A lightning disruption of remittance costs: a silver lining for entrepreneurship during a crisis?

Vulnerable micro, small and medium-sized enterprises, such as women-led businesses, have been hit disproportionately by the COVID-19 crisis, with many reporting revenue losses of over 50 percent, largely due to their smaller size, informality, and concentration in heavily affected sectors (IFC 2021). Many of these entrepreneurs in low-income economies rely on remittances (the personal transfers sent home by migrant workers) that remain a ‘lifesaver’ – providing opportunities to open new businesses and empowering the most vulnerable to engage in economic activities. Nevertheless, remittance costs remain unbearably high, reducing the money ultimately received.

While fintech start-ups are getting traction in their mission to disrupt global payments, a genuinely revolutionary milestone in remittance costs can be established by Bitcoin’s Lightning Network. Lightning Network is a second layer blockchain protocol for instant payments developed on top of Bitcoin protocol, the world’s first open monetary network. With Bitcoin as $1 trillion asset, Lightning’s network capacity has grown exponentially and is now around $150 million. Bitcoin’s Lightning Network payments app such as Chivo wallet or Strike are providing such innovative solutions for remittances. Strike, for example, recently piloted its service in El Salvador. El Salvador is also one of the most dependent economies on remittances globally per World Bank data (24.1% of GDP) and where 70% of adults don’t have a bank account, according to the World Bank Global Findex database. With Strike, users in the US can now use the Bitcoin network with their bank account or debit card and send any amount of dollars to El Salvador at virtually no cost, at any time, instantaneously. However, if a migrant in the US doesn’t have a bank account, a crucial factor is that neither a migrant in the US nor a receiving person in El Salvador needs a bank account for sending and receiving payments. A migrant, who sends the payment in the US, can just go to the closest Bitcoin ATM and initiate a cash payment by obtaining a Lightning Invoice/Bitcoin address from a person’s Strike wallet in El Salvador. Remitted amount from an ATM in the US will be automatically converted to dollars in a person’s Strike wallet in El Salvador. It should be noted that in case of remitting money via Bitcoin ATM, there might be fees charged by an ATM provider depending on the ATM used. A receiving person in El Salvador also doesn’t need a bank account to receive the payment or take a bus to go to a local branch to collect cash and to risk being robbed. The only thing required is a smartphone. El Salvador users can subsequently use received funds to pay for goods and services whenever bitcoin is accepted or make P2P payments between each other. If needed, such users can go to a Bitcoin ATM or local Bitcoin teller and receive cash, as for example, is shown in this video.

The author’s tests using the Strike app (by funding the Strike wallet with the US debit card) show that as little as $0.02 can be sent to an individual in El Salvador for zero cost. Notably, in this case, a user doesn’t need bitcoin the asset and encounter potential Bitcoin volatility risks to benefit from Bitcoin the network. All operations by users, in this case, were conducted in dollars. By using the Bitcoin network under the hood, Strike was able to achieve cross-border, instant, free, cash finality. After establishing its presence in El Salvador, Strike Global also plans to launch its services in over 200 countries, and recently also added app’s integration with Twitter to send tips over the Lightning Network around the globe. Chivo wallet is another recently launched app that uses Bitcoin’s Lightning Network and is reserved for Salvadoran nationals living at home or abroad to transact for free. El Salvador President Nayib Bukele tweeted in this regard on September 25^th, 2021: “2.1 million Salvadorans are ACTIVELY USING @chivowallet (not downloads). Chivo is not a bank, but in less than 3 weeks, it now has more users than any bank in El Salvador and is moving fast to have more users that [sic] ALL BANKS IN EL SALVADOR combined. This is wild!”.

Time will show how this latest innovation in international fund transfers will develop. But the success story already exists that is purely disruptive. Lightning Network at this very moment already economically empowers the most vulnerable unbanked citizens in El Salvador, provides them with more freedoms to trade, and for entrepreneurs to start a new business. Lightning Network might also become in high demand in countries affected by fragility, conflict, and violence, as is the case in Afghanistan, where regular financial channels cannot always be reliable.