The transfer of value has always been costly and sluggish. This is especially true for cross-border payments. Meanwhile, the blockchain technology can speed up and simplify this process and can also lower down the expenses hugely.
What is blockchain technology?
Most of the parties in the financial sector already have a grasp of concept such as bitcoins and other cryptocurrencies. The idea works on the blockchain technology, which is a digital and public transaction ledger with identical copies maintained on each of the network’s members’ computers.
All parties can review the previous entries and record the new ones. Transactions are grouped in blocks, recorded one after the other in a chain of blocks, and this makes up the blockchain.
The links between blocks and their content are cryptographically protected. That means that the previous transactions cannot be destroyed or forged. This means that the ledger and the transaction network are trusted without a central authority.
Blockchain for cross-border payments
The blockchain technology can innovate many processes within the financial sector, like cross-border payments.
The transfer of value has always been tedious and boring especially in cross-border payments. For example, if a person wants to transfer money from Europe to their family in the Asia, who has an account with a local bank, it takes a number of banks and currencies before the money can be collected.
Faster and more affordable
The blockchain technology can quicken up and simplify this process, cutting out many of the traditional middlemen. At the same time, it makes money remittance much cheaper.
Currently, the costs of remittance were 5 to 20 percent. The blockchain reduces the costs to 2 to 3 percent of the total amount and provides guaranteed, real time transactions across borders.
A few barriers
This is why the blockchain technology is gaining some firm footing in the field of money remittance. Of course, there are a few barriers that should be broken. The most important one is the absence of regulation for cryptocurrencies.
If money is transferred from one country to another using the blockchain technology wallets, and one of the wallet providers goes out of business or the wallet is attacked by hackers, the cryptocurrency stored will also be lost and there is no central authority like a bank to reimburse the loss.
Cryptocurrency exchange
There is also the question of the exchanging the cryptocurrency back into locally accept fiat currency at the destination. This usually requires the use of cryptocurrency exchange where digital currencies like bitcoin are trade for US dollars.
Using such an exchange can add more complexity and runs the danger of fluctuating exchange rates, which are notoriously wild in the case of cryptocurrencies. Even so, many people are still willing to take these risks since the benefits are far bigger than the drawbacks.
Regulators
When regulated has been implemented, the blockchain technology will also be an interesting option for corporate cross-border payments. As hard as it is for individual customers to lose their money when parties go default, it is even more challenging for corporates transferring large amounts of money through cross-border payments.
With the proper regulation, banks will be able to offer their corporate clients interesting propositions based on blockchain technology. They are already improving their understanding of the blockchain and developing proofs of concept.
