Dubai: Expatriates have always been in search of alternative means to transfer their hard-earned money back home at a lower cost – and now a new, albeit much riskier, way is becoming the talk of the town.
Many expats worldwide are now experimenting with cryptocurrencies to remit money to their families back home and save on commissions charged by exchange houses and banks. But how is it possible?
After cryptocurrencies are bought and stored in a crypto wallet, it can be sent to anybody anywhere who has access to a wallet and can encash the digital currencies. This is possible either by using a private key or passcode shared by the remitter or the cryptocurrencies can also be directly deposited to the recipient’s wallet via a crypto exchange.
In doing so expatriates worldwide are aiming to remit money at a much lower cost, and while this practice is attracting a lot of attention, there are a number of reasons why crypto and financial experts advise that it can be very risky to remit money this way.
But before we examine in detail what the risks are when doing so, let’s examine why many are seeking a cheaper way to remit and also if the new so-called alternative really is cheaper than the proven options already used to send money to one’s home country.
Remittance costs have risen
Traditional money-sending services usually charge extra for withdrawals, deposits, and transfers. Also, they make money when they convert it using their exchange rate.
Most of the time, the fees charged will vary depending on the amount you’re sending and how fast you want your money transferred. Some platforms will allow same-day transfers, but for a larger fee.
The main problems within the current remittance ecosystem boil down to two main aspects: price and speed. The fees can stack up and the remittance can take quite a while to get to its destination.
Additionally, banks can sometimes set money limits alongside the above two key problems, limiting the amount you can send and receive.
Fees on international bank transfers have been significant enough that the United Nations set a 2030 Sustainable Development Goals' target to reduce the transaction costs of migrant remittances to less than 3 per cent from their current estimated average 7.1 per cent.
Why are remittance fees high?
Fees are high because several players are involved in the international payments process: the source bank, an intermediary money transfer operator, the top lending authority of the country you are remitting to and, finally, the destination bank. At each of the four points, a fee is charged for the service.
The time it takes to get the money from the source to the destination can also be lengthy. Sometimes, transactions between some countries take up to a week before the money ends up in the hands of the recipient. This is why remittances have been at a great cost to expatriates worldwide.
According to a global study that included 2,000 remitting expatriates, 70 per cent of those surveyed were paying fees to send money internationally, with over 40 per cent paying a percentage fee averaging 6.2 per cent, and 28 per cent paying a fixed fee that averages $14.80 (Dh54.36).
In aggregate, the cost to consumers is $3.5 billion (Dh12.86 billion), according to the report. While 30 per cent of respondents stated that they do not pay a fee, they may be paying exchange rate costs.
However, with the advent of digital or electronic wallets powered by blockchain technology, some opine that the way international payments are made can change as a result.
How are expatriates sending money internationally with cryptocurrencies?
Just like their traditional counterpart, crypto remittances make use of crypto wallets, exchanges, or peer-to-peer marketplaces.
Basically, if you know how to send cryptocurrencies to another person with access to a digital wallet, then you can do remittances with cryptocurrencies.
First, you and your recipient should create and verify your own crypto wallet account. Next, you need to buy whichever cryptocurrency you prefer, using any of the payment options available.
Ask your money recipient, who is in your home country, to send their crypto wallet address or QR code to you. Once you have the recipient’s crypto address, use your wallet to send any number of cryptocurrencies by copying your recipient’s wallet address or scanning their QR code.
Keep in mind however that transactions are irreversible so make sure that the wallet address is correct. The moment the cryptocurrencies are transferred to your recipient’s wallet, tell them to cash out by selling the digital currencies and getting the cash to their respective accounts.
Top 5 risks to keep in mind when remitting using crypto
Risk #1: Sharing your wallet's ‘private key’ with anyone put your money at significant risk
A crypto wallet's ‘key’ operate in a similar way to your bank account number. A ‘key’ is simply a long string of random numbers, but as to whether or not you can share it with others depends on what type of key you have.
A ‘public key’ can be shared with a third party, such as a cryptocurrency exchange, without compromising the security of your wallet. This key allows you to receive cryptocurrency in transactions – most times by using a wallet address, which is essentially a compressed version of the wallet’s public key.
Private keys, on the other hand, should always be kept private. A private key allows you to access the actual cryptocurrency on the blockchain. So if someone has access to your private keys, it’s as good as having access to the crypto in your wallet.
So if you plan to share your private key for the purpose of remittance, this makes it potentially vulnerable to hackers as it is now prone to be accessed easily.
Risk #2: Your money is being converted twice, so risk of losing money due to volatility in prices is high
When remitting using crypto, you must be extra mindful of the exchange prices and related fluctuations.
Remember that your money is being converted twice when you send money abroad to someone in another country with cryptocurrency. The first conversion comes when you buy the crypto using your money and then the second happens when your recipient converts it back.
Keep in mind that cryptocurrencies are still highly volatile, so if crypto is priced at one particular amount when you remit and if that value changes by the time the recipient receives the crypto, you lose money.
To prevent that from happening, you have to be aware to make the best possible trades and know how to prudently time the market, which is why it is not recommended by crypto experts and financial advisors.
Risk #3: There is a fee (that cannot always be predicted) involved to transfer crypto between wallets
In addition, sending cryptocurrencies also have transaction fees, which can be unpredictable.
For example, Bitcoin fees are calculated on a per-byte basis, rather than a percentage, meaning that small transactions are comparatively more expensive.
In February 2021, Coindesk reported that the average Bitcoin transaction cost $23 (Dh84.48), although a patient-user could save money by waiting for lower congestion, paying $9 (Dh33.06) to $11 (Dh40.40) instead.
For a $200 (Dh734.60) payment, which is the World Bank’s measuring standard, it makes it even more expensive than traditional remittances – unless you use less-expensive cryptocurrencies, which again are unreliable and volatile.
Risk #4: High risk of country-wise restrictions and rampant crypto-related scams
For expatriates to be able to use online wallets and send remittances home with smaller fees and within minutes, the crypto wallets and the exchanges the remittance-recipient uses must be licenced in the country it operates.
Given that cryptocurrency is not uniformly accepted in every country worldwide, transferring money to a country that has not legalised or not clearly defined the use of crypto, poses an undefinable risk to your money.
For example, crypto exchanges are banned in countries like China, Bolivia, Indonesia, Turkey and Egypt, whereas in several other countries like India, exchanges’ access to provide crypto services have been on-and-off withdrawn these past months. This again poses an immense risk to the money you remit.
Cryptocurrencies are not licensed by the most central banks in the world and although a number of cryptocurrency exchanges have been given permission to operate, there are numerous others operating under the guise of being licenced. So beware of scams or hackers targeting your hard-earned money.
The UAE’s path towards digitising the industry began last year, when the SCA stipulated that anyone offering crypto assets in the UAE must be formally licensed and comply with a range of anti-money laundering, cybersecurity and data protection laws.
Cryptocurrencies are not licensed by the UAE Central Bank although a number of cryptocurrency exchanges have been given permission to operate within the financial free zones. The UAE dirham is the only legal tender in the country that is recognised by the Central Bank.
The DMCC Crypto Centre, launched in May to promote blockchain technologies in Dubai, is home to more than 100 organisations operating in the crypto space, with a further 900 more having applied for licences. There are more than 400 crypto businesses operating in the UAE.
MidChains, a virtual asset trading exchange based in Abu Dhabi backed by Mubadala Investment Company, completed its first trades on Bitcoin, Ethereum, Litecoin and Bitcoin Cash in September. BitOasis, another UAE crypto asset exchange, earlier last month said it raised $30 million in funding, which it will use to expand mainly in the Middle East. So far, only a handful others are qualified under the regulations to create crypto exchanges in the UAE.
Dubai-based analysts evaluate how interest in cryptocurrencies and blockchain is expected to keep growing in the UAE, as consumers and investors flock to digital assets with online payments gaining pace. A growing number of institutional investors and wealth managers in the UAE plan to increase their exposure to cryptocurrency assets between now and 2023, according to a survey by Nickel Digital Asset Management, based in London.
Due to the high cost of traditional services, users could save money by sending cryptocurrencies directly to the recipient. But at what cost?
The process of remittances through cryptocurrencies is turning into a lot more efficient and faster than the conventional process and given the current hype in crypto assets like Bitcoin, Ethereum and many others, the trend is seen accelerating by some.
However, although Bitcoin was the preferred choice for remittances, its transaction costs are rising, so currencies like Ripple and Dash are seen as good replacements due to substantially lower fees.
While remitting money, users would want the value to remain unhindered by market volatility so expats looking to remit money are doing so through some of the less volatile crypto assets such as Stablecoins.
Globally, several start-ups like Satoshi Citadel in the Philippines have started offering services to facilitate Bitcoin remittances, but are yet to provide services in the Middle East.
As crypto have been becoming popular in places with high inflation like Lebanon, Turkey, Afghanistan and Venezuela, the Economic Times reported that remittances in crypto are finding favour because people want to protect themselves against hyperinflation.
However, given that cryptocurrency is not uniformly accepted in every country worldwide, transferring money to a country that has not legalised or not clearly defined the use of crypto, poses an undefinable risk to your money.
Moreover, cryptocurrencies are asset classes whose prices cannot be predicted, so if crypto is priced at one particular amount when you remit and if that value changes by the time the recipient receives the crypto, you lose money.
Also, procedures to remitting via crypto are more complex as opposed to traditional remittance. Although the sending speeds are quicker, there are more steps in the process, so not taking the time to understand the process can prove very costly. For now, this type of remittance is tailored to those that prioritise speed and expenses.
So, while it is not recommended by most crypto investment planners, some analysts opine that remittances through crypto assets are still expected to grow, especially because transferring smaller amounts can be expensive through the traditional services.