Long reads

The Future of Digital Banking in North America: Chain reactions - Cryptocurrency vs. remittances

Madhvi Mavadiya

Madhvi Mavadiya

Head of Content, Finextra

This is an excerpt from Finextra’s report, 'The Future of Digital Banking North America 2023'.

The payments landscape is currently undergoing intense digital-led transformation, but is there a place for both remittances and crypto? Across the spectrum of cryptocurrency and money transfers, how are digital currencies are finding a space in the industry, where cryptocurrency’s benefits are considered and the debate of whether it could ever replace conventional money transfers continues. Cryptocurrency is making waves in remittances, but where is the genuine impact and what is just digital noise?

According to Kaitlin Asrow, executive deputy superintendent, research and innovation, New York State Department of Financial Services, there is room for both cryptocurrency and remittances. “Innovation in one area, such as virtual currency, should not preclude other innovations. I believe we can work towards improving traditional payment systems, while virtual currency continues to evolve. It is exciting to be working on multiple innovative paths.”

There has been a massive shift toward digital platforms across all industries as a result of the Covid-19 pandemic and political leaders around the world have taken steps to move their economies in the same direction. El Salvador made headlines for becoming the first country to adopt Bitcoin as legal tender despite citizen protest.

When announced, the country’s president Nayib Bukele stated that cryptocurrency was a direct competitor for remittances, adding that lowincome families in El Salvador would receive from the “equivalent of billions of dollars every year.” Remittance, defined as people sending money to support their families and communities back home make up a significant component of GDP for many countries.

Further to this, Synapse CEO and co-founder, Sankaet Pathak reiterated that “sparked by the COVID-19 pandemic, location no longer matters for workers in the digital goods economy. Freelancers, gamers, and content creators of all kinds now fuel an interconnected, global workforce. Additionally, cross-border families, travelers and residents in countries experiencing high inflation or negative interest rates require access to more stable stores of value."

According to the World Bank, global remittances totalled roughly $700 billion in 2020, $540 billion of which is noted to have been sent to low- and middle-income countries. TechCrunch reported that El Salvador received nearly $6 billion of that. Cryptocurrencies, however, are estimated to make up less than 1% of the volume of global cross-border remittances.

Daniel Webber, founder and CEO of FXC Intelligence, highlighted that the industry is not ready for an either-or situation when it comes to cryptocurrency and remittances. “Crypto is not in a position to replace conventional remittances – and it won’t be for the foreseeable future. Claims about it being faster and cheaper are often overstated. Our own data tracking crypto cross-border shows it is often about the same speed on many corridors due to the time it takes to on and off-ramp and is not always cheaper either.”

Webber elucidated this point further and stated that the benefits of cryptocurrency are still of value. “That’s not to say there is no benefit to crypto for the end user for money transfers – they are well suited to applications where users want to keep their money in digital currency or in some circumstances where part of the currency pair is particularly volatile or has restrictions.

“However, crypto’s benefits for money transfer customers are specific to niche use cases – for many it offers no notable edge over the wide range of solutions in the conventional market. Where there do seem to be opportunities is for improving the treasury management – a liquidity needed by money transfer providers.” Amid innovation and nuanced waves of technology trends, the financial services industry and fintech sector alike must not forget that conventional, or traditional methods of money movement still work.

Legacy global rails and payment networks are also changing and being modernised to suit the future of digital banking. Since its emergence, blockchain has shown potential for financial inclusion and the formalisation of remittances. In the background, regulators have been studying the capabilities of blockchain to streamline and replace the infrastructure underpinning cross-border payments and remittances - correspondent banking. Also referred to as Nostro-Vostro accounts, these bilateral arrangements that allow banks to provide services in countries where they do not directly operate are in dire need of innovation.

As a result, there is a growing interest in a link between remittances, blockchain and correspondent banking, particularly by organisations such as Ripple. As written by Durham University’s Ludovico Rella in the paper ‘Blockchain Technologies and Remittances: From Financial Inclusion to Correspondent Banking’, blockchain has been proven to foster the formalisation of remittances and can be incorporated into existing infrastructures, business models, and regulatory structures.

The paper introduction reads: “Concerns about risks and efficiencies presently animating correspondent banking arrangements—rather than financial inclusion agendas per se—are driving the application of blockchain and DLTs in remittances. Previous critical social scientific research argues that digital technologies for financial inclusion are actually motivated by the monetisation of users' data.

“This paper argues that the application of DLTs within existing correspondent banking arrangements aims to reduce costs and fees, and to mobilise the idle liquidity ‘locked up’ in Nostro and Vostro accounts. This is achieved through interoperability, understood as the visibility and synchronisation of payment systems to and with each other. Interoperability, in turn, enables real-time clearing and settlement of transactions. Ripple is almost the only case where blockchain, correspondent banking, and remittances overlap.”

Core banking systems have been modernised to meet constantly shifting customer demands, while also reducing cost and risk. By automating processes and streamlining application delivery, resilience, efficiency, and time to market has improved. Partnerships across the financial services ecosystem can resolve technology challenges from a business-led and a technology-led perspective. However, industry sentiment continues to question whether banks are truly able to innovate independently, or whether financial institutions can partner efficiently.

A spokesperson from Wells Fargo explored this point: “Client centric design and innovation must include thinking beyond our walls. The future of banking will rely on investing in critical partnerships to create value for our customers across a variety of ecosystems. It isn’t about fintech vs. banking but leveraging the data and scale of Wells Fargo with the nimbleness and precision of fintechs and technology firms, to create a result that is better than the sum of its parts. We leverage these partnerships to create experiences that fully encompass a customer’s financial journey.”

Looking to the future, it is evident that while traditional models of innovation are predominantly linear, featuring limited feedback loops. A cycle of feedback that combines views around technical innovation and social change will lead to success across the entire value chain. Technological innovation brings about new products, but also new ways of using products and services, spurring still more technological innovation.

Emerging technologies such as distributed ledger technology and blockchain technologies have been treated in this manner by traditional financial institutions. Wells Fargo continued: “Wells Fargo is committed to exploring emergent technologies and innovative concepts that will benefit our customers. Currently, we are evaluating Digital Ledger Technology (DLT) for potential transactional, transparency, and settlement innovations it may hold. For example, potential benefits include: easy access to data, end-toend transparency, increased settlement speed, and improved auditability. In addition, Wells Fargo is collaborating with financial institutions and exploring distributed ledger initiatives that will complement our core business. As with all emergent technologies, understanding the regulatory environment and ensuring customer security are foundational elements of any exploration.

“While we do not accept crypto assets — in deposit, custodial, or other accounts — we are actively conducting research and development in the digital currency space to evaluate the underlying technology for potential transactional, transparency, and settlement innovations it may hold.”

In exploration of how innovation is currently operating, Asrow added that: “Virtual currency, like other markets, is an opportunity for investment and job creation, if the innovation occurs in a responsible manner. Blockchain technology itself also has exciting potential applications within financial services and beyond. As this space continues to grow, it is essential that there is efficient and rigorous regulation. NYDFS implemented the first tailored regulatory framework for virtual currency in 2015 and under Superintendent Harris’ leadership, DFS is committed to using its suite of regulatory tools to keep New York at the centre of technological innovation."

In a concluding comment, Webber stated that: “We are still early on crypto and its use cases in payments for end users. When it comes to improving the efficiency of banks and payment companies, there are situations where it can offer specific benefits, particularly when using stablecoins such as USDC and helping to reduce the need to pre-fund currencies around the world.

“As adoption of crypto grows at the checkout, that will cause the growth to fundamentally change the payments side of the business. If consumers or businesses want to spend their crypto, then fintechs and banks will develop the solutions necessary. We are also seeing a set of crypto companies embracing regulation and looking to gain the same level of trust that traditional financial service companies have. In this respect, more and better regulation can only help the sector become more mainstream.”

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