Blockchain the future for remittance payments?

Migration is on the rise in many nations. For those living outside their home country, Bitcoin remittance platforms offer a quick and cheap alternative for sending money back home to friends and family.

In countries suffering mass inflation or political instability, remittances are vital to the economy. Mainly due to the high costs associated with building and maintaining financial infrastructure like ATMS and banks, many families in developing nations depend on remittance payments to get by.

Platforms specializing in remittances, such as BitSpark and Bitpesa, use blockchain technology to ease the cost and difficulty of sending money across borders.

 Endearingly called "dollars wrapped with love" by economist Dilip Ratha, global remittances totaled $596 billion (€479 billion) in 2016 and are vital to the livelihood of millions.

Remittances are technically described as peer-to-peer transactions from  migrant workers to family or friends living in their home country. From Germany alone, over $23 billion was sent abroad in 2016, mainly to Turkey, Italy, Serbia and Montenegro.

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What is blockchain?

 Research has found these payments are mainly used for basic expenses such as food, clothing, transportation and education, making them vital to the livelihood of those in developing nations.

Read also: A new legitimate era for Bitcoin

"There are millions of people who migrate each year. With the help of the family, they cross oceans, they cross deserts, they cross rivers, they cross mountains," says World Bank economist Dilip Ratha.

"They risk their lives to realize a dream, and that dream is as simple as having a decent job somewhere so they can send money home and help the family, which has helped them before."

How it works

In the olden days before Bitcoin and blockchain became household words, sending remittances involved using a bank or a specialized service like Western Union. The process works like this: the bank converts the local currency to dollars, transfers them to an account in the recipient's country and then converts them back into the local currency.

Bitcoin is certainly an option when looking for cheaper ways to transfer money across borders

There is a loss through converting currencies this many times, not to mention fees and time spent waiting for transfer approvals. A study by the World Bank found that fees average 7.09 percent of the amount sent. By using Bitcoin to this transaction, blockchain platforms are able to reduce fees and transfer money more quickly. The World Bank also noted that cutting prices by 5 percent can save $16 billion a year.

Blockchain technology is the foundation for cryptocurrencies like Bitcoin. With blockchain, a tally of transactions are encrypted and stored in every participating account's ledger, in the form of blocks.

This means that a transaction cannot be altered without changing every single block, making Bitcoin impervious to fraud. The peer-to-peer network eliminates the need for a bank to keep track of the accounts. The decentralized nature of Bitcoin is the basis for much of its growing popularity.

Easing the burden of migration

As a self-titled "Blockchain Evangelist," American resident Jay Stark opts to use blockchain platforms over banks. He reasons "it's much easier than having to take time out of your day, go to a bank, sign documents, provide various forms of ID, making a pin, and only during the hours of 10 and 5 in the afternoon. You can basically download a bank on your phone and transact at any time across any time zone."

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These tasks are further complicated for immigrants, where getting a bank account or proper identification involves more paperwork and bureaucracy than simply downloading an app. The UN reported that 258 million people now live in a country other than their birth country, a 49-percent increase from the year 2000.

Lorenzo Fioramonti, a political professor and director at the Center for the Study of Governance Innovation, notes that using cryptocurrencies "results in a transparent open-access registry of monetary flows which makes the intermediation of banking authorities unnecessary. Thus it challenges the conventional belief that money can only work through central planning."

In countries like Nigeria and Zimbabwe, government controls and a chronic shortage of dollars has kept these economies in financial crisis. And political instability and ultra-high inflation has many turning to Bitcoin as a safe alternative to securing and protecting financial assets.

Cryptocurrencies are still in the beginning stages of innovation, and companies have only just begun exploring their potential role in remittance payments. Fioramonti is optimistic this is only the beginning.

"In the near future, we will have a variety of money with different qualities and different purposes. This will make economies more resilient against shocks and will support more equitable and sustainable development, by putting users in the driver seat and reinforcing local economic development."

Bitcoin: Where it came from and where it's headed

Good time to start a currency

Introduced in 2009, Bitcoin was the world's first decentralized digital currency. It quickly gained traction amid lingering uncertainty in the wake of financial crisis. Designed to be as rare as gold, Bitcoin was created to have a maximum of 21 million "coins." Initially worth just a fraction of a cent, by February 2011 the currency had gained parity with the US dollar, then it really took off.

Bitcoin: Where it came from and where it's headed

An anonymous founder

The name Satoshi Nakamoto is synonymous with Bitcoin. It is said to be the alias for an unknown IT whizz who invented the cryptocurrency. But despite claiming to be a 30-something Japanese national, it is generally thought that several computer science experts created the technology behind the digital coin. One rumor even suggested that Tesla chief Elon Musk is the real Satoshi, which he denied.

Bitcoin: Where it came from and where it's headed

So no coins then?

Instead of being printed like dollars and euros, each Bitcoin is created on a global network of computers and verified by the system rather than a bank. There are no transaction fees. The smallest amount you can buy is a "Satoshi" or one-hundred-millionth of a Bitcoin. Purchases can be made anonymously and even at digital currency ATMs. When you buy Bitcoin, it is often stored in a digital wallet.

Bitcoin: Where it came from and where it's headed

Complex puzzles

To ensure that not too much Bitcoin comes into circulation, a process called mining was created where blocks of transactions could only be processed once a difficult math problem was solved by geeks. The puzzles are becoming so complex that bigger and bigger computers are being utilized to decipher them. That's led to concerns about the amount of electricity used to handle Bitcoin transactions.

Bitcoin: Where it came from and where it's headed

Are Bitcoin fortunes legit?

Due to its anonymous nature, Bitcoin's success is likely being fueled by organized crime, including money laundering and the purchase of illegal goods. The currency is also being targeted by cybercriminals. A recent hack blamed on North Korea forced a South Korean digital currency exchange into bankruptcy. Reports suggest the "Islamic State" armed group used Bitcoin to receive funds to buy arms.

Bitcoin: Where it came from and where it's headed

Bitcoin leads, others follow

Bitcoin is the largest of all the cryptocurrencies and its incredible rise has spawned many imitators. Other large digital cash creators include Ethereum, Zcash, Bitcoin Cash, Ripple and Litecoin. As of November 2017, their number had swelled to 1,324. Hundreds of others have attempted and failed to launch their own digital coins. The market is now coming under increasing scrutiny by regulators.

Bitcoin: Where it came from and where it's headed

Watch it skyrocket

2017 was a stratospheric year for Bitcoin. Worth close to $1,000 in January, some twelve months later it had scaled to an all-time high of $19,784. Despite much skepticism, the currency started to see serious interest from institutional investors. Two exchanges began Bitcoin futures trading, allowing speculators to punt on the incredible volatility in the value of the cryptocurrency.

Bitcoin: Where it came from and where it's headed

Warnings abound

From central banks to respected investors, almost the entire financial establishment warned of a massive Bitcoin bubble, which they said can only end in disaster for holders of the digital currency. Among them was Nobel prize-winning economist Joseph Stiglitz who said Bitcoin "ought to be outlawed." Jamie Dimon, the CEO of JPMorgan Chase labeled those who buy the currency "stupid."

Bitcoin: Where it came from and where it's headed

The shape of things to come?

Just before Christmas 2017, Bitcoin saw a dramatic rally, topping out at nearly $20,000 before losing a third of its value in just five days. More intense volatility followed early in the New Year, only to be reversed when it plummeted by almost half. Are we in for an even bigger rollercoaster ride if Wall Street adopts Bitcoin?

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