The National - News
Cryptocurrencies must become ‘real’ for money transfer companies to offer services
▶ Among the biggest concerns is that digital transactions can be used for money laundering activities
The possibility of adding cryptocurrencies into portfolios of remittance companies is not far-fetched, but it requires regulatory oversight, a top official at global money-transfer services provider Western Union said.
The volatility of cryptocurrencies and lack of globally accepted regulatory standards are hindrances for operators in the industry to forge ahead with offerings, said Jean Claude Farah, president of Western Union’s Emea and Apac operations. But once there is consensus on legislation, the transition of cryptocurrencies to the remittance ecosystem will be seamless.
“The moment cryptocurrencies will become, from both a regulatory and volatility perspective, a real currency, it’s just a flip of a switch for us to add it to what we offer,” Mr Farah said at FinTech Abu Dhabi. “You need to make sure regulators are backing them up; the overall ecosystem just won’t allow it yet to happen.”
The volatility of Bitcoin, the world’s largest cryptocurrency, has resulted in it surging or plunging in double digits in recent years. In 2011, it leapt to more than $32 from $2. In 2017, Bitcoin peaked near $20,000. Then, on December 27, it crashed to below $12,000. On Thursday, at 9.36am UAE time, Bitcoin was trading at $57,111.
The remittance ecosystem is big business worldwide, especially in countries with huge expatriate populations. Even as the global economy slowed during the height of the Covid-19 pandemic, inflows to low and middle-income countries hit $540 billion in 2020, a 1.6 per cent year-on-year drop compared with 2019’s $548bn, according to the World Bank.
The UAE’s remittances market was the second-biggest globally in 2020, behind only the US. Remittances by foreign workers in the Emirates hit $43bn last year, World Bank data showed.
The digital channels of remittance companies have been a key factor in maintaining the sector’s strength. In June this year, Dubai-based Al Ansari Exchange said it posted a 212 per cent surge in digital transfers. Mr Farah said Western Union’s share of its digital business to its overall operations rose to 25 per cent from about 10 per cent a couple of years ago.
Proponents of cryptocurrencies argue that using digital currencies instead of traditional money can enable remittances by removing intermediaries and significantly reducing, if not totally eliminating, fees for remitting, an Investopedia study showed.
However, a major concern remains that cryptocurrency transactions can be used for money laundering or other illicit transactions and they don’t have a fundamental intrinsic value,” top economist Nouriel Roubini said at a conference in Dubai last month.
“Cryptocurrencies are not a unit of account and calling them currencies is a “misnomer”.
“Cryptocurrencies may have an asset value but based on my definition they are not currencies. That’s a fact,” said Mr Roubini, chairman of New York consultancy Roubini Macro consultancy, and known for predicting the sub-prime mortgage crisis in the US and the subsequent 2008 global financial crisis. “If something is volatile [at] 5 to 10 per cent, [it] cannot be a currency. A currency has to have a stable value relative to the price index of goods and services.”
Blockchain – the technology upon which cryptocurrencies are built – are also being trialled by exchange houses for integration in their operations. But for Mr Farah and Adeeb Ahamed, managing director of Lulu Financial in the UAE, it is still not quite there.
“We’ve seen the enormous amount of results in terms of reducing the costs of operations. The problem is that there is a reduction on one side, but the level of compliance costs go up,” Mr Ahamed said. “It needs to be balanced out at some point in time and the balancing will happen by adopting technologies.
“Blockchain can be used in two ways: either to enable remittances or to settle with partners around the world. We tried it but, so far, it wasn’t faster nor cheaper. But we need to keep in mind that blockchain is an evolving technology; what did not work yesterday could work today.”
The companies, however, acknowledge cash is still king. Hasan Al Fardan, chief executive of Dubai-based Al Fardan Exchange, said while its digital remittances grew nine times, more than 90 per cent of its business still happens in its physical branches.
“As long as cash is relevant, it is important to complement that with the physical space. The only way forward for growth is to blend physical and digital channels, or an omni-channel offering. That will be the case in the next five to 10 years at least,” Mr Al Fardan said.
FinTech services can also attract those who use informal channels to send money, most notably the hawala system, a fund-transfer service between people using non-bank settlement methods, commonly described as ‘money transfer without money movement’.
The Central Bank of the UAE, which does not recognise cryptocurrencies as legal tender, permits legitimate hawala activity and requires hawala providers to register with the CBUAE to enhance the transparency of financial transactions.
“One of the positive outcomes of the pandemic is that the greater need to adopt digital methods forced some of these participants in informal channels to become formal, which means it’s good for a lot of the businesses operating in the correct manner,” Mr Al Fardan said.
The UAE Central Bank, which does not recognise cryptocurrencies as legal tender, permits legitimate hawala activity