” when using Bitcoin services, costs are roughly the same. Describing what it’s like in the Filipino region, CryptoNight explains “the average remittance shop at the average strip mall does no more than two hundred transactions a day.” The system of remittance shops, lead to money entering the region through these kiosks first. These kiosks have to charge customers enough to match costs “they’d normally expect to incur over their first year or so.” By this measure, the process ends up with a flat fee of “US$3-5 dollars or a spread of 1-1.5% fee per transaction.”

Then the final “mile” leads to the monopolization of the local pawn shops who serve as the collective domestic backbone within the remittance economy. (CryptoNight notes this is not true for all countries) This CryptoNight says, is due in part to the “90 million people spread across 2,000 islands, and 75% of them are unbanked.” So the pawnshops act as the final filter through the remittance ecosystem within Rebit’s target region in the Philippines and surrounding islands. The author claims that pawnshop networks charge 6-7% saying: “when a Bitcoin company, acting on the behest of its sending customer, wants to transfer USD$10 from one city to another, it needs to pay that same fee.” The author believes that for Bitcoin services to conquer remittance they must change the “first and last mile” of the process, CryptoNight states:

“All told, the costs of a Bitcoin-powered remittance and that of a transaction powered by Moneygram or any other traditional provider are markedly similar, because the local currency needs to flow through the same physical channels.” — CryptoNight, former member of Rebit

This comes to the idea of “closing the circle” which would make the system entirely different if it operated by cryptocurrency filters only. In a comment to the article “Bitcoin Doesn’t Make Remittances Cheaper” via reddit’s r/Bitcoin a person writes: “I see why you should want to eliminate bitcoin from the process to make it streamlined for users, but the real magic happens when we eliminate fiat from the process.” This statement is the widely agreed upon opinion as the end game for Bitcoin remittance solutions closing the circle and removing the monopolized currency from the equation. The former member of Rebit explains that some in the community understand this concept, but it’s seemingly not an easy task to overcome. From the Austrian economic perspective with fiat and additional circumstances, “the economic analysis of money prices is therefore not circular” as explained in Murray Rothbard’s, “Man, Economy, and State.” Rothbard gives insight to how the fiat system of today and yesterday reflect the prices and the marginal utility of all money today, including Bitcoin. The Austrian economist explains: “If prices today depend on the marginal utility of money today, the latter is dependent on money prices yesterday.“

The Austrian economic theory shows that what Cryptonight says about the system still revolving around the “same physical channels,” the “last mile” is indeed impeding Bitcoins progress. He does acknowledge that the digital money does serve well as an instantaneous payment solution, yet the fiat problem and their facilitators are making fees roughly the same as the centralized services. Within the economy of fiat still being used globally, this tell-tale sign makes perfect sense. The author also highlights Abra as a service which is attempting to change the “last mile” paradigm. CryptoNight says: “Abra has been attempting to establish partnerships with logistics providers and airtime top-up vendors, essentially anyone with a large footprint and decent amounts of liquidity.”

On the same reddit post, a few services offered their opinions to the dilemma. A commenter representing OpenBazaar writes: “This is why we are creating OpenBazaar. We need to learn to embrace Bitcoin and stop building so many damn bridges into and out of fiat. It’s going to be a long, hard slog, but that’s where the value proposition is. A global currency that doesn’t need to go in and out of fiat.” Following this comment another service, Vaultoro explains their stance: “This is why we made Vaultoro a bitcoin-only business. If people want to hedge the perceived price volatility of bitcoin, then they can easily jump into another private asset that has no intrinsic debt, needs no bank account and can instantly be spent as bitcoin again. Bitcoin is such an amazingly peaceful revolution that I try to stick to it and not run back to filthy fiat for cover all the time.”

These opinions are largely represented throughout forums and posts regarding this specific article including the author’s opinion. The subject is a good topic to discuss because removing fiat from the Bitcoin loop would provide a more sustainable union with remittance efforts. The current system blockades this circle from closing by the power of the main ingredients of monetary trade, which is the use of unbacked legal tender. In Man, Economy, and State, it explains how fiat prices stay fixed within the global markets as Rothbard writes: “Despite later losing their ties to direct commodity value through state interference, paper currency retained status as money because of the memory of previous money prices.” The end game of Bitcoin remittance must be the removal of these previously envisioned monetary memories and replace them with the “real magic.”