For all the dazzling speed high-tech startups and solutions bring to the financial scene, one aspect of the sphere continues to run slow—relentlessly slow. International money transfers—aside from being unpredictable, error-prone and expensive—piddles along just a tad faster than wealth transfer via three-masted schooners.
But as it turns out, a new ship has come in. Blockchain—the digital ledger that keeps track of cryptocurrencies such as bitcoin and ethereum—promises to revolutionize the staid, slow world of international money transfers.
To be certain, cryptocurrencies are still accompanied by mysterious volatility, international arrests and a whiff of “dark web” danger. But as more banks and financial organizations embrace decentralized currencies, it’s clear that blockchain represents an unstoppable game changer: a built-for-speed cruiser.
“Over the last two decades, the internet has created a world where friction no longer limits the exchange of information,” says Dr. Tomicah Tillemann, co-founder of the Blockchain Trust Accelerator at the New America Foundation and chairman of the nonprofit Global Blockchain Business Council.
Tillemann predicts that in the next two decades, blockchain will vastly streamline the exchange of assets. “Intermediaries will either be far less important—or far more efficient—than in the past.”
That’s a fearless forecast given blockchain’s nacense. The digital ledger bowed about 10 years ago as a way of transacting bitcoin. Transfers of value between bitcoin holders’ wallets are collected into digital blocks holding batches of transactions. All confirmed transactions in the blockchain are recorded in chronological order with a private key and signature that provides proof of ownership, enforced with cryptography.
Why does it matter to international transfers? “Ecommerce has already started a trend offering cost-effective convenient purchases,” says Lamia Pardo, senior vice president of growth and operations at Pangea Money Transfer, a mobile-centric remittance platform that lets people send money from the U.S. to Latin America and Asia in less than 30 seconds for a low flat fee. The name itself implies blockchain’s unifying power; “Pangea” refers to the primordial land mass of all the continents before they drifted apart.
“People are used to optionality and immediacy but when it comes to payments, the alternatives are still limited,” Pardo points out. “For example, a user in any country can go on Amazon, pay in one click, and get the product delivered in a different country within hours. Yet when it comes to person-to-person payments, there are fees of more than five percent and transfers may take up to four business days.”
Another particular pain point pinches international transfers, said Steven J. Ehrlich, Vice President, Strategy Lead Analyst at Citi in New York City.
While “just about every money center bank” is at least researching the technology and has probably done a pilot or two, he notes that the international money transfer giant Swift still rules the transfer ecosystem, with 11,000 partners.
Meanwhile, the venture-backed digital ledger startup Ripple has perhaps 90 to 100 major international institutions as partners. Ripple’s technology is based on its own proprietary distributed ledger technology, designed to address some of the scalability and privacy concerns of its customer base. It can be used to transfer any digital asset—but right now its primary use centers on the exchange or transaction in fiat currencies such as the dollar, rather than cryptocurrencies such as bitcoin.
Measuring blockchain reach in a different way, Tillemann cites an IBM study that “found 15 percent of global banks anticipate having blockchain solutions in place by the end of 2017. Two-thirds of banks expect to be using blockchain at commercial scale by 2020.”
“Adoption is also moving beyond FinTech,” he adds. “Governments are exploring or adopting blockchain as a platform for transferring property titles, maintaining vital records, and distributing benefits.
And with speed comes the trio of ubiquity, profitability and safety: “If your business thrives on efficiency, accountability, security and trust, then blockchain could provide a huge boost to your bottom line. If you make money off of friction, then you should be concerned.”
So at this point, what hinders universal adoption?
“For the past few years, there’s been an extensive dialogue around the impact of blockchain in cross border payments,” Pardo says. “It's been said and written that it would remove the barriers, friction, time and, most importantly, exorbitant costs in today's payments markets. Others have said the contrary; that customers and regulators are not ready for such a big shift in trust on a new ‘alternative’ currency.”
While forceful contentions inform both sides, “I believe the answer lies in the middle,” Pardo offers. “Most individuals are not ready to embrace the nuances of alternative currencies, so companies are the first place to start.”
Ehrlich also highlights how some people and institutions shy from anything connected with bitcoin because of its connection to illicit purposes such as drug trading. Nor has it helped that in September, banking luminary and JPMorgan Chase CEO slammed bitcoin as “a fraud.”
Regardless, institutions need to decide if they want to move toward enterprise-level adoption of blockchain and understand how stable and how scalable this solution is. Says Ehrlich: “You will only learn some of that once you take the training wheels off,” he said.
Experts recommend that individuals and institutions can learn about solutions in places such as:
What does the future hold? Well, if even the Pentagon has reportedly started to experiment with blockchain, maybe it’s becoming something more mainstream.
“A few years ago the discussion around bitcoin applications for international remittances or trade was merely theoretical,” Pardo said. “I believe at this point it is worth considering the inclusion of blockchain in a company's settlement mechanism or FX algorithm. It is important to demystify it, learn it, consider it and track it.
After all, what good is setting sail on a fast new payments vessel if it can’t conquer uncharted waters?
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Jeanne Pinder is the founder of ClearHealthCosts.com, an award-winning startup bringing transparency to the health care marketplace.
Steve Ehrlich was a featured guest on the BAI Banking Strategies podcast.