How the tech will help to send money home

▶ The prospect of sav­ing time and money is only the start of the tech­nol­ogy’s ap­peal, re­ports Stian Over­dahl

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Us­ing blockchain and cryp­tocur­ren­cies in the re­mit­tance in­dus­try could lower costs for ex­change houses and make it eas­ier for start-ups to en­ter the mar­ket, in­creas­ing com­pe­ti­tion and re­sult­ing in lower fees for con­sumers in the UAE.

Hasan Hei­der, a part­ner at global ven­ture cap­i­tal com­pany 500 Star­tups, says there is an op­por­tu­nity for tech­nolo­gies such as blockchain and cryp­tocur­ren­cies to have a “sig­nif­i­cant im­pact” on the re­gion’s size­able re­mit­tance mar­ket. The UAE and Saudi Ara­bia are the sec­ond and third-big­gest out­ward re­mit­tance coun­tries in the world be­hind the US, send­ing out send­ing out $46bn (Dh169.2bn) and $35.3bn in 2018, ac­cord­ing to Cen­tral Bank data.

While some as­so­ciate cryp­tocur­ren­cies with risky in­vest­ments, the real op­por­tu­nity for com­pa­nies is to use the tech­nol­ogy to power back-of­fice func­tions and pro­vide a sim­ple ser­vice for or­di­nary peo­ple to use, says Mr Hei­der. “There is a mas­sive dis­rup­tion al­ready tak­ing place in the re­gion with start-ups like De­narii Cash and a few oth­ers,” he adds.

One com­pany at the fore­front of the global push to use cryp­tos for re­mit­tances is Rip­ple, best known for XRP, a cryp­tocur­rency de­signed for in­ter­na­tional trans­fers that is about 1,000 times faster and cheaper than Bit­coin, the com­pany claims.

The ben­e­fits of crypto and blockchain-pow­ered re­mit­tances could be far-reach­ing, says Navin Gupta, man­ag­ing di­rec­tor at Rip­ple for South Asia and Mena, with cheaper and quicker trans­fers, more ef­fi­cient in­ter­na­tional pay­ments for busi­nesses and lower er­ror rates and costs for banks and re­mit­tance com­pa­nies.

Blockchain, the tech­nol­ogy used for ver­i­fy­ing and record­ing trans­ac­tions, is a dig­i­tal chain of trans­ac­tions linked us­ing cryp­tog­ra­phy, a mech­a­nism for se­cure com­mu­ni­ca­tions. The data­base is a real-time li­brary of records that are dif­fi­cult to tam­per with.

The cur­rent system for trans­fer­ring money in­ter­na­tion­ally comes with chal­lenges, Mr Gupta says, specif­i­cally high er­ror rates that lead to de­lays and ad­di­tional costs as well as a pre-fund­ing model that is cap­i­tal-in­ten­sive.

Cheaper re­mit­tances could also have im­por­tant so­cial ben­e­fits, as blue-col­lar work­ers typ­i­cally pay a higher per­cent­age of their wages in re­mit­tance fees than a white-col­lar worker send­ing a large amount when fixed fees come into play, says Mr Gupta.

“If ev­ery­body is pay­ing – say for ex­am­ple – $10 for a re­mit­tance, then for some­body who sends $100 that fee is 10 per cent of it, but if some­body is send­ing $1,000, then it is 1 per cent,” he says. “So when a blue-col­lar worker sends $200, and he pays $10 to send his re­mit­tance, it’s a much larger por­tion of his salary that is be­ing eaten away as a re­mit­tance fee.”

A num­ber of banks and re­mit­tance houses in the GCC al­ready use Rip­ple’s blockchain-based cross border set­tle­ment pay­ment rail, de­signed to cut er­rors caused by is­sues such as miss­ing pa­per­work on the re­ceiver side – a sig­nif­i­cant con­trib­u­tor to re­mit­tance costs and de­lay, says Mr Gupta. A blockchain set­tle­ment system can in­form a party be­fore they start a trans­ac­tion if there are any miss­ing doc­u­ments, rather than send­ing a pay­ment only to have it re­turned hours or days later.

An even big­ger trans­for­ma­tion, how­ever, could hap­pen if re­mit­tance com­pa­nies use cryp­tocur­ren­cies for in­ter­na­tional trans­ac­tions, buy­ing dig­i­tal as­sets in one coun­try be­fore send­ing them at light­ning speed to the next, sell­ing them in the lo­cal cur­rency and pay­ing out the re­ceiver.

Mr Gupta says this would lead to sig­nif­i­cant cost sav­ings, be­cause most in­ter­na­tional pay­ments rely on a pre-fund­ing model, mean­ing banks or ex­change houses keep pre-funded ac­counts in the des­ti­na­tion coun­tries, which they use to pay out when a cus­tomer makes a trans­fer.

Main­tain­ing pre-funded ac­counts is ex­pen­sive, as ex­change com­pa­nies must fore­cast de­mand, which can surge around a hol­i­day in one coun­try, and hedge against cur­rency swings, says Osama Al Rahma, chief ex­ec­u­tive of Al Far­dan Ex­change.

Us­ing a cryp­tocur­rency such as XRP or Stel­lar Lu­mens – an­other dig­i­tal as­set de­signed for in­ter­na­tional pay­ments – would en­able the trans­ac­tion to hap­pen almost in­stantly, mean­ing banks or ex­change houses would only have cap­i­tal locked up for a few sec­onds, slash­ing costs.

Mr Gupta de­scribes the pre-fund­ing model as “highly cap­i­tal-in­ef­fi­cient”. “We be­lieve that re­mov­ing [pre-fund­ing] will make the over­all mar­ket very ef­fi­cient,” he says. Ex­change houses are bet­ter placed to use cryp­tocur­ren­cies for re­mit­tances than banks as they are sub­ject to less reg­u­la­tory ap­proval and have a higher cost of fund­ing, he adds.

At least one ma­jor re­mit­tance com­pany is al­ready us­ing cryp­tocur­ren­cies; MoneyGram – which Rip­ple paid about $50 mil­lion for a 9.95 per cent stake in – said last month it was “mov­ing ap­prox­i­mately 10 per cent of its Mex­i­can peso for­eign ex­change trad­ing vol­ume through Rip­ple’s on-de­mand liq­uid­ity so­lu­tion and has al­ready started trans­act­ing in four ad­di­tional cross-border cor­ri­dors, in­clud­ing Europe and the Philip­pines.

For a re­mit­tance com­pany to use a cryp­tocur­rency to trans­fer money be­tween cur­ren­cies, it needs ac­cess to an ex­change with suf­fi­cient vol­ume in both coun­tries to buy and then sell the dig­i­tal to­ken. This is some­thing that may slow adop­tion, says Mauro Roma­l­dini, a Fin­Tech con­sul­tant.

In the UAE, li­censed cryp­tocur­rency ex­changes are on the hori­zon through the reg­u­la­tory frame­work re­leased in rhe Abu Dhabi Global Mar­ket in 2018. Reg­u­la­tors at the fi­nan­cial free zone are ex­pected to grant the first full li­cences for cryp­tocur­rency ex­changes later this year or in 2020, Wai Lum Kwok, ex­ec­u­tive di­rec­tor of cap­i­tal mar­kets at the Fi­nan­cial Ser­vices Reg­u­la­tory Au­thor­ity, told Zawya ear­lier this year. The reg­u­la­tor has al­ready granted a num­ber of in-prin­ci­ple ap­provals.

Other po­ten­tial ob­sta­cles around adop­tion in­clude rep­u­ta­tional is­sues. Bit­coin, for ex­am­ple, first rose to promi­nence be­cause it was used for il­le­gal trans­ac­tions on the dark web, an as­so­ci­a­tion the cryp­tocur­rency space has strug­gled to en­tirely shake off.

How­ever, fed­eral reg­u­la­tions could soon give greater clar­ity to the broader blockchain space. The UAE’s Se­cu­ri­ties and Com­modi­ties Au­thor­ity said in

Oc­to­ber it was seek­ing in­dus­try and stake­holder feed­back on the reg­u­la­tion of cryp­tocur­ren­cies in the coun­try, in­clud­ing fi­nan­cial crime pre­ven­tion mea­sures, in­for­ma­tion se­cu­rity con­trols and tech­nol­ogy gov­er­nance norms.

The cen­tral banks of the UAE and Saudi Ara­bia are also work­ing on a pilot project to launch a shared dig­i­tal cur­rency for fa­cil­i­tat­ing cross-border bank trans­ac­tions us­ing blockchain tech­nol­ogy.

Mr Al Rahma says us­ing cryp­tocur­ren­cies could slash costs – at least in the­ory. “Pre-fund­ing costs are re­ally huge, adop­tion of blockchain tech­nol­ogy with proper ar­range­ments can change the whole mech­a­nism of set­tle­ment, with ef­fi­ciency and sav­ings,” he says.

But, there is a “gap” be­tween the­ory and prac­tice, says Mr Al Rahma, who is also the vice chair­man at the For­eign Ex­change and Re­mit­tance Group. “It only works if the whole ecosys­tem is ac­cept­ing that so­lu­tion,” he adds. “This is the main is­sue. It’s not about bi­lat­eral re­la­tion­ships, it’s about the ma­jor­ity of banks ac­cept­ing the same model.”

And it’s not just reg­u­la­tory de­vel­op­ments in the UAE that re­mit­tance houses must con­tend with if crypto re­mit­tances take off. In the main re­mit­tance re­ceiver coun­tries – In­dia, Pak­istan, Egypt and the Philip­pines – only the lat­ter stands out as hav­ing made big steps in adopt­ing cryp­tocur­ren­cies. In In­dia, which re­ceives more than a third of all re­mit­tances from the UAE, cryp­tocur­ren­cies face an un­cer­tain reg­u­la­tory fu­ture with calls from some law­mak­ers to ban them en­tirely.

Mr Gupta says the global reg­u­la­tory en­vi­ron­ment for cryp­tos is atom­ised, but be­lieves that once the ben­e­fits from early adopters be­come clear, “other coun­tries will re­alise this is a great so­lu­tion”.

One player al­ready in the mar­ket is De­narii Cash, a re­mit­tance app founded by Jon San­til­lan, which fo­cuses on ex­pa­tri­ates from the Philip­pines liv­ing in Saudi Ara­bia and the UAE. Mr San­til­lan says the two main chal­lenges for new re­mit­tance com­pa­nies are fast trans­ac­tion speeds and high cap­i­tal costs. “Us­ing crypto will al­low new play­ers to en­ter the mar­ket to compete with other in­cum­bent play­ers, and to have fairer pric­ing for ev­ery­one,” he says.

Mr San­til­lan’s app ad­ver­tises no fees, which he says is ap­pli­ca­ble to the first Dh1,000 trans­ferred each month. Busi­ness has taken off since the be­gin­ning of this year, when the com­pany par­tic­i­pated in an ac­cel­er­a­tion pro­gramme in Saudi Ara­bia run by 500 Star­tups, with word of mouth re­fer­rals help­ing to drive in new busi­ness, he says.

The com­pany orig­i­nally planned to use a dig­i­tal sta­ble to­ken for trans­fers from the UAE to the Philip­pines, be­fore re­al­is­ing this wasn’t sup­ported by UAE reg­u­la­tions. In­stead they use a blockchain ledger for set­tle­ment, but the trans­fers them­selves still take place via tra­di­tional fi­nan­cial net­works.

Mr San­til­lan says even­tu­ally the com­pany would like to use a cryp­tocur­rency for trans­fers to the Philip­pines from the UAE, such as Stel­lar Lu­mens or XRP.

“We’re still hop­ing in the fu­ture to lever­age an ex­ist­ing crypto to move our as­sets quicker and much more cheaply. Our idea for De­narii Cash is to get all these sav­ings and then pass it to the con­sumers,” he says.

The cen­tral banks of the UAE and Saudi Ara­bia are work­ing on a shared dig­i­tal cur­rency for cross-border trans­ac­tions

Chris Whi­teoak / The Na­tional

Jon San­til­lan, founder of De­narii Cash, which helps ex­pa­tri­ates from the Philip­pines liv­ing in Saudi Ara­bia and the UAE to send money home

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