FX International Payments
By Frances Coppola
But Bitcoin is no longer the only game in town. There are other cryptocurrencies capable of providing fast, secure and low-cost international payments, and the number is rising. Bitcoin is now the tallest tree in a forest of cryptocurrencies.
Bitcoin may no longer be the best cryptocurrency for international payments. Its payments protocol is slow and expensive at high transaction volumes, and a solution to this problem has so far proved elusive. Bitcoin's clone, Bitcoin Cash, is a lower-cost alternative, though currently not so widely accepted.
Because of Bitcoin's scaling problems, other cryptocurrencies may better meet business needs for a fast, secure and cost-effective means of making international payments. Here are four established cryptocurrencies that businesses could consider as alternatives to Bitcoin.
Litecoin. As its name implies, this is "Bitcoin lite" – some call it "silver" to Bitcoin's "gold."2 It explicitly markets itself as a cheaper and faster solution for international payments. There are four times as many litecoins in circulation as Bitcoins, which helps to keep its price lower. It also uses a different form of verification from Bitcoin, known as "proof of stake," which is faster than Bitcoin's "proof of work" and requires less computing power.
Ethereum. Ethereum is much more than just a cryptocurrency – it is an entire development platform. People use it to create "distributed applications" for crowdfunding, autonomous organizations and even new cryptocurrencies: many of the "initial coin offerings" (ICOs) issued recently to raise funds for new ventures are based on Ethereum.3 Ethereum's "smart contracts" offer the intriguing possibility of automating legal agreements along supply chains, potentially making international payments enforceable without recourse to the courts. This could minimize the risk of supply chain disruption due to payment default, and thus make trade finance more robust.4
Ripple. Unlike other cryptocurrencies, Ripple works with banks rather than bypassing them. It provides a seamless international payments protocol for all of its partner banks, eliminating the need for slow and costly correspondent banking networks. Its native "currency" is only used to facilitate international payments via the Ripple network.5
Dash. Dash's two-tier protocol separates payment functions from core network functions such as block creation. This helps to avoid Bitcoin's problem that high transaction volume drives up transaction fees. It could be useful for businesses that need to accept and/or make smaller payments, for example online retailers.6
There are many more cryptocurrencies that businesses could consider. Currently, nearly 1,500 cryptocurrencies are actively traded, and more are being created all the time.7 However, many of these could lack sufficient liquidity to be useful for international payments, since the less widely traded a cryptocurrency is, the more difficult it will be to buy and sell. Businesses may find the most useful cryptocurrencies for international payments are those listed by many cryptocurrency exchanges.
Using any cryptocurrency – not just Bitcoin – for international payments incurs exchange rate risk at both ends of the trade. If the cryptocurrency's price is volatile, then potential losses can be high, and there are at present few hedging products.8 Additionally, most cryptocurrencies can only be traded on unregulated cryptocurrency exchanges, which can be a magnet for thieves and hackers,9 though governments are moving towards regulating them.10 Businesses may wish to consider whether the convenience of using cryptocurrencies as an alternative to wire transfers outweighs the risk of loss.
Mainstream payment service providers are now investing in blockchain technology similar to that used by cryptocurrencies.11 In light of this, businesses may also wish to evaluate the relative merits of cryptocurrencies versus mainstream service providers.
Unless Bitcoin can solve its scaling problem, new cryptocurrencies – and even existing mainstream payment service providers – could overtake it in the race to improve international payment services. But this doesn't necessarily mean that Bitcoin would disappear.
Some envisage a new role for Bitcoin as a "safe" investment asset similar to gold, and in this light, anticipate its price rising much higher.12 However, others warn that Bitcoin's price could rise to the point where it becomes useless for international payments, if it becomes too expensive to be easily exchanged for the purposes of a cross-border transaction.13
Others envisage Bitcoin's gold-like properties enabling it to become the "anchor" in a diversified cryptocurrency ecosystem, similar to the role that gold played in the classical gold standard of the 19th century and the Bretton Woods managed exchange rate system after World War II.14 In such a scenario, Bitcoin could help the prices of other cryptocurrencies to stabilize, making them more useful for international payments.
The growing forest of cryptocurrencies potentially offers businesses a variety of alternatives to wire transfer for international payments. At present, the prices of most cryptocurrencies can be highly volatile and the exchanges on which they are traded can be insecure, which raises the risk of using them for international payments. However, as the cryptocurrency forest matures, prices may become more stable – possibly by means of a Bitcoin anchor – and exchanges may be regulated, reducing the risk of losses. Existing international payment services providers, too, may adopt cryptocurrency technology to provide faster and cheaper payment services for international businesses. As this is a fast-moving space, businesses may wish to re-evaluate their international payments arrangements regularly.
With 17 years’ experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.
1. “Cryptocurrency Market Capitalizations,” Coinmarketcap.com; https://coinmarketcap.com/
2. “6 Cryptocurrencies You Should Know About (And None Of Them Is Bitcoin),” Entrepreneur; https://www.entrepreneur.com/article/293053
3. "Ethereum to ICOs: You’re Doing It Wrong,” Coindesk; https://www.coindesk.com/ethereum-icos-youre-wrong/
4. “Blockchain Smart Contracts for Supply Chains,” Global Trade Magazine; http://www.globaltrademag.com/global-logistics/blockchain-smart-contracts-supply-chains
5. “Ripple Explained: Medieval Banking With a Digital Twist,” Coindesk; https://www.coindesk.com/ripple-medieval-banking-digital-twist/
6. “Dash Review,” Bitcoin Exchange Guide; https://bitcoinexchangeguide.com/dash/
7. “Cryptocurrency Market Capitalizations,” Coinmarketcap.com; https://coinmarketcap.com/15
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9. “Chaos and Hackers Stalk Investors on Cryptocurrency Exchanges,” Reuters; https://www.reuters.com/investigates/special-report/bitcoin-exchanges-risks/
10. “Bitcoin Exchange Regulation,” Bitcoin Exchange Guide; https://bitcoinexchangeguide.com/bitcoin-exchange-regulation/
11. “Visa launches first phase of blockhain B2B payments,” Coindesk; https://www.coindesk.com/visa-launches-first-phase-of-blockchain-b2b-payments-system/
12. “Bitcoin is ‘digital gold’ for millennials and could reach the $100,000 price range, says strategist Tom Lee,” CNBC; https://www.cnbc.com/2017/11/29/bitcoin-could-easily-reach-the-100000-range-strategist-tom-lee.html
13. “The Fundamental Conflict At The Heart Of Bitcoin,” Forbes; https://www.forbes.com/sites/francescoppola/2017/07/26/the-fundamental-conflict-at-the-heart-of-bitcoin/#7fd5233c4fdb
14. “Bitcoin: The Trust Anchor In A Sea Of Blockchains,” Coindesk; https://www.coindesk.com/bitcoin-the-trust-anchor-in-a-sea-of-blockchains/