Published on People Move

Transforming Global Remittances with Distributed Ledger Technology and Interledger Protocol

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While many humanitarian issues need to be addressed with respect to international migrants and refugees, the cost of global remittances, which may support entire families in low and middle income countries, continues to be a topic of debate. According to the latest Knomad Migration & Development Brief, the global average cost of sending $200 was 7.1% in the first quarter of 2018 ($14.20 per payment). The most expensive average cost of 9.4% was in Sub-Saharan Africa, the lowest 5.2% in South Asia. More concerning is the fact that these fees have remained at this level (or higher) for almost 20 years.
The continuing decline in correspondent banking relationships has resulted in the use of higher priced remittance service providers in many corridors.
Several cost drivers contribute to these high fees:
  1. Costs of collection and risk assessment of the remitter
  2. Costs of transmission of funds, often via intermediaries
  3. Costs of foreign exchange conversion and delivery of liquidity, i.e. making funds available in the country of the beneficiary in a timely manner
  4. Costs of risk assessment and ultimate delivery of funds to the beneficiary
Distributed ledger technology (DLT) is being considered as one possible solution to increasing costs in global remittances, in particular due the difficulty of opening correspondent bank accounts.
DLT’s highest impact may be in the lower cost and faster transmission of funds across multiple actors and in the delivery of liquidity across borders. This could be achieved by standardized coordination or so-called ‘atomic’ transactions across disparate ledgers and networks, such that a debit to the sender is always accompanied by a credit to the beneficiary.
The open Interledger Protocol (ILP) addresses precisely this requirement with seamless coordination of payments across disparate networks and ledgers. A W3C Internet Community Group now governs the development of this new global standard with a mission to create the Internet of Value -- a world where value is exchanged as quickly and simply as information is today.

Leveraging the power of ILP, the Bill & Melinda Gates Foundation created Mojaloop in 2017. Mojaloop offers a way for financial providers, governments and mobile network operators to simplify and reduce the cost of deploying inclusive payments platforms.

ILP is also the underpinning for commercial enterprise solutions being used by banks like Santander to offer new global remittance services at scale. 

Cryptocurrencies, like Bitcoin, have captured the attention of entrepreneurs, financial institutions and central banks. Given the possibilities for risks from non-compliance with Anti-Money Laundering and Counter Terrorism Financing regulations, any use of this novel technology needs to be considered with care.

However, they can be a bridge to convert fiat currencies more efficiently, especially in more exotic corridors, as a native network asset with no counterparty risk. In the longer term, financial institutions may opt to hold crypto-assets with instant convertibility, in lieu of myriad fiat currencies with intermediaries in each destination country, as is the current practice. This can directly address the issue of declining correspondent banking relationships and deliver cheaper liquidity on demand. 

Ultimately, as more banks and non-banks adopt DLT technology and crypto-assets, systemic costs for cross-border transactions should fall. Competition among these entities will also likely bring down fees for those most in need -- the people sending and receiving remittances. 
If rapid adoption in the next few years achieves the SDG target fees of 3% of value, DLT will have secured a place in the history books for all stakeholders. And made life just a bit better for over 250 million migrants seeking their place in the world.


Dilip Rao

Global Head of Infrastructure Innovation at Ripple

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