Cryptos need to become a 'real currency' for money transfer companies to provide services

The possibility of adding cryptocurrencies into the portfolios of remittance companies isn't far-fetched, but requires regulatory oversight, a top official of money-transfer services provider Western Union said.

The volatility of cryptocurrencies and lack of globally accepted regulatory standards are hindrances for players in the industry to forge ahead with offerings, Jean Claude Farah, president of Western Union's Emea and Apac operations, said. But once there is consensus on legislation, the transition of cryptocurrencies to the remittance ecosystem will be seamless, he said.

"The moment cryptocurrencies will become, from both a regulatory and volatility perspective, a real currency, it's just a flip of a switch for us to add it to what we offer. You need to make sure regulators are backing them up; the overall ecosystem just won't allow it yet to happen," Mr Farah said at FinTech Abu Dhabi on Wednesday.

The volatility of Bitcoin, the world's largest cryptocurrency, has seen it surge or plunge in double digits. In 2011, it leaped to more than $32 from $2. In 2017, Bitcoin peaked near $20,000. Then, on December 27, it crashed to below $12,000. On Thursday, at 9.36am UAE time, Bitcoin was trading at $57,111.

The remittance ecosystem is big business worldwide, especially in countries with huge expatriate populations. Even as the global economy slowed during the height of the Covid-19 pandemic, inflows to low and middle-income countries hit $540 billion in 2020, a 1.6 per cent year-on-year drop compared to 2019's $548bn, according to the World Bank.

The UAE's remittances market was the second-biggest globally in 2020, behind only the US. Remittances by foreign workers in the Emirates hit $43bn last year, according to data from the World Bank.

The digital channels of remittance firms have been a key factor in maintaining the sector's strength. In June this year, Dubai-based Al Ansari Exchange said it posted a 212 per cent surge in digital transfers. Western Union, Mr Farah said, saw the share of its digital business to its overall operations rise to 25 per cent from around 10 per cent a couple of years ago.

Proponents of cryptocurrencies argue that using digital currencies instead of traditional money can facilitate remittances by removing intermediaries and significantly reducing, if not totally eliminating, fees for sending, an Investopedia study showed.

A major concern is that cryptocurrency transactions can be used for money laundering or other illicit transactions and they don't have a fundamental intrinsic value. Cryptocurrencies are not a unit of account and calling them currencies is a “misnomer”, top economist Nouriel Roubini said at a conference in Dubai last month.

“Cryptocurrencies may have an asset value but based on my definition they are not currencies. That’s a fact,” Mr Roubini, chairman of New York-based consultancy Roubini Macro consultancy and well known for predicting the subprime mortgage crisis in the US and the subsequent 2008 global financial crisis, said.

“If something is volatile [at] 5 to 10 per cent, [it] cannot be a currency. A currency has to have a stable value relative to the price index of goods and services.”

Blockchain – the technology upon which cryptocurrencies are built – are also being trialled by exchange houses for integration in their operations. But for Mr Farah and Adeeb Ahamad, managing director of UAE-based Lulu Financial, it's still not quite there.

"We've seen the enormous amount of results in terms of reducing the costs of operations. The problem is that there is a reduction on one side, but the level of compliance costs go up," Mr Ahamed said. "It needs to be balanced out at some point in time and the balancing will happen by adopting technologies."

"Blockchain can be used in two ways: either to enable remittances or to settle with partners around the world. We tried it but, so far, it wasn't faster nor cheaper. But we need to keep in mind that blockchain is an evolving technology; what did not work yesterday could work today," Mr Farah added.

The companies, however, acknowledge cash is still king. Hasan Al Fardan, chief executive of Dubai-based Al Fardan Exchange, said while its digital remittances grew nine times, more than 90 per cent of its business still happens in its physical branches.

"As long as cash is relevant, it is important to complement that with the physical space. The only way forward for growth is to blend physical and digital channels, or an omni-channel offering. That will be the case in the next five to 10 years at least," Mr Al Fardan said.

FinTech services can also attract those who use informal channels to send money, most notably the hawala system, a fund-transfer service between people using non-bank settlement methods, commonly described as 'money transfer without money movement'.

The Central Bank of the UAE, which does not recognise cryptocurrencies as legal tender, permits legitimate hawala activity and requires hawala providers to register with the CBUAE to enhance the transparency of financial transactions and strengthen the oversight of money transfers.

"One of the positive outcomes of the pandemic is that the greater need to adopt digital methods forced some of these participants in informal channels to become formal, which means it's good for a lot of the businesses operating in the correct manner," Mr Al Fardan said.

FinTech can enable safer and faster money transfers, and "the more choices you give to customers, the less they will use informal methods, which will give them control and good price", Mr Farah added.