As most of us know by now, blockchain is revolutionising global payment systems. Compared to traditional service providers, such as banks, that still rely on operational systems from decades ago and charge high transaction fees to sustain these operations, blockchain offers a faster, cheaper and more secure alternative.
Traditionally, when you send money overseas, say from New York to London, you can expect to be charged a $25 USD fee plus additional fees often hidden in the exchange rates. In this particular case, it may take around 2 days for your money to arrive at the other end. In other cases, such as when you transfer money from Ghana to The Gambia, it may take much longer.
In contrast, as payments on the blockchain are peer-to-peer, they are almost instant and as they are recorded on a distributed ledger the blockchain eliminates the need for third-parties to manage the transactions.
Now, apart from banks, money can also be sent across borders using Money Transfer Operators, like MoneyGram, or with other third-party service providers such as Venmo, PayPal or Square Cash.
But in all these cases unnecessarily high fees are charged and verification remains dependent on centralised parties. This means that there is always someone else holding your information. Blockchain, however, provides users with an unprecedented amount of financial freedom.
The advantages of blockchain as a means by which to conduct cross-border money transactions are clear. However, the development of blockchain is still in its early stages. There are risks and therefore it’s important to make conscious decisions. Here are five simple, but important things to remember about sending money using blockchain.
1. Every cryptocurrency is different
First of all, you must take volatility into account: bitcoin and most altcoins are volatile in nature. This may be ideal for speculation, but not for cross-border money transfers. Stablecoins are better suited for such transfers as their value is pegged to fiat currencies and therefore tend to be more reliable.
Second, you must take liquidity into account. If you were to transfer a popular currency, then it will be easier for the recipient to sell that currency for another asset.
2. Every blockchain is different
Every blockchain operates according to a different protocol. Compared to some of the newer blockchains, the Bitcoin blockchain is relatively slow and expensive. It takes around 10 minutes for a new block to be added to the chain and fees hover at around $20 USD give or take. In time, as the rewards for miners goes down, transaction fees will continue to rise.
BitShares, on the other hand, is much faster than Bitcoin with transactions confirmed in a matter of just 1 second on average. Fees are no more than a few cents.
3. Every exchange method is different
Although blockchain technology is extremely safe, it is important to realise that not all exchange methods are. As such, make sure to make an informed decision about where you want to exchange your currencies.
It is possible to exchange assets through an OTC, which is either purely peer-to-peer or facilitated by an escrow service. OTCs are generally more susceptible to scams with little to no oversight as to who you’re exchanging with.
You can also choose to exchange crypto on a centralised exchange. Reputable exchanges often enjoy high liquidity, but due to their centralised nature, your money is once again managed by a third-party meaning that the safety of your assets will ultimately be dependent on their security systems.
The safest way to exchange your crypto is through decentralised exchanges. In this case, you hold sole custody over your own funds.
4. Every wallet is different
Cryptocurrencies never really ‘leave’ the blockchain with which they are associated. Instead, traders exchange public and private keys by which ownership is determined. These keys are stored in wallets. Not all wallets support every single currency, but more importantly, not all wallets are equally safe.
Hot wallets (online) are more at risk than cold wallets (offline). For now, serious traders are advised to keep around 20% of their active funds in hot wallets and 80% in cold wallets. Some resort to noting their keys down on a piece of paper. Whichever method for storage you choose, it’s important to research these methods diligently.
Read our advanced tips on how to keep your funds safe here.
5. Every transaction is different
For some, transactions on the blockchain are part of an ongoing process of trading in and out of currencies to raise value. For others, regularly sending money across borders using blockchain is less about cryptocurrency and more about transferring value from one place to another as fast, secure and cheaply as possible.
Because crypto has not yet been adopted by the mainstream, the end goal of such cross-border money transfers is usually still reversion to fiat currency. In the end, people want money in hand so that they can spend it on a day-to-day basis. Here it’s important to realise that most exchange services still rely on banks for the eventual delivery of value. Only very few are actually able to provide a fully functional end-to-end system that is cash-in cash-out.
Bitspark is a bankless money transfer ecosystem that enables businesses and people to cash in and cash out cryptocurrencies across Asia and Africa.