December 15, 2013 4:15 AM UTC

Bitcoin As A Medium Of Exchange: Domestic Remittances Use Case

Bitcoin could be the most efficient means of moving fiat around the world.

International Remittances

Before we delve into the promise of Domestic remittances, we must understand the hype behind International remittances.  International remittances have been growing every year, and many consider it to be a “killer app” for Bitcoin.  One noticeable example of a startup rising up to face this challenge is Buttercoin.

About Buttercoin, Bloomberg’s Businessweek had this to say:

The company is working with licensed money transmitters in several countries to establish software systems in which currencies can be automatically converted—first into Bitcoin, then into another currency. Buttercoin will focus on a few markets at first, such as the $3.4 billion in annual remittances sent from from Canada to India. The company says it will take a commission of less than 1 percent.

Any business that plans to be international in scope and legal compliance has many hurdles in front of them, so it’s a good thing Buttercoin has international support.  However, from this small case study we can appreciate the inherent difficulty in establishing an international remittance network.  Buttercoin is currently in the mire of regulatory hurdles and it may be a while before we see a functioning Bitcoin International remittance system of any sort.  However, the demand for international remittance transfers at less than 1% commission is very large in our current world where the current international remittance commission fee is an average of around 9%.

Domestic remittances, sooner than International remittances, will highlight Bitcoin’s superiority as a medium of exhcnage

Domestic Remittances

According to the UN, there are about 3.5x the amount of migrant workers that have migrated within their country of birth than workers that have migrated outside of their country of birth.  The aggregate amount of domestic remittances far outweighs that of international remittances.  

As of 2011, in India, domestic remittances are more than double that of international remittances, meaning that domestic remittances in India total over $100 billion USD per year.  Compare that with the $3.4 billion USD market that Buttercoin is facing.

In Sub-Saharan Africa, where the fees for both international and domestic remittance transfers are the highest in the world, domestic remittances are 8 times more prevalent than international remittances.

There is a wealth of data demonstrating the demand for more efficient domestic remittance methods.  I will focus on domestic and international remittances in China as those are the areas in which I have academic training and personal experience, respectively.

In a 2005 study by Chong and Zhong, the aggregate amount of domestic remittances was found to be much larger than the amount of international remittances.  This comes as no surprise given the floating migrant worker population in China that numbers more than 100 million.  The total of domestic remittances in 2005 was larger than that of international remittances in that same year.   The data for recent years is not as readily available but extrapolation can be done on the growing not shrinking size of China’s migrant worker population.

Migrant workers within China were found to use a combination of the China postal service, commercial banks, and rural credit cooperatives to remit their money, totally over $30 Billion USD, back home.  In recent years since the article though, commercial banks have been closing their rural branches due to changes in regulation.  This and other factors such as a intimidation by and/or unwillingness to participate in formal settings, forms, and procedures serve as an obstacle preventing the older, less educated, and poorer from knowing about or utilizing these formal forms of remittance.  Instead, as little as 25%, but likely much more, of remittance money is sent through informal means, such as having a trusted friend visiting the village to carry the cash right to the family; however, due to the inherent difficulty in quantifying how much money moves around in this manner one must realize that the grand total of domestic remittances in any region or country is systemically underestimated.

The average per transaction fee for domestic remittances in China sits at around 1 to 1.5%; similarly, Wells Fargo charges $15 for a $500 to $1000 transfer from America to China which makes their fee 1.5% at best.  The fact of the matter is, 1 to 1.5% of the meager remittances that migrant workers are able to scrounge about to send home, is often 30 to 50 yuan, otherwise known as their monthly food allowance.  Even in China, with some of the lowest domestic remittance fees in the world, the demand for lower fees is still as strong as hunger pains; just imagine the potential in Africa.

The Path of the Future

With this knowledge in hand we are now able to identify the largest obstacles to Bitcoin, in relation to exchange use, are internet penetration and bank account penetration.  Access to the internet and having a bank account both are currently required to participate in the Bitcoin economy if the bitcoins need to be converted to a native currency for use purposes or for accounting purposes.  The reality is that Bitcoin is, as of yet, not poised to make even a small impact on the International Remittances market due to the lack of bank account penetration in the countries that would benefit most.

In developed countries such as the United States, almost 90% of all adults have a bank account, and also internet access.  In certain countries in Africa the bank account penetration rate is barely in the double digits; furthermore, there is an increased gap in bank account penetration between the top 20% richest and the 20% poorest in each country.  The lack of financial institutions of any sort are part of the reason why these poor areas stay poor, as there isn’t infrastructure to provide loans to reinvest in the community or even to provide basic savings functions.

Across the world, more promising data for the financial future via Bitcoin is provided by studies about internet penetration.  In China, there is a large and obvious gap between the number of urban Chinese internet users and the number of rural Chinese internet users.  However, compared with their urban counterparts, rural Chinese internet users under the age of 19 are using proportionally more internet than their urban counterparts.  This supports the trend that all have undoubtedly observed: Internet penetration is increasing, partly due to the onset of 3G and mobile phones, and this phenomenon is occurring even in Africa.  More importantly, we are faced with the fact that internet penetration growth is far outpacing bank account penetration growth.

We may soon find ourselves in a world where Bitcoin and other cryptocoins are the best “bank account” that someone in a third world country could conceivably own or have steady access to.

A single trusted domestic exchange is all that is necessary to utilize Bitcoin as a medium of exchange for domestic remittance transfers.

This exchange could be centralized or decentralized, compliant or non-compliant; however, it is much more plausible that said exchange would reach its status as trusted domestic exchange if they were centralized and legally compliant.

Trusted domestic Bitcoin exchanges within countries will become the preferred method of domestic remittance due to their ability to offer the lowest fees.  From there, Bitcoin’s use for international remittances will be a natural progression.

Caleb Chen @bitxbitxbitcoin

Caleb is a graduate of the University of Virginia where he studied Economics, East Asian Studies, and Mathematics. He is currently pursuing his MSc in Digital Currency at the University of Nicosia.

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