With all the talk about bitcoin and the blockchain revolutionizing the banking sector, what can we do to leverage a blockchain in the specific case of cross-border transfers? We used to think that blockchains were risky, but now things have changed and the technology has caught up with the times, giving us more freedom and our clients more access than ever.
What is a blockchain?
Understanding blockchains taps into many different expertises, such as cryptography and macro-economics. Nevertheless, let us attempt a one-sentence, plain english definition: A blockchain is an open, incorruptible ledger that tracks and verifies transactions.
Blockchains are kept incorruptible by the use of cryptography and a very wide network of powerful computers automatically "verifying" transactions for profit.
Blockchain currency and transaction fees
Top six blockchains according to coinmarketcap.com
The activity of verifying transactions is kept profitable by the use of an associated currency, normally referred to as a cryptocurrency. Every blockchain must have a currency associated with it. Transaction fees (in that currency) are attached to every transactions. Those fees are collected by the network of verifiers. Since the process is entirely automatized, the fees are extremely low compared to banking standards. In the 10€ bracket, a typical transaction fee would be 3%. They fall below a fraction of a percent at the 1,000 € bracket.
Some blockchain's associated currency are meant to be used for real-world spending. That would be the case for Bitcoin, the most famous and most successful blockchain. However, some other blockchain's associated currency are solely meant as a way to power the verification network. Ethereum, the second most valued blockchain, is a prime example.
Why use blockchain for money transfer
The extremely low transfer cost of cryptocurrencies makes it seem like a perfect vector for cross-border money transfer. However, in reality, there are significant blockers in the way of using blockchains accross currencies.
Let's examine some of the most famous blockchains, and how they can be used for our purpose.
Bitcoin for cross border payments
In the case of Bitcoin, it's pretty straightforward. Bitcoin is money, and it's as much of a Freely Convertible Currency as there can be, since there is zero governmental oversight on it. When converting from Euro to a local currency is made difficult by overzealous regulators, why not use bitcoin as a middle ground?
Well, this solution would only work if converting from bitcoin to your currency was cheaper/faster/easier than converting from Euro directly. For most currencies around the world, converting from Euro is actually more convenient. Regulators are usually even more wary of bitcoin than of Dollars and Euros. But in some select cases, it might be worth it.
Ethereum is very different from bitcoin. Unfortunately, it is significantly more complex. The ethereum associated currency, Ether, isn't meant as a means of exchange or a store of value. For our use case, it is generally comparable to bitcoin, the above applies.
The intended use of the Ethereum blockchain is as a contractual platform. As such, its use cases are multiple and far-reaching. Anything requiring a signature could be handled through this blockchain. Not only your contracts, but your passport or your prenuptial arrangement. It is one of the most exciting blockchain out there, however, in the case of international money transfers, it isn't better or worse than Bitcoin.
Ripple, the third most valuable blockchain, is an excellent candidate for international transfers. In fact, it was built with that very purpose in mind. Once again, the associated cryptocurrency is not meant for direct trading. It's only there to pay for the (very low) transaction fees. The actual exchange happens in traditional fiat-based currency such as Euros and Dollars.
From Ripple's own website: Instant, certain, low-cost international payments.
Using Ripple, one could have their invoices paid in Euro and converted to a local currency. It would happen instantly and at virtually no cost. However, the money would be received on a Ripple account, not on a traditional bank account. And a Ripple account is worthless as long as local banks haven't adopted the system.
Virtual bank accounts: a modern, existing solution that works with a blockchain
Work is still in progress. Using a blockchain-based currency as intermediary is not useful in most cases, but can be considered for select currencies. Sometime in the future, it is quite likely that Ripple, or something like it, will make cross-border transfer painless and virtually free. However, banks and financial institution are moving carefully and that future is still far enough that some expert worry it will not happen.
In the meanwhile, for right here, right now, existing modern solutions like a virtual bank account in Europe is the next best thing. It is a close emulation of the efficiency and low cost of blockchains.