How Bitcoin might be integrated into the international settlements system

Most of the inflow of money happens to be in the developing economies, for example Philippines is the third-largest receiver of remittances in the world. The numbers are compelling: US$26 billion received in 2013, an estimated US$27.5 billion in 2014, and consistent growth of about US$1 billion to US$2 billion annually. Dollar movements create market opportunity for middlemen such as Moneygram, Western Union or Wells Fargo where average transaction fees arrives around $15 for a $500 to $1000 from say USA to China which makes their fee 1.5% at best. And the settlement period can take as long as a week to be received by the beneficiary. Bitcoin can provide an alternative, a better method of value transfer mechanism with a quick turnaround time due to its decentralised nature.

Let’s first observe a Fiat-to-Fiat Money Transfer in a traditional (yet practised) way between USA and a South Asian country:

  • A US MSB/MTO will reach out and partner up with a Philippines based MTO/Bank.
  • Both these licensed entities will formulate a Correspondent Agreement (which can take a couple of weeks)
  • Once the agreement is in place, there is now a route and a settlement mechanism on how money will traverse from US to Philippines.
  • Let us assume a person in NYC signs up for the service as being offered by the US MTO.
  • The Sender decides to send US$ 1,000 to Philippines.
  • The US MTO extracts US$ 1,000 from Sender’s account.
  • Based on the Correspondent Agreement with the MTO in Philippines, the US MTO instructs them to payout the equivalent in Philippines Pesos.
  • The MTO in Philippines pays out from its local currency account to the Beneficiary.
  • There is now a pending IOU of US$ 1,000 that the MTO in US needs to send to the MTO in Philippines.
  • Then money is sent on say T+2, via SWIFT
  • The money (US Dollars) now arrives in Philippines… and here is perhaps the most important part of the transaction
  • The US Dollars are surrendered to the Central Bank and its equivalent are presented to the MTO.
  • The Central Bank of Philippines’ US Dollars Reserves have now just increased by US$ 1,000.

When remittances come into the country, the US Dollars (or whatever Foreign Exchange is in play) is surrendered to the Central Bank, thereby increasing the Foreign Exchange Reserves of a country. In other words, the books of the country have now improved.

A country can print as much of its own money but cannot print the foreign exchange currency of others. This is why it depends on the inflow of foreign exchange to keep its forex reserves healthy.

Let’s observe the above procedure if Bitcoin had been used for remittance, taking the same play of a transfer from NYC to Manila:

  • A US Entity offers Money Transfers to Philippines.
  • A working Pinoy logs on to the US Website and initiates a transfer.
  • He wants to send US$ 1,000 out to someone in Manila.
  • The US Entity takes US$ 1,000 equivalent and concerts them immediately into Bitcoin. Let us assume 1 BTC = US$ 250, so this is 4 Bitcoins.
  • The 4 Bitcoins are then immediately inserted into a multi-signature wallet that is shared by the US Entity and the Payout Partner in Philippines.
  • When the Payout Partner in Philippines sees that 4 Bitcoins are now in the multi-sig wallet, the partner then releases to the beneficiary in Manila the equivalent of US$ 1,000 in local Pesos.
  • Once the local payout has been confirmed, the 4 Bitcoins are released to the Payout Partner in Philippines
  • The transaction is now essentially complete.

What the Payout Partner in Philippines does with the 4 Bitcoins is up to them. They can retain them, send them elsewhere in the world, cash them out at a local exchange, sell them on an international exchange, there is no restriction on what they can do.

And herein lies the problem: The Central Bank of Philippines does NOT get to see this transfer. Since no US Dollars were surrendered, this transaction essentially went undocumented in the books of the central bank. The foreign exchange reserves did NOT improve.

Many developing markets/countries rely on remittances, for the sheer fact that their foreign exchange reserves can build up. In transactions where Bitcoins are being used for value transfers and there is no surrendering of the original fiat currency that was received, it is bad for business as far as the central bank is concerned. It is bad for the economy.

So how does one make it better? Simple: Add another component leg that transfers US Dollars into the economy.

Let’s construct the Bitcoin remittance process compliant with Central Banking Reporting:

  • A US Entity offers Money Transfers to Philippines.
  • A working Pinoy logs on to the US Website and initiates a transfer.
  • He wants to send US$ 1,000 out to someone in Manila.
  • The US Entity takes US$ 1,000 equivalent and concerts them immediately into Bitcoin. Let us assume 1 BTC = US$ 250, so this is 4 Bitcoins.
  • The 4 Bitcoins are then immediately inserted into a multi-signature wallet that is shared by the US Entity and the Payout Partner in Philippines.
  • When the Payout Partner in Philippines sees that 4 Bitcoins are now in the multi-sig wallet, the partner then releases to the beneficiary in Manila the equivalent of US$ 1,000 in local Pesos.
  • Once the local payout has been confirmed, the 4 Bitcoins are released to the Payout Partner in Philippines
  • The Partner then sells these 4 Bitcoins immediately on an exchange outside the Philippines, thus booking a sale in US Dollars. As an added option, the US Entity can agree to buy back the coins at US$ 1,000 also (Sell/Buy transaction for them).
  • On an agreed settlement date, T+1 (for example), the funds are then wired into Philippines, where they are surrendered for local Pesos.
  • Now the transaction is recorded by the Central Bank.

This additional step is very important when fighting for your case for Bitcoin remittances in developing markets. Attitudes of central bankers from around the world range from cautious to skeptical and, in some cases, downright negative when it comes to Bitcoin. But if you can show that you are indeed maintaining status quo, it would help towards the legitimizing of Bitcoin remittances in these developing nations.

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