Whether you’re talking about remittances sent home by migrant workers or other larger sums moving from one country to another, cross-border payments are the part of finance that crypto companies believe they can most easily and effectively disrupt.
However, Jim Nguyen, CEO and co-founder of global payments FinTech Six Clovers, is not one of them and does not think blockchain is going to take over the business as many other predict.
“Blockchain will absolutely play a part in the future of cross-border payments. It’s happening today already, but it’s not going to replace it,” Nguyen told PYMNTS recently. “All of the existing rails that exist today will still exist. Blockchain will be additive to the infrastructure today.”
Still, disrupt it can, said Guillermo Vicandi, CEO and co-founder of neobank and infrastructure developer Bnext. Finance generally is the industry blockchain technology has the most potential to remake.
“I also think that there’s a tendency now of trying to put everything on the blockchain, and it probably doesn’t work for everything,” Vicandi said. But cross-border payments and remittance is a prime target, he added.
“For some countries in Latin America, remittances represent around 20% of their GDP,” Vicandi said. “So, it’s a massive corridor, and it’s a massive inflow of funds for some countries” and yet “it’s still a bit slow, and it’s still very expensive.”
Pointing to the Spanish market, he said that €18 billion is sent by migrant workers in Spain to families throughout Latin America. And to send $200, they pay 7.3%, according to the Bank of Spain, he noted.
UX Matters
What Bnext does is make that cheaper and faster by taking customers’ euros, buying dollar-denominated USDC stablecoins, and sending it over the Algorand blockchain, an ethereum-competitor that allows transactions to be made for pennies and in about four seconds, Vicandi said. Then they off-ramp it at the other end. For which Bnext charges 1.5%. Which is to say $3 instead of $15 for that $200 — including the off-ramp from crypto to the local currency.
Now, there’s nothing stopping the worker and his family from doing that themselves, Vicandi said. What his company does is improve the user experience (UX), he said, noting that the complexity and level of crypto knowledge necessary to do that is a service.
“In the time it takes you to shut down our app, open your WhatsApp and let your dad know that you sent money, it’s already there,” Vicandi said.
Crypto, he added, “has got the potential to eliminate friction when it comes to money movement. It could eventually reduce volatility risk and liquidity risk when it comes to money remittances. But it has to have an easy-to-use interface so pretty much anybody can use those services.”
Compare that to SWIFT, Vicandi said. “It has a fee in every single step that the money takes and it takes a lot of time to get to its destination.”
One key to that low cost and fast settlement, Nguyen said, is using a next-generation blockchain like Algorand rather than ethereum or bitcoin, which have higher transaction fees and settlement times of 10 minutes and an hour, respectively.
That said, Layer 2 blockchains like Lightning Network that sit on top of them are cutting the costs at least.
Interoperability Is Key
One thing that Nguyen comes back to is his belief that no one type of digital asset will conquer all.
There is room and opportunity for traditional price-floating tokens, dollar-pegged stablecoin and the forthcoming central bank digital currencies (CBDCs) to exist and coexist, he argued.
What that means, Nguyen added, is that there is a need for cross-chain payment rails that can let digital assets pass between many different blockchains’ native tokens, to stablecoins and CBDCs, and possibly to future types of cryptocurrencies.
Just as the banking system today can move fiat from one country to another, there needs to be a better system for converting from fiat to stablecoins and back, and between stablecoins native to specific blockchains.
“That is a critical component to getting this off the ground, because we can’t force senders and receivers to adopt one stablecoin or one blockchain because consumers want choice,” Nguyen said. “Interoperability is a critical component.”
Taking the example of Circle’s USD Coin (USDC), there are versions on nine blockchains and Circle will add five more early next year, and it does have a method for exchanging value between chains. But other cryptocurrencies have had a huge amount of trouble with cross-chain bridge platforms designed to facilitate cross-chain payments. The vast majority of the $3.1 billion stolen in crypto hacks this year was taken from cross-chain bridges, which have become a favorite with thieves.
CBDCs Welcome
The same applies to central bank digital currencies, which are under investigation or development in more than 100 countries representing 95% of the world’s GDP. While launching a digital dollar is still a question mark, China’s digital yuan is ready to go and there is strong support in the EU, among others.
Interoperability between CBDCs and stablecoins is another necessary component, Nguyen said. In this, he agrees with U.S. Comptroller of the Currency Michael Hsu who in April argued that both types of digital asset must be compatible with each other as well as others like them.
“We don’t see islands drawn around digital assets, which means bitcoin and ether, stablecoins and CBDCs,” Nguyen said. “Those three need to be able to move seamlessly across each other. As a matter of fact, fiat, digital assets, stablecoins and CBDCs, all four of those need to be interoperable.”
Any currency on earth, he said, should be convertible to any other.
What’s Next
A big part of that means putting the technological infrastructure for interoperability in place.
“Money’s a good indicator of where the innovation is happening,” Vicandi said. “Not always, but it tends to be. And pretty much all the money right now is going to infrastructure in interoperability — connections, new Layer 2s. Very little money is going to real-life use cases.”
The next stage, he said, is to take that infrastructure and “create a use case, simplify the interface, simplify the UX so that can access a wider audience. It’s still very early days.”
Another area that needs work is building the “monitoring tools to help regulators and payment operations team operate better,” Nguyen added. “In the fiat world today, we have extensive tools for anti-fraud and so forth. Similar tools like that need to also be developed and deployed in the blockchain.”
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