There’s lots of talk that Bitcoin and cryptocurrencies will take over offshore banking. I believe the offshore banking industry is moving in that direction, but we are several years away from a complete solution.
The reason for the need to move to crypto or a blockchain system is several fold. First, the United States is involving itself in every transaction around the world. No matter the currency or the country, the US has imposed KYC and other transactional restrictions.
Second, the processing time for international wires can be weeks, or even 30 days, depending on the country of origin. This is because wires in US dollars go through a US correspondent bank. That bank is under orders from the US government to search, delay, and seize any transfer that looks the least bit suspicious.
Third, there’s the cost and lack of security of transferring through SWIFT. This network charges massive fees, which are supported by a monopolistic system operated by the largest banks. And, according to Fortune Magazine and others, SWIFT was hacked at least 3 times in the summer of 2016 alone.
Fourth, there’s the currency conversion charges taken by the banks. They make big money whenever you send in one currency and receive in another. The smaller the receiving country the higher the FX fee.
And finally is the control the United States has over credit card companies such as MasterCard and Visa, and any other payment process where a provider is in the US. The United States government regularly gets records of transactions for MC and V for their various investigations. There is absolutely no right to privacy in your US financial dealings.
And the same goes for Bitcoin brokerages in the United States. Just recently the DOJ and IRS issued a John Doe Summons demanding the records of all Bitcoin customers. They plan to compare this to tax records to find unreported income of US citizens.
A John Doe summons is a fishing expedition where the US government doesn’t have a specific target, but they know something’s going on. So, they throw dynamite into the water and see what floats to the surface. For more, see: IRS Escalates Hunt For Bitcoin Users In Coinbase Summons Case
These costs and inefficiencies make it impossible to send small international transfers. If you wanted to hire a worker in the Philippines for $500 a month, your transaction costs would be over $100 or 20%.
When I pay a designer in India, they need to go through a lot of trouble to sign up for Payoneer. This allows me to pay them using my credit card, for which I get charged a $12 fee.
Payoneer is a great system, but it’s expensive and imposes all kinds of transaction limits. From what I’ve heard from users, there’s no way you could operate a sizeable business on this platform.
PayPal isn’t an option because they charge my contractors a fee to transmit money out of the system and into their banks. Also, the countries supported by PayPal are very limited (you can setup an account from anywhere, but limited options on connecting to your bank account).
Bitcoin solves many of these problems, but not all of them. Bitcoin is not instant… in fact, it’s relatively slow for a pier to pier system. And it seems costs will continue to go up.
The costs of maintaining the blockchain continue to rise because of the costs being incurred by full nodes. As these FinTech companies gain more transactions and more control, they will begin to act more like banks charging ever increasing fees. I expect the cost to send money over Bitcoin to hit $30 in the next few years.
Add to this the fact that Bitcoin is highly volatile and not accepted by the vast majority of merchants, and you can see the need for another solution.
One such option is Mobi by BTCC, the largest Bitcoin broker in China. Mobi is a stored value card that operates on the Visa network. It’s a hybrid FIAT currency and cryptocurrency card that tries to provide the best of both. See also Mint with Mobi.
But this is an imperfect solution. First, it relies on Bitcoin, which is a gamble. Then it’s processed over the Visa network, exposing it to US regulators.
In my opinion, the perfect offshore banking solution is a pier to pier system based on the blockchain which transmits FIAT currency from bank to bank. This would operate outside of SWIFT and Fedwire, and thus avoid the fees.
And there are a few providers building these types of networks. For example, Ripple in the United States is doing amazing things on the blockchain. In China, where FinTech rules, there are 9 or 10 companies operating completely online and outside of the banking system.
Hopefully these technologies will make there way to the offshore banking industry and free us from US domination and the high costs of doing business on these legacy systems.