Cryptocurrency and traditional currency – Why do we need to use cryptocurrency for remittances?
Cryptocurrency – the term is no longer unfamiliar to most people in the world. Since Bitcoin was created in 2009, a new way to take a payment has also been formed and developed to this day. Based on the new technology that created this coin called blockchain, many new cryptocurrencies have been published and used in lots of transactions around the world in a decentralized manner.
Decentralization is one of the differences between traditional currency and cryptocurrency. So, which are the others and why do we need to use cryptocurrency for not only remittances but also other types of cross-border transactions?
What is cryptocurrency?
According to Wikipedia, a cryptocurrency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.
It is a decentralized system for verifying that the parties to a transaction have the money they claim to have, eliminating the need for traditional intermediaries, such as banks, when funds are being transferred between two entities.
Differences between cryptocurrency and traditional currency (fiat currency)
- Fiat currency is limitless, cryptocurrency is limited.
Traditional currency (fiat currency) is created by the state or its representative organization. The state should only print more money when the total volume of goods and services in the country increases. Otherwise, prices will increase accordingly and cause inflation.
Contrary to fiat money, crypto money is created by the code of a certain group of people to first serve their own benefits and then the common benefit of the whole society when they are decentralized and not dependent on any intermediary. Therefore, cryptocurrencies are deflationary instead of inflationary because of the limitation of issuing more coins to the market.
According to the operation of the economy, inflation causes the loss of value of money and vice versa. Therefore, the value of cryptocurrencies is increasing rapidly, they only decrease when user confidence declines or the impact of the cryptocurrency trading markets.
- Fiat currency is centralized and exists in physical form while cryptocurrency is decentralized, cannot be physical, and is only circulated through the network.
Because fiat currency is created by the state or a representative organization of the state, it can be printed in physical form and circulated on the market widely under strict supervision by the state or competent authority.
In contrast, cryptocurrency is created entirely by blockchain technology, so it is decentralized, with no specific physical shape.
Why do we need to use cryptocurrency for remittances?
Although fiat currency has been and is being used very commonly in remittances (even as technology has developed, and some new methods of online money transfer have emerged). After the appearance of cryptocurrency, it solved a number of limitations in the remittance process of fiat currency such as:
- Too high fees in the remittance process
*Blockchain networks offer significantly lower transaction fees. Ethereum currently averages ~$20, which is acceptable for businesses. However, Ethereum scaling solutions, like Arbitrum and Polygon, charge less than $0.10 per transaction. Others, such as Solana, settle for less than a cent.
In contrast, with the involvement of third parties in the remittance process, the fees for this service are often very high (companies accepting card payments typically incur 2-3% transaction fees).
This is partly due to traditional remittance services like Western Union often charging over 7% more than mid-market exchange rates. Coupled with local bank fees, these costs substantially impact, considering that migrants sent an estimated $800B in 2022.*
*Sourced by Cryptosale
The reason why cryptocurrencies can solve the above problem is that the goal of their founders is rarely to make a profit from the above services but to build an ecosystem around that coin (such as Ethereum, Polygon, or Solana ecosystem). And the ultimate purpose of creating these cryptocurrencies is decentralized and no-fee transactions between individuals or businesses.
Meanwhile, receiving remittances in fiat currency will cost not only the fee for the intermediary but also the foreign exchange conversion fee between countries.
- Too long time for the remittance recipient to receive the money
**While international wire transfers can take up to five days, cryptocurrencies like Ethereum settle transactions within seconds (12 seconds on average). Others settle even quicker – Stellar within 2-5 seconds and Solana within 400 milliseconds. This speed enhances business flexibility and cash flow.**
**Sourced by Cryptosale
This problem occurs because a key weakness of fiat money is centralized management on one agency authorized by the state, so there will be differences in exchange rates between countries' currencies, making it difficult for foreign exchange conversion and approval from the governments of the parties to become very long.
- Unbanked and underbanked objects cannot be served
Crypto remittances provide increased accessibility. Despite over 1.4 billion unbanked adults worldwide, two-thirds own mobile phones. Crypto remittances bridge this gap, allowing even the unbanked to receive funds seamlessly.
In short, the development of technology and the advent of cryptocurrency has promoted the development of the remittance industry to be faster, easier and less costly. However, the issue of applying remittances by electronic money also encounters many barriers. Those barriers will be mentioned by FinFan in the following article.