Even as cryptocurrencies have skyrocketed in price, there’s always been the question of what they can really be used for. One of the stronger use cases is remittances—the cross-border cash transfers that have long been dominated by the likes of Western Union Co. and MoneyGram International Inc.
Intuitively, a technology that allows one person to send money to another without an intermediary could make remittances quicker and cheaper.
There are still huge barriers, from the wild volatility of many cryptocurrencies to the complexities of buying them in one country and then converting them back to traditional cash in another. Bitso, a Mexico City-based crypto trading platform, says it’s making a dent. It estimates it’s helping money transmitters move around 2.5% of the more than $40 billion in remittances flowing across the border from the U.S. to Mexico annually.
Bitso doesn’t offer remittances directly on its crypto trading app, which has more than 2 million users in Latin America. Instead, it’s so far been doing work behind the scenes for money transfer services, which can use Bitso’s API, a technology that shares data among apps or services.
One such company is Bridge21, a U.S. service that says it’s been using crypto for Mexico-bound remittances since 2016. “Depending on the cryptocurrency you use it can take minutes or even seconds to move the money as opposed to days,” says Will Madden, Bridge21’s chief executive officer.
These businesses can collect dollars in the U.S. and then convert it to crypto, which can then be exchanged for pesos to be paid out in Mexico. Bitso’s customers in remittances can use different tokens, but one option is to swap their currencies for the USDC stablecoin, a crypto currency that’s pegged to the U.S. dollar, which means its price is supposed to remain $1 at all times. In a big chunk of these transactions, users don’t even know their money is being turned into crypto along the way, says Bitso co-founder and CEO Daniel Vogel.
In other words, Bitso hasn’t yet eliminated all the layers of middlemen, though it says it can make things more efficient. “Seventy percent of all remittance flows are cash to cash,” says Santiago Alvarado, Bitso’s head of product for business. “Unless the first mile and last mile start with a digital wallet or digital bank account, you still have to have that partner that can collect cash and allows for cash pick-up on the other end. Everything else can be done within Bitso.”
Remittances remain a gigantic source of income for the Mexican economy as whole, representing almost 4% of the country’s gross domestic product. An estimated 95% comes from emigrants in the U.S., who have long relied on relatively expensive remittance services that may operate out of storefronts or desks inside convenience stores. According to data from the World Bank, the average cost of sending $200 from the U.S. to Mexico in the first quarter of 2021 was $7.29, or 3.65%.
Douglas King, a payments risk expert with the Federal Reserve Bank of Atlanta, says crypto can bring much-needed competition to the industry. “There is potential for continued pressure to bring the cost down,” he says. The transfer business is expensive because it involves having agents on both sides of the border, as well the costs of foreign exchange, banking relationships, and ensuring ready access to cash in multiple currencies and countries. Commissions can pile up throughout the transaction. Bitso says it can cut one of the biggest costs—foreign exchange—down to a few tenths of a percentage point, compared with about 2% at some providers.
Bitso is hardly the first company to try to do remittances via crypto—one incumbent has already taken a shot. MoneyGram, one of the largest money-transfer services in the U.S., worked with Ripple Labs Inc. in 2019 to try out a similar approach. It sent some foreign-exchange transactions over Ripple’s network, using a crypto token called XRP as the bridge between traditional currencies. “The technology works,” says MoneyGram CEO Alex Holmes.
“But it was an early product and had a long way to go.” And then Ripple ran into a regulatory snag that Holmes says forced MoneyGram to stop using it. The U.S. Securities and Exchange Commission alleged that the XRP token was essentially an unregistered security that Ripple sold to raise money for the company. Ripple has disputed that XRP is a security and is fighting the SEC’s lawsuit.
MoneyGram has launched a different crypto partnership, this time with the Stellar Development Foundation, which is intended to allow its consumers to use local currencies to buy USDC stablecoins, or to exchange those tokens for cash. The foundation, which maintains an open-source payments network called Stellar, also worked with Bitso to integrate USDC into its platform.
But MoneyGram’s experience with Ripple points to a challenge for crypto remittances: The regulations around crypto are essentially still being written. On Nov. 1, a group of federal regulators in U.S., including the Treasury Department and the Federal Reserve, issued a report calling for stricter rules for stablecoins, which are now valued at around $130 billion.
Because such coins are typically designed to be backed by traditional currencies and assets held in reserve, the regulators urged Congress to pass laws to regulate them like banks so as to lessen the risks of panics akin to bank runs. “The regulations have not caught up, and it’s a total blind spot,” says John Court, who heads regulatory affairs at the Bank Policy Institute, a trade association. He says companies using crypto in remittances should “absolutely be worried” about policymakers looking over their shoulders.
In Mexico, too, crypto has been viewed with skepticism by policymakers. The nation’s central bank has repeatedly said cryptocurrencies aren’t legal tender and that financial institutions can’t allow consumers to buy and sell goods using crypto, though companies are able to use the technology internally.
The Comisión Nacional Bancaria y de Valores, a financial regulator, says in a statement that money transmitters including MoneyGram can’t offer to turn cash into tokens as the company plans to with Stellar. “We are aware of Mexico’s position and if/when we do expand into the Mexican market, we will do so only after securing required licensure and ensuring the structure is compliant with Mexican law,” a spokesperson for MoneyGram says in a statement.
The CNBV also says that business models being developed though crypto trading platforms aren’t regulated by any financial authority in the country. (Bitso says its crypto business is regulated in Gibraltar, where it has a license.) “Mexico still doesn’t have strong regulation in terms of cryptocurrencies, there’s still a legal void,” says Mario Di Costanzo, the former head of Condusef, Mexico’s consumer protection agency for financial services.
“We also can’t rule out serious problems with money laundering and frauds. Consumers are vulnerable because if there’s ever a problem with a transaction, it’s not entirely clear who would be able to help them, and I don’t see the regulation changing in the short term.”
The fact the remittances cross international borders means that a broad swathe of agencies could enter the fray. “There will be huge push back from regulators on the use of cryptocurrencies” for regular remittances, says Ahmed Ismail, co-founder at Havyn Global, an online platform for digital currencies based in Dubai. He says there will always be compliance issues, particularly in countries seen as higher risk for money laundering. “But I do see a shift in many businesses in that they want to learn more about cryptocurrencies and naturally we’ll see more crypto-based solutions.”
—With Justin Villamil and Michael O’Boyle. Read original story on Bloomberg
