Blockchain and remittances: are the new market strategies within reach?

Core facilitator: World Bank Group
Blockchain shows great promise as a mechanism to address fundamental problems within the remittance value chain, such as transmission of consumer data and settlement between operators. However, as a new technology, blockchain carries unique risks, and the market is skeptical of its safety and application.

Blockchain is a method by which transaction information (and other, related information) is transmitted and shared across many points in a “chain” of nodes. Because the information is disaggregated, each point in the chain “knows” the same information. This distributed data makes it difficult to commit fraud because a dishonest actor must convince multiple points in the chain that the information they have is wrong, and doing so is a difficult and costly process. As a result, blockchain, or distributed ledger technologies (DLT), offer a safer, more transparent method for sending money, having the potential to change the remittance market.

Blockchain offers real benefits to the remittance market :

1. De-risking: blockchain may allow users to bypass formal banking institutions whose de-risking policies close out new players.

2. Data: blockchain can aid in identity verification (KYC), which is one of the main challenges for MTOs and financial institutions.

However, as with any new technology, blockchain comes with its own challenges:

1. Applicability: migrant families use remittances primarily to address everyday needs, and blockchain cannot easily be used to buy goods and services yet.

2. Cost/convenience: currently, blockchain is not always cheaper to use, and it is often more challenging, especially for inexperienced customers.

3. Regulatory concerns: regulators are wary of new technologies, and there are not simple solutions for regulating DLT.

4. Understanding: there is a lack of understanding of blockchain within the industry, and there is no concerted effort to increase awareness. As a result, minimal resources are invested, and industries are reluctant to pursue blockchain while regulatory guidelines remain uncertain and risks remain unknown.

The remittance market may not be ready for blockchain today, but there are steps that can be taken to use it in the future.

Regulators can establish regulatory sandboxes to encourage technology companies to test blockchain (and other DLTs) and identify what methods work best while still remaining compliant and safe for customers. In addition, regulators should conduct in-depth studies on the benefits and risks of the blockchain, placing particular emphasis on individual (non-bank) accounts and micro-transactions.

Private industry can use blockchain networks amongst themselves, testing the technology and preparing for widespread use. Beyond transactions, an industry can test blockchain technologies for data storage (cloud services) and contracts, which are generally not restricted by financial regulations. They can develop use cases to explore how customers might take advantage of blockchain technologies.

Public and private industry can explore blockchain as a way to verify customer information, making senders and intent transparent. Because blockchain offers greater assurance on who is performing a transaction, its use can lead to reduced AML/CFT concerns and greater financial inclusion.

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