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Deconstructing the invisible Bitcoin remittance solution

When Bitcoin was created in 2009, its most obvious use was for sending money across the planet, as easily as sending an email. The potential benefits for the 230 million migrants all over the world that send US$430 billion in remittances back home each year could be enormous. But beyond all the rhetoric, the practical implementation has yet to be sorted out.

When Bitcoin was created in 2009, its most obvious use was for sending money across the planet, as easily as sending an email. The potential benefits for the 230 million migrants all over the world that send US$430 billion in remittances back home each year could be enormous. But beyond all the rhetoric, the practical implementation has yet to be sorted out.

Over this series of articles, we’ll look at how the Bitcoin remittance process actually works, and follow the pioneering startups who have been focusing on this exciting space since 2013. From Nairobi to San Francisco to Manila, each new company brings us a little closer to the perfect solution; an affordable, safe, and universally accessible money transfer network unlike anything the world has ever seen.

The First Mile

In most parts of the world, the most common way that migrant workers send money back home to their families is through remittance outlets or agents. This often requires an actual physical visit to a shop. In more sophisticated locales like South Korea, however, this “first mile” has been replaced by a Facebook chat.

Instead of taking a bus to the remittance shop, Filipino migrant workers in Seoul chat with the shop’s staff through Facebook Messenger. The customer states how much money they want to send, and which payment channel they want to use. The agent replies with a quote in Korean Won (KRW), which the sender pays the same day in order to initiate the transaction.

South Korea’s banking system allows most of these small payments to be settled in a matter of seconds, and once the agent has received confirmation that the KRW has been deposited, they initiate the actual cross-border remittance.

It’s the First Mile partner’s job to manage Know Your Customer (KYC) processes. They may set amount thresholds and daily or monthly limits, in compliance with the requirements of their own jurisdiction.

In South Korea, Payphil is one of the most prominent First Mile providers, handling the majority of outbound Korean bitcoin remittances. Through the Bitcoin blockchain, they can send funds to any participating Last Mile partner anywhere in the world. For the rest of this analysis, we’ll focus on the remittance corridor they’ve built with the Philippines.

The Last Mile

Once a remittance has been initiated, the “last mile” partner receives the instructions, records the beneficiary details, and finally forwards the actual funds to one of several possible payment channels.

In the Philippines, only about 25 percent of adults have bank accounts, so the most common way to accept overseas remittances is via cash pickup outlets. These outlets are composed of pawnshop chains, logistics companies, or convenience stores. Each of these outlets has drastically different service fees, some are less than US$1 and others cost over US$5.

Once the payment has been successfully forwarded, the Last Miler signals that the remittance was successful, informing the recipient via SMS and email that their money is now available. Meanwhile, the First Miler informs the sending customer on their side of the world.

My startup, Bloom, is one of the major Last Mile providers in the Philippines, and thus handles inbound remittances to Filipino beneficiaries from a variety of different countries. As of November 2016, this includes South Korea, Singapore, Hong Kong, China, Australia, and Canada. In practice, there may be any number of Last Milers in a given country, and indeed the Philippines is fortunate to be the home of three other Bitcoin-friendly players: Coins.ph, Paylance.ph, and Rebit.ph.

bitcoin remittance workflow

The Origin Exchange

So far we’ve discussed the remittance process from the perspective of the customer, but in order for cash to actually move between countries, we need to look behind the scenes.

Using Bitcoin (BTC) as a settlement medium can be initially challenging to set up, but is almost immediately beneficial as soon as it’s functional. Being able to instantly settle a remittance through Bitcoin means that businesses can avoid having massive cash reserves sitting in a destination country. Instead, transactions can be paid for in real time, without needing to go through international wire transfers.

The first step in using Bitcoin this way is to find an exchange, or in limited circumstances a broker, where the First Mile provider can purchase BTC in exchange for their local currency. Most countries have local order book exchanges that enable this.

The First Miler buys Bitcoin from these exchanges, and deposits it with the Last Miler.

The Settlement Process

Because Bitcoin can be sent in a matter of seconds from one party to another, it’s easy to pay for a remittance ad hoc. In practice, however, most high-volume remittance businesses would prefer to simply pre-fund their balances with Bitcoin, allowing them to only perform two to three large funding transactions per day, instead of 500 small ones.

Although this method may sound similar to the traditional way of doing things, it is still vastly superior to wiring US$1,000,000 to a destination country, waiting three banking days for it to arrive, and then being subjected to an unpredictable exchange rate when it gets converted to local currency.

As an example: the First Miler might choose to send 10 BTC to the Last Miler at the beginning of the work day. At current rates, this is equivalent to US$10,000.

The Last Mile partner quotes them a local rate for the 10 BTC, 500,000 Philippine Pesos (PHP)  in this example, and as soon as it’s confirmed by the blockchain, that local currency is added to the First Miler’s spendable balance.

The First Mile partner now has PHP500,000 to draw down from, as the remittances come in, and they can top up as it’s consumed. In technical terms, the Last Mile partner has a liability of PHP500,000 and must secure this deposit on behalf of the First Miler.

The Destination Exchange

The Last Miler, amongst its other responsibilities, must also ensure that the bitcoins it receives can be sustainably converted into local currency as it’s coming in. Liquidity varies drastically from country to country, and it is often difficult to ensure that a large sale of bitcoins won’t cause the local price to drop precipitously.

In contrast with the First Miler, whose primary action is to buy BTC, the Last Miler is almost exclusively selling BTC on a daily basis. Ideally, there’s a local exchange where the Last Miler can quickly liquidate its BTC, but not every country has one of these just yet.

Notably, the Philippines is a huge destination for bitcoins and does not yet have any significant exchanges. Due to the lack of liquidity in young markets like the Philippines, there is often no way to sell all of the incoming BTC without taking losses.

The current estimate is that the Philippines sees about 1,000 bitcoins entering its “borders” each day looking for buyers, whether it be for remittance companies, speculative investments, or other use cases. There simply isn’t enough local buy pressure to absorb that much Bitcoin.

The Exchange Web

Without enough channels to liquidate locally, Last Milers must find other places to sell their incoming BTC. Typically this involves selling their coins on exchanges or brokerages in other countries, and receiving USD in payment.

This is a challenging solution, as it implies the presence of a large cash reserve to facilitate international trading, and is subject to all sorts of hurdles such as bank delays, regulatory issues, and FX volatility.

A Last Miler might liquidate their coins on an exchange at a small profit, but then still have to wait three banking days for the USD to be transferred to their bank account in their home country. This type of trading could be viewed as arbitrage trading, although that implies that one is prioritizing profit-seeking as opposed to speedy liquidation.

The perfect scenario, of course, is that a Last Miler also acts as a First Miler for a different corridor. Although Bloom receives hundreds of BTC each day, it may choose to use some of those coins to pre-fund Last Mile partners in China, Australia, or Vietnam, instead of selling it all.

With each new node in the network, it becomes less and less necessary to constantly liquidate BTC for local currency. Instead, Bitcoin could flow freely from country to country, dispersing and reforming all across the region in an ever-expanding web of real-time settlement.

Luis started working in the Bitcoin remittance space in early 2014 and, with his young startup Bloom, focuses on bringing blockchain technology to small and medium businesses around the world. This series of essays is based on “Reinventing Remittances with Bitcoin,” a free ebook available for download.


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