Crypto will provide better payment and remittance services

The claim being made here is that a. crypto can provide payment and remittance services by functioning as a currency, and b. crypto can provide better payment rails and remittance services than existing technologies. We find that crypto does not fulfil the definition of a currency is not technologically capable of competing with existing payment rails, and the level of advancement needed to do so should not be considered inevitable. While we do note that crypto does appear to serve the functions of a currency in practice in nations with non-functional financial systems such as Ukraine, this fact should be taken less as a testament to the potential of crypto and more as a sign that political and economic support is needed in these cases.

Evaluation: Largely false (high confidence)

Crypto is not technologically capable of competing with existing payment rails, and the level of advancement needed to do so is far from a sure thing. In fact, crypto is not up to acting as a currency at all. It does appear to serve these functions in practice in developing nations with non-functional financial systems, as the example of Ukraine shows. However this should be taken less as a testament to the potential of crypto and more as a sign that political and economic support is needed in these cases. And, being better than poorly functioning legacy systems is not what the spirit of this claim gestures to.

Examples of the claim being made

BLOCKDATA (2019) ‘Blockchain is disrupting the $700 billion remittance industry’, Medium, 7 March. Available at https://medium.com/@blockdata_tech/blockchain-is-disrupting-the-700-billion-remittance-industry-b79a01a95a10 (Accessed: 13 September 2022).

CMT, B.M.I., CFA (2015) ‘The Value Investor’s Case for... Bitcoin?!’, Miller Value Partners, 8 September. Available at: https://millervalue.com/a-value-investors-case-for-bitcoin/ (Accessed: 13 September 2022):

The open ledger combined with the complexity of transaction data makes Bitcoin a very secure method of payment... One of Bitcoin’s biggest advantages over other payment networks like Visa (V) and MasterCard (MA) is minimal transactions fees. While other payments networks typically charge the greater of ~3% and $0.15, Bitcoin’s transaction fee tends to be a negligible fraction of the transaction, if any at all. Lower transaction fees not only enable buyers and sellers to transact at prices that are better for both parties, but they could enable micropayments in markets that are not otherwise compatible with a $0.15 surcharge on low-price, low-margin goods and services.

Ver, Roger. quoted in COINTELEGRAPH (2013) Western Union is not yet ready for bitcoin international transfer, Cointelegraph. Available at: https://cointelegraph.com/news/western_union_is_not_yet_ready_for_bitcoin_international_transfer (Accessed: 13 September 2022):

I think we will know when bitcoin has reached prime time when it is transferring more value each day than Western Union or MoneyGram... I think we may see that happen within another two years.

Nakamoto, S. Bitcoin: A Peer-to-Peer Electronic Cash System. Available at: https://www.ussc.gov/sites/default/files/pdf/training/annual-national-training-seminar/2018/Emerging_Tech_Bitcoin_Crypto.pdf

Claim steel-manned

Subclaim 1: Crypto can provide payment and remittance services by virtue of fulfilling the functions of a currency

Payment systems and remittance services need to pay in something. That something must either be a currency (eg dollars) or a commodity (eg cows).

Crypto can provide payment systems and remittance services because it serves the three functions of a currency:

  1. It can be a unit of account in that it’s a standard and divisible unit of measurement of market value (i.e. it can be used to signal what something is worth).

  2. It can be a medium of exchange in that we can use it as an intermediary instrument to transact for goods and services.

  3. It can act as a store of value in that it (at least ideally) retains its purchasing power over time, such that we can retrieve the value of our investment at a later date without making a significant loss.

Subclaim 2: Crypto can provide better payment rails and remittance services

Crypto can provide us with better payment rails - i.e. a better Visa, Stripe etc - and more efficient international remittances - I can send money abroad, e.g. from US dollars to Indian rupees using crypto. These blockchain-based payment rails would have reduced friction and costs resulting in a cheaper, faster, more efficient service.

Evaluation: Largely false (high confidence)

Subclaim 1: Crypto can provide payment and remittance services by virtue of fulfilling the functions of a currency

Crypto assets are not currencies because they cannot fulfill the definition of money.

Crypto assets do not currently seem promising as a medium of exchange. Even the latest technologies have yet to show they can reliably process transaction volumes at a similar level to traditional payment rails1. They thus don’t work as a global currency system as they can’t process transactions fast enough.

Proponents argue that technical innovations, from third party protocols such as the lightning network2 to the shift from proof-of-work to alternative validation methods such as proof-of-stake3, will help solve this throughput problem. However even with these new technologies in place blockchains are a long way from competing with traditional payment rails in speed and reliability. Significant leaps in capability are required to reach parity, let alone exceed existing payment methods, and these should not be taken as an inevitability.

One further hurdle to new crypto assets acting as a widespread medium of exchange is privacy. The public blockchains which dominate web3 record all transactions on an openly viewable ledger, meaning even transactions using anonymised wallets are often easily traceable4. Many users are unlikely to be happy with this potential lack of privacy, particularly businesses who are concerned with revealing sensitive information to their competitors. Emerging methods and technologies are targeting the problem of privacy, however again they are a far cry from being able to guarantee widespread transaction privacy on public blockchains any time in the near future.

Crypto assets also do not appear to hold potential as a store of value given their extremely high price variance. If they were to behave as a store of value, they would have to abandon hypervolatility, and there is no easily identifiable economic mechanism for this to happen. It should be noted that this volatility could at least in theory ease with time. However, as we have previously noted, the price dynamics of crypto assets are predominantly determined by bubble dynamics fuelled by economic narratives and “animal spirits” of investors. The vast majority of crypto projects are detached from productive economic activity and generate assets with no use value beyond speculation. This has been played out in the repeated, large scale crypto crashes of 20225. Given this, vulnerability to price volatility seems all but guaranteed to continue.

Subclaim 2: Crypto can provide better payment rails and remittance services

Since crypto assets cannot function as a currency, they are not useful in building payment rails or remittance services. Crypto assets can be used as an intermediate asset in which trades can be settled in, but this does not serve a technical or financial purpose; it simply introduces an unnecessary conversion step.

If a person wants to send money abroad, say from US dollars to Indian rupees, they would typically use a service like MoneyGram or WesternUnion. These services charge a transaction fee and do a direct swap of dollars to rupees from the reserves the company holds in both currencies.

If one postulates using a crypto asset or stablecoin as a means to do remittances then they are still faced with the last mile problem6. Their relatives in India still have to convert the crypto asset into the local currency to buy domestic goods and services since supermarkets and stores don't accept crypto assets. So instead of a dollar-to-rupee conversion we would hypothetically do a dollar-to-bitcoin-to-rupee conversion. This introduces price-risk, counterparty-risk and unnecessary conversion fees to accommodate the extraneous third exchange. The process adds unnecessary complexity and is likely more expensive.

In addition, if crypto were to provide cheaper and faster payment rails, it’s likely this will have been achieved not via technological advancements, but by removing safeguards. The costs present in most retail financial services have very little to do with the technology. Transaction costs associated with payments are fraud mitigation, transaction reversal, custodial services, customer service, and compliance. Customers want these safeguards. Once we add compliance back to crypto payment rails, it’s unclear that there would be any efficiency increase or cost savings.

See industry analysts describe this problem in more depth: Does Bitcoin/Blockchain make sense for international money transfers?

Do developing nations qualify our analysis?

One potential qualification to this analysis is the use of cryptocurrency to bypass traditional economic apparatus which is otherwise dysfunctional. The most prominent recent example has been Ukraine, where both non-state actors and the government itself have raised significant amounts of money in cryptocurrencies to support the war effort7. The standard crypto-skeptic response to this is that there is nothing to stop donations being made via traditional payment rails. While this is in some sense true, the reality is more complex.

First, traditional fundraising platforms often block use of funds for the purchase of weapons and other military equipment, which is a priority for Ukrainian forces currently. More interestingly however, it has been reported that the use of cryptocurrencies and particularly crypto tokens such as USDT in Ukraine was already relatively common due to widespread distrust in the government8 , a poorly functioning banking system9 and persistently high levels of inflation in the local currency. There is anecdotal evidence that this situation gave rise to a secondary economy in the cryptosphere, where direct crypto to crypto transactions were common for more expensive items10. Use of cryptocurrency to purchase war supplies – which proponents engaged in these efforts claim are paid for directly in crypto itself – has also been identified as quicker and easier than trying to navigate the slow and unreliable banking system to make international purchases in a currency such as USD, even for the government itself11.

Should this analysis of the situation in Ukraine and other similar contexts hold true, then the following qualifications may be in order:

  1. The last mile problem will not hold where economic transactions can be carried out directly in cryptocurrency. This may be in states where parallel crypto-economies have emerged to fill a void left by a dysfunctional financial system, or simply due to cryptocurrency being more widely accepted as a direct payment method for things like online transactions (evidenced by major platforms such as PayPal facilitating the use of cryptocurrency to pay for goods and services).

  2. Better is a relative term. Blockchain may well provide a better payment rail compared to highly dysfunctional traditional systems, such as the financial system of Ukraine.

We should be measured in judging the implications of these qualifications for the overall claim, however. The spirit of the claim is that Web3 can provide better payment rails than the best of existing technology. The fact that Web3 may provide a better payment rail than very poorly functioning versions of traditional financial infrastructure does nothing to further this.

Further, while the last mile problem can be overcome, the high price volatility in particular of cryptocurrency, and the now well documented risks to the stability of prominent stablecoins12, means that crypto assets still appear unsuitable as an effective medium of exchange in all but the most dire of circumstances.

These observations point to a deeper point it is worth acknowledging. It does seem at least plausible that crypto assets are currently supporting financial activity in certain highly unstable and dysfunctional economies13. However, it is problematic to use this observation to argue that replacing traditional financial infrastructure with blockchain based alternatives is desirable. Technical interventions such as the creation of parallel crypto-economies are akin to sticking plasters - they may address the most severe symptoms in the short term but they are not a feasible long term solution, and do not address the real roots of the problem. Well functioning and stable economies which meet the basic needs of everyone on the planet should be a fairly uncontroversial aspiration. Freedom from runaway inflation and currency depreciation, trustworthy banking and financial systems, the ability to hold money without fear of it being lost or taken, and to quickly and easily make both domestic and international transactions (even during times of crisis and war) are real possibilities. More than that, they are the everyday reality for most of us already in the global north. These can be obtained for everyone on earth, but the levers for doing so lie at the level of political economy not technology. Acknowledging that crypto assets have been used to some effect to bypass the worst symptoms of economic dysfunction should not mean we give up on trying to improve domestic economies or the global economic system more broadly. Claims that we can simply bypass this work through technological means are a dangerous red herring.

Conclusion

Crypto is not technologically capable of competing with existing payment rails, and the level of advancement needed to do so is far from a sure thing. In fact, crypto is not up to acting as a currency at all. It does appear to serve these functions in practice in developing nations with non-functional financial systems, as the example of Ukraine shows. However this should be taken less as a testament to the potential of crypto and more as a sign that political and economic support is needed in these cases. And, being better than poorly functioning legacy systems is not what the spirit of this claim gestures to.

Deep dives

FAQs

Concepts

Notes

Footnotes

  1. Fonda, Daren. “Solana Could Be the Visa of Crypto Networks. Not So Fast, Says Visa.” Barrons. January 2022. https://www.barrons.com/articles/solana-could-be-the-visa-of-crypto-networks-not-so-fast-says-visa-51642091862

  2. ‘Lightning Network’, accessed 15 December 2022, https://lightning.network/.

  3. ‘The Merge | Ethereum.Org’, accessed 15 December 2022, https://ethereum.org/en/upgrades/merge/.

  4. Molly White, ‘Anonymous Cryptocurrency Wallets Are Not So Simple’, Molly White (blog), 12 February 2022, https://blog.mollywhite.net/anonymous-crypto-wallets/.

  5. ‘Post FTX Collapse Reflections on Crypto | Making Sense of Crypto and Web3’, accessed 15 December 2022, https://web3.lifeitself.org/notes/post-ftx-collapse.

  6. ‘Last Mile: What It Means in Reaching Customers’, Investopedia, accessed 15 December 2022, https://www.investopedia.com/terms/l/lastmile.asp.

  7. ‘Ukraine Readies NFT Sales as Crypto Donations Top $60 Million’, Bloomberg.Com, 5 April 2022, https://www.bloomberg.com/news/articles/2022-04-05/ukraine-readies-nft-sales-as-crypto-donations-top-60-million.

  8. Gallup. ‘World-Low 9% of Ukrainians Confident in Government’. Gallup.com, 21 March 2019. https://news.gallup.com/poll/247976/world-low-ukrainians-confident-government.aspx.

  9. Kramer, Andrew E. ‘In Ukraine, Not Even the Top Banker Trusts the Banks’. The New York Times, 1 November 2016, sec. World. https://www.nytimes.com/2016/11/02/world/europe/ukraine-banks-corruption.html.

  10. Patel, Nilay. ‘How Ukraine’s Wide Use of Cryptocurrency Is Playing out during the War’. The Verge. Accessed 22 November 2022. https://www.theverge.com/23138465/decoder-ukraine-war-cryptocurrency-michael-chobanian-interview-bitcoin-usdt

  11. Ibid.

  12. Steven Ehrlich, ‘Tether Falls From Its $1 Price Peg Amid Market Turmoil Across Multiple Exchanges’, Forbes, accessed 15 December 2022, https://www.forbes.com/sites/stevenehrlich/2022/11/10/tether-falls-from-its-1-peg-amid-market-turmoil/.

  13. ‘Cryptocurrencies: Developing Countries Provide Fertile Ground’, Financial Times, 5 September 2021.