FX International Payments
By Bill Camarda
We’ve previously published a full introduction to bitcoin explaining what bitcoin is and how it works.1Briefly, bitcoin is a digital currency guaranteed not by any government, but by trust in a decentralized, open-source, peer-to-peer global network built with strong cryptography. While bitcoin quickly became the currency of choice for some illegal transactions, it is now used widely in legitimate transactions. Companies such as Overstock.com, Expedia, Dell, and Microsoft have begun accepting bitcoin.2
Recently, businesses searching for payment solutions in nations with very high currency volatility, or where the costs and delays associated with utilizing local financial institutions are especially high, have begun using bitcoin. In such markets, offering the option of a bitcoin payment solution could make a company more competitive in serving customers and in recruiting high-quality suppliers or freelance talent.
Dr. Garrick Hileman of the London School of Economics Centre for Alternative Finance has modeled 40 variables to identify where bitcoin payment solutions have “the greatest potential for adoption.”3 Topping the list: Argentina, Venezuela, Zimbabwe, Iceland, Malawi, Guinea-Bissau, Democratic Republic of Congo, Belarus, Nigeria, and Angola.4 In a 2016 article, Hileman said a current list would likely be similar. 5 The categories of variables in Hileman’s analysis included “technology penetration, international remittances, inflation, size of informal economy, financial repression, historical financial crises, and Bitcoin penetration.”6
Some countries Hileman identified have indeed seen growth of bitcoin payment solutions. After Argentina imposed currency controls in 2011, some 6,000-8,000 Argentinians began using bitcoin to simplify currency exchange.7 A bitcoin community emerged in Buenos Aires, where one startup helped some 200 hotels accept bitcoin-based credit card payments. One firm said many of its customers were freelancers serving international clients.8 Bitcoin proponents say local demand remained strong even after a new government relaxed currency controls.9
According to Financial Services Monitor Worldwide, “new Bitcoin-related initiatives have recently emerged in parts of Zimbabwe … offering cross-border payment, exchange and call credit refill service.” 10 To help jumpstart bitcoin, one company staked 100 women farmers to a bitcoin wallet worth $255 towards equipment and services to help them become more productive.11
Meanwhile, in Venezuela, where the official bolivar currency depreciated by 60 percent against the dollar in one recent month, one bolivar-to-bitcoin trading platform said its user community grew from 450 in August 2014 to more than 85,000 in November 2016.12 The Guardian reported that some Venezuelans rely on bitcoin to purchase food or medicine; to receive remittances from abroad; to buy Amazon.com gift cards that can be redeemed for courier shipments from Amazon; or to protect savings against rampant inflation.13
Steps towards demonetization have recently contributed to growing bitcoin usage in India. One Indian bitcoin firm said it did nearly as much business in November 2016 as it had in all of 2015, and was “on track to add 50,000 users per month following the government’s decision.”14
While Indian users came to solve problems caused by demonetization, some may stay for bitcoin’s reduced costs. One company recently told Forbes that its bitcoin-based international payroll service gave customers “about 80 rupees for every dollar they earned, while those using the legacy banking system only got about 68.5.”15
Key concerns about using bitcoin payment solutions include volatility and security. On February 2, 2017, Yahoo! Finance reported a 52-week bitcoin trading range of $752.80-$1,1172.33.16A bitcoin-based investment trust soared 43.7 percent in the final two weeks of 2016, and plummeted nearly 20 percent in a day and a half of trading early in February 2017.17
Regulation is slowly coming to bitcoin payment methods. In the U.S. and elsewhere, bitcoin’s decentralized nature remains challenging for regulators; controversies include whether and how bitcoin can be reconciled with know-your-customer/anti-money-laundering rules (KYC/AML).18 In April 2016, the U.K. Treasury announced that it would “bring digital currency exchange firms into anti-money laundering regulation, as it is at the point where users “cash in” and “cash out” of digital currency networks that money laundering and terrorist finance risk is highest.”19
In the same month, an Australian government panel recommended amending the country’s AML laws to clearly regulate bitcoin and other convertible digital currencies. 20 It also recommended regulating the exchange of convertible digital currency for other currency, whether fiat, digital, or physical; as well as providing wallets, account services, or ATM services for convertible digital currencies.
Based on a synthesis from many articles and experts, the following suggestions can help reduce risk for businesses electing to use bitcoin as a global payment solution.
Bitcoin may be a practical payment solution for selected transactions where developing-country currencies are highly volatile or where conventional exchanges are slow, costly, or unreliable. However, using bitcoin comes with its own set of risks needing mitigation.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
1. “Bitcoin and the Future of Blockchain in International Payments Systems,” FX International Payments ;https://www.americanexpress.com/us/foreign-exchange/articles/bitcoin-future-of-blockchain-in-international-payments-systems/
2. "We Must Regulate Bitcoin. Problem Is, We Don’t Understand It", Wired; https://www.wired.com/2016/03/must-understand-bitcoin-regulate/
3. The Bitcoin Market Potential Index, Garrick Hileman, London School of Economics;http://trade.ec.europa.eu/doclib/press/index.cfm?id=1524
5. "Argentina Tops List of Countries with Greatest Bitcoin Adoption Potential",Cointelegraph; https://cointelegraph.com/news/argentina-tops-list-of-countries-with-greatest-bitcoin-adoption-potential
7. "Argentine small businesses turning to bitcoin",FT.com; https://www.ft.com/content/b2a8cca4-2c11-11e5-8613-e7aedbb7bdb7
8. "Can Bitcoin Conquer Argentina",New York Times Magazine; https://www.nytimes.com/2015/05/03/magazine/how-bitcoin-is-disrupting-argentinas-economy.html
9. "With Financial Restrictions Over, Bitcoin is to Unleash Full Potential in Argentina",Cointelegraph; https://cointelegraph.com/news/with-financial-restrictions-over-bitcoin-is-to-unleash-full-potential-in-argentina
10. "Economist suggests Bitcoin for Zimbabwe",Financial Services Monitor Worldwide; http://www.itwebafrica.com/home-page/e-commerce/703-zimbabwe/237060-economist-suggests-bitcoin-for-zimbabwe
11. "Backed by Bitcoin: Virtual currency may help Zimbabwe's women farmers", UPI;http://www.upi.com/Top_News/World-News/2016/12/27/Backed-by-Bitcoin-Virtual-currency-may-help-Zimbabwes-women-farmers/6651482867367/
12. "Growing number of Venezuelans trade bolivars for bitcoins to buy necessities", The Guardian; https://www.theguardian.com/technology/2016/dec/16/venezuela-bitcoin-economy-digital-currency-bolivars
14. "Bitcoin is approaching new highs for the year because of India’s demonetization",Quartz.com; https://qz.com/859661/bitcoin-is-approaching-new-highs-for-the-year-because-of-indias-demonetization/
15. "How India's Demonetization Is Affecting Bitcoin Startups,"Forbes; http://www.forbes.com/sites/jonathanchester/2016/12/21/how-indias-demonetization-is-affecting-bitcoin-startups/#50e69c8f1d08
16. "BTC/USD (BTCUSD=X)",Yahoo! Finance (Retrieved February 2, 2017); https://finance.yahoo.com/quote/BTCUSD=X?ltr=1
17. Gartman: Bitcoin Is Nearly Incomprehensible At This Point, Yahoo! Finance;https://finance.yahoo.com/news/gartman-bitcoin-nearly-incomprehensible-point-153742481.html
18. "Can You Really 'Know' a Customer Who Uses Bitcoin", American Banker; https://www.americanbanker.com/news/can-you-really-know-a-customer-who-uses-bitcoin
19. Action Plan for anti-money laundering and counter-terrorist finance,HM Treasury (Home Office);https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/517992/6-2118-Action_Plan_for_Anti-Money_Laundering__web_.pdf
20. Report on the statutory review of the anti-money laundering and counter-terrorism financing act 2006 and associated rules and regulations, Australian Government Attorney-General’s Department;https://www.ag.gov.au/Consultations/Documents/StatutoryReviewAnti-MoneyLaunderingAndCounter-TerrorismFinancingActCth200/report-on-the-statutory-review-of-the-anti-money-laundering.pdf
21. Bitcoin for Merchants,Business Law Today, American Bar Association;http://www.americanbar.org/publications/blt/2014/11/02_middlebrook.html
22. "Isn’t Speculation and Volatility a Problem for Bitcoin?",Frequently Asked Questions, bitcoin.org; https://bitcoin.org/en/faq#isnt-speculation-and-volatility-a-problem-for-bitcoin
23. "5 Steps to Keep Your Bitcoin Safe,”,Due; https://due.com/blog/5-steps-keep-bitcoin-safe/
24. "Australia to regulate bitcoin under counter-terrorism finance laws",Sydney Morning Herald; http://www.smh.com.au/world/australia-to-regulate-bitcoin-under-counterterrorism-finance-laws-20160808-gqnne2.html
25. "Scott Morrison scraps GST on Bitcoin, cuts fintech red tape",Sydney Morning Herald;http://www.smh.com.au/business/banking-and-finance/scott-morrison-to-scrap-gst-on-bitcoin-cut-fintech-red-tape-20160321-gnn28r.html
26. "Bitcoin for Merchants",Business Law Today, American Bar Association; http://www.americanbar.org/publications/blt/2014/11/02_middlebrook.html