All the transactions are registered in the blockchain that is used to validate a transaction using cryptography technology: it ensures that you can’t use a bitcoin you don’t own or you don’t use the same bitcoin more than once. This last action previously required a third party, but with bitcoin this is not the case anymore: the network replaces financial institutions and banks.

Then, money transfers are almost in real time as the network is responsible for validating transactions. Currently you need only 10 minutes to get your money transfer approved.

As there is no third party the transfer is almost free. Miners are the only ones to be rewarded to issue new bitcoins. They also collect fees to integrate a new transaction into the blockchain, then validate a transfer. Currently a typical fee costs 0.0001 bitcoin (BTC) per transaction.

The remittance market is huge and moving swiftly to digital

Remittance was a $582 billion market in 2014 according to the World Bank. Most of all it is dominated by transfers from developed countries to developing ones. In 2014, China received $64 billion through remittance and India $71 billion. Philippines received $25 billion, Mexico $22 billion, Nigeria $21 billion, Egypt $17 billion and Vietnam $11 billion in 2013.

So far most transactions are made through brick and mortar networks; in 2014 only 5% were digital transactions. These networks like Western Union or MoneyGram charge high fees to finance their deep local presence worldwide. A typical money transfer costs up to 10% fees.

But as mobile phones are spreading across the world, even in emerging countries, money transfers are shifting to digital. And mobile/digital remittance services are booming as they offer reduced fees mainly thanks to lower-fixed costs (maintaining a mobile app is much cheaper than operating a retail network).

Most of the digital remittance operators claim they are at least 45% cheaper than physical networks. Some of these new companies are operating under a P2P model: connecting buyers and sellers to arrange currency exchanges.

Bitcoin allows several operating models

Even through digital, remittance remains deeply dependent on third parties: banks are still validating money transfers from senders to the remittance operator and again to recipients.

Then Bitcoin could even lower fees thanks to its decentralized network and through three different operating models that could be shaped:

- Full bitcoin: The sender owns bitcoins he sends to the recipient who can directly use them. This requires the owner to get bitcoin, which is easy in developed countries thanks to e-wallets and exchange platforms like Coinbase in the U.S. But it also requires the recipient either to be able to exchange them in fiat currency or to use bitcoins to pay for goods or services which is not that easy so far.
- From bitcoin to fiat currency: The sender have an easy access to bitcoins he sends to the remittance operator that sends fiat to the recipient. This model considers developing countries have an easy access to bitcoins wallets but paying with bitcoins is very limited especially in developing countries.
- From fiat currency to fiat currency: The sender pays its local money to the remittance operator that sends fiat to the recipient, using bitcoins to transfer money from one currency to another.

A few startups are already operating on the bitcoin/remittance market

Even at the early beginning this market has already attracted entrepreneurs and investors.

Though far from Transferwise, a mobile remittance company that has a valuation over $1 billion and uses a P2P model to facilitate easy money transfers and currency exchanges, BitPesa has recently raised $1.1 million to ease bitcoins transfer from the UK to Africa.

Abra raised a seed round and launched its service a few weeks ago in San-Francisco to ease money transfers based both on P2P and bitcoin technologies.

In emerging countries, Rebit is developing its remittance service to send money to the Philippines through bitcoin, ArtaBit develops a service to Indonesia and Coincove to Latin America.

Risks and threats

Whereas bitcoin is an open-source technology, it has long been regulated and constrained by banks and states. Because it relies on a P2P network to operate, bitcoin is seen as a threat to financial markets and states. Based on a combination of public and private key the technology is seen as an anonymous way to transfer money then easing traffic and money whitening. Then, for instance China forbids Chinese’s financial institutions from handling bitcoin transactions.

Companies that are operating bitcoin transfers also need to get a regulation approval to operate in developed markets as financial institutions request every actor to confirm it operates under transparent processes.

The bitcoin currency has also been very volatile, as its value moved from a few dollars for 1BTC at inception to over $1,000 for 1BTC at the end of 2013 and is now around $230 for 1BTC. This is a threat for bitcoin/remittance operators as they need to be very quick at exchanging currencies to make sure they will not keep bitcoins for a too long time. Protecting against currency exchange rates is the main issue for these companies.

Security is another issue for the Bitcoin industry as a few platforms have been hacked and bitcoin wallets have been closed making millions of BTC disappear without any counterpart for their owners. Then bitcoin/remittance companies need to ensure customers they will not lose the money they upload on their platforms.

Finally, bitcoin technology has a lot of property to attract digital remittance operators, starting with its decentralized technology, and some money has been invested in this market as the remittance industry is quickly shifting to digital. Bitcoin also seems to have been introduced to manage remittance to developing countries thanks to it low-cost operating structure, especially as a lot of money is currently lost in fees along the remittance process.

By Florian Graillot
Associate at AXA Strategic Ventures
www.axastrategicventures.com
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