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Author Topic: the core problem when using Bitcoin for international money transfers  (Read 2606 times)
niko
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December 30, 2011, 05:10:09 PM
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There has been lots of discussion along the lines of Bitcoin used for international money transfers, Western-Union style. At the first glance, international transfer with Bitcoin are easy and affordable, but the fact is that at this point Bitcoin economy is too small, and exchanging from and to local fiat is necessary. This brings us to the core problem: if Bitcoin were used by the masses to send money from "developed" countries to their families in the "developing" countries, there would surely be an imbalance in money flow.

An example: Any local BTC exchange in say Philippines would face a challenge of transferring fiat from the US to Philippines, and exchanging from the USD to Pesos (before or after the transfer). If the local BTC exchange uses Western Union or real banks to do this job, they surely cannot offer competitive rates, right?

How do banks and WU transfer fiat across borders anyway? What expenses are involved? Are there other private entities involved behind the scenes?

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December 30, 2011, 05:24:34 PM
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blaa blaa

I travelled to England, Netherlands, Poland, Czech republic, Brazil during last few months without paying money changers and using local bitcoiners to aquire currency.


ok I re-read your post. What would happen is that the price of bitcoin would go down vs the more desirable currency. If it happens enough then arbitrage becomes an attractive option.

A bitcoin shop would not use Western Union to do their arbitrage.
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December 30, 2011, 05:47:07 PM
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Since Western Union is transferring money both ways (USD > PHP and PHP > USD), they'll accept your USD, deliver PHP on the receiving end.  They then wait for someone with PHP to send money to the US.  They accept new PHP and deliver what used to be your USD to the new recipient.  Of course it's much more liquid than this simple example, involving many currencies, but you get the idea.

If there's an imbalance, for example lots of people depositing USD and withdrawing PHP but not many performing the reverse, WU will go to the forex markets to trade their excess USD for needed PHP.  Aside from their normal charges, WU will charge extra if they convert currency since making those forex trades isn't free (and they will mark it up since you're willing to pay for the convenience).

The same thing will happen with Bitcoins if there's a large imbalance.  For example:  Lots of people trade USD to BTC, send the BTC to someone in China, who then trades BTC to CNY.  If this happens too much, the exchange rate for CNYBTC will start to fall.  When it falls too much, someone will notice an arbitrage opportunity - they'll trade BTC to USD (on GOX), trade USD to CNY (at any currency desk or forex market), then trade CNY to BTC.  Because the CNYBTC was cheap they end up with more BTC than when they started, despite all the trading fees.  They will continue doing so as long as they can find a profitable way to do so.  If it's a huge imbalance people will do the USDCNY trades as fast as they can (eg, international wires), because it's profitable even with the high cost of a wire.  Smaller imbalances are handled by slower, cheaper methods.  Eventually the arbitrage will push the USDBTC down and CNYBTC up until things are back in balance.

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December 30, 2011, 05:57:46 PM
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A bitcoin shop would not use Western Union to do their arbitrage.

Right, so what would they use? Would they need to actually register as a bank?  Or can an exchange typically do this?  Whatever the case may be, it sounds to me like Bitcoin in this case is just an unnecessary intermediary. If you can already transfer fiat across the border, why not use the Occam's Razor?

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December 30, 2011, 06:03:48 PM
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Thanks, Revalin. I think this makes more sense now. Still, I think that my comment above about Occam's razor still holds.

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December 30, 2011, 06:33:23 PM
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In the very longterm Bitcoins gets spread among "everyone" like the dollar has, you might have been paid with some Bitcoins by someone.
Thus you probably have some Bitcoins or can get some from any of your friends or your lokal kiosk and by than there will be no need to exchange them. The people you send them to will simply use them to pay the rent or buy something on the internet, they will not go to an exchange.

But thats perhaps atleast 10 years from now, so in the shortterm Bitcoins are not a threat to Western union.

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December 30, 2011, 08:03:54 PM
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I think you should look at the buy/sell spreads of the banking systems of different countries.  Locally I get about 6% spread, but in Australia banks charge closer to 15%, and those airport travel kiosks are higher (I've seen 40% for USD).  Transferring bitcoin at the trading mid-point meand I get 3% more, and the other end also gets more fiat.

As for the currency imbalance, yes, that counts, and is normally recorded in a country's balance of payments.  For a small volume of Bitcoin it will not make much difference, but if it grew (say a few billion) then it would start destabilizing the local fiat.  If the currency markets work properly, then it would adjust to reflect the purchasing power parity of the currency, but the local government might not know why the money flow and flow of goods were out of whack.

For an extreme example, consider a fictitious country selling tractors as their only export and they suddenly all get purchased in bitcoin.  There are now a lot of bitcoin in the local economy, and people want to buy food with them and the local currency.  You need to exchange them, but ultimately, someone has bitcoin and will send them back overseas to a country where they can get something they want.
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December 31, 2011, 09:30:51 AM
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Thanks, Revalin. I think this makes more sense now. Still, I think that my comment above about Occam's razor still holds.

One entity needing to make large transfers pay lower fees than if many entities (the general populace) needs to make many small transfers.

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December 31, 2011, 10:35:07 PM
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Thanks, Revalin. I think this makes more sense now. Still, I think that my comment above about Occam's razor still holds.

One entity needing to make large transfers pay lower fees than if many entities (the general populace) needs to make many small transfers.



Yes, I've been in that position before, and you do get better rates when you start moving to $100k-$1m, but the banks still take a hefty fee.
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January 02, 2012, 03:32:50 AM
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The real problem with intl xfer is that there needs to be a lot more places to easily exchange BTC locally. Take for example Western Union. In Thailand you can go to any post office and receive money orders (not so sure about sending, never tried). When Bitcoin has a network of ready people to exchange them then it will be in a position to handle intl xfers. All over Asia there is small (and large bank) money changers available so one hopes that some will hook into the Bitcoin network and start to offer exchange. But I'm pretty sure it won't happen until there is demand (volume) and probably some organization creates a "package" to set them up and make it easy and reliable. These changers aren't going to figure out the technology on their own.

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January 02, 2012, 04:33:23 AM
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BkkCoins, do not mix up "currency exchange" and "money transfer without opening an account". These are two different businesses. And if the first can be an Indian shop down the corner, for the latter one need very serious license almost close to the banking or to be a government body (i.e. Thai Post is).

Of course it can be done under the counter. But we already have Chinese "banks" working this way without any cryptotechnology behind.
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January 02, 2012, 04:37:21 AM
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The real problem with intl xfer is that there needs to be a lot more places to easily exchange BTC locally. Take for example Western Union. In Thailand you can go to any post office and receive money orders (not so sure about sending, never tried). When Bitcoin has a network of ready people to exchange them then it will be in a position to handle intl xfers. All over Asia there is small (and large bank) money changers available so one hopes that some will hook into the Bitcoin network and start to offer exchange. But I'm pretty sure it won't happen until there is demand (volume) and probably some organization creates a "package" to set them up and make it easy and reliable. These changers aren't going to figure out the technology on their own.

Those places exist in great numbers because of the insane fees they charge.  Bitcoin is going to kill them, in a very personal and targeted way.  In theory, they could continue to exist by still charging the same crazy fees on bitcoin transfers/exchanges.  But, since bitcoin takes away all of the transfer risks, every shopkeeper should be willing to do small transfers and exchanges for a tiny fee for any random stranger off the street that is willing to wait an hour (or so).

So, don't expect the parasites to be much help, since doing so will hasten their own demise.

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January 02, 2012, 07:23:22 AM
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BkkCoins, do not mix up "currency exchange" and "money transfer without opening an account". These are two different businesses. And if the first can be an Indian shop down the corner, for the latter one need very serious license almost close to the banking or to be a government body (i.e. Thai Post is).

Of course it can be done under the counter. But we already have Chinese "banks" working this way without any cryptotechnology behind.
But the point is that currency exchanges ARE money transfer with Bitcoin. If they offer you exchange of local currency for Bitcoin then it's only a minor issue for you to transfer the Bitcoins. The shop doesn't have to do it and I wouldn't them to. No record keeping. Small corner shops offering exchange of Bitcoins is what I mean here, not banks and large institutions. These little shops no doubt have to have a license but not for money xfer - just for exchange.

I walk in and say I want X BTC. They give me a price and I buy them. Then on my phone/laptop I send them to someone across the planet. Likewise, they walk in and sell the BTC for local cash. The problem now is that most places you go the exchange is not available or too inconvenient. Somebody may say, "oh I'll do exchange for you on Kan San Rd.", but it's hit and miss, and they may be there or gone tomorrow.

I think Bitcoin Locator is a fantastic idea. But no one seems to be using it - I mean not more than few dozen at most. So a network like that where you can, any time, find a local exchange will help it along immensely.

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January 02, 2012, 07:28:35 AM
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Those places exist in great numbers because of the insane fees they charge.  Bitcoin is going to kill them, in a very personal and targeted way.  In theory, they could continue to exist by still charging the same crazy fees on bitcoin transfers/exchanges.  But, since bitcoin takes away all of the transfer risks, every shopkeeper should be willing to do small transfers and exchanges for a tiny fee for any random stranger off the street that is willing to wait an hour (or so).

So, don't expect the parasites to be much help, since doing so will hasten their own demise.

Fees aren't the issue. Bitcoins services already want to charge fees. I read that BitPay was charging merchants 2%. You cannot have people provide a service without charging a fee. They can make it on spread, or perhaps speculate (not likely for a business), but people just don't get out of bed, come down and do stuff for you without some fee. And so far the Bitcoin fees look to be about the same as using an ATM/CC.

WU fees are crazy but your average small exchange shop in Asia has pretty close to market exchange rates. So if they offered BTC exchange then the fees would be pretty good, and show up as rates slightly off market (spread). BUT only with competition - one shop per town won't give you this.

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January 02, 2012, 08:57:47 AM
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No record keeping. Small corner shops offering exchange of Bitcoins is what I mean here, not banks and large institutions. These little shops no doubt have to have a license but not for money xfer - just for exchange.
I doubt that this poor shop can use your words as an argument when anti-money laundering agency come to ask them some questions. That shop will get an opportunity to explore all the deepness shit can have.

I actually don't understand the point of this discussion. The world tries to bring as many services from offline to online as possible. Nice online system of Bitcoin created and you guys trying to drag it offline. Weird! Of course some gateways needed, but WU is definitely not a model to copy from.
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January 02, 2012, 11:54:42 AM
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No record keeping. Small corner shops offering exchange of Bitcoins is what I mean here, not banks and large institutions. These little shops no doubt have to have a license but not for money xfer - just for exchange.
I doubt that this poor shop can use your words as an argument when anti-money laundering agency come to ask them some questions. That shop will get an opportunity to explore all the deepness shit can have.

I actually don't understand the point of this discussion. The world tries to bring as many services from offline to online as possible. Nice online system of Bitcoin created and you guys trying to drag it offline. Weird! Of course some gateways needed, but WU is definitely not a model to copy from.

The point of this thread was meant to be about the fact that individuals sending money across borders involves net flow from developed to developing countries (i.e. people sending money "back home"). This would lead to drop in exchange rates of BTC to  local currencies. As others have pointed out, arbitrage should then naturally kick in, but (in big picture of things) using BTC for international money transfers eventually will have to involve a step of transferring fiat across borders, with all the fees and regulations.

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January 02, 2012, 12:13:05 PM
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Fiat transfer is actually pretty efficient when you're not a lowly consumer.  Large imbalances get handled in the forex markets.  The regulation is minimal and you pay no fees... Just the spread, which is in the low hundredths of a percent.

Bitcoins can very much improve the situation compared to international wires.

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January 02, 2012, 05:16:34 PM
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BkkCoins, do not mix up "currency exchange" and "money transfer without opening an account". These are two different businesses. And if the first can be an Indian shop down the corner, for the latter one need very serious license almost close to the banking or to be a government body (i.e. Thai Post is).

That is only half the story. Western Union has it set up so that when your local grocery store or Post Office handles Western Union remitances, they don't need a Money Service Business license. The local outlet simply acts as a franchise following Western Union procedures/fees. That way, they can use Western Union's Money Service Business License instead.

As far as I can tell, Bitcoin will have a hard time following MSB requirements unless the regulations are chanaged. For example, you are required to send customer details along with the electronic transaction. Only certain bank wires are exempt. Bitcoin would need its own exemption. Even if you expend resources to embed this information in the block-chain, you would be running afoul with privacy legislation.

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January 02, 2012, 09:54:08 PM
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BkkCoins, do not mix up "currency exchange" and "money transfer without opening an account". These are two different businesses. And if the first can be an Indian shop down the corner, for the latter one need very serious license almost close to the banking or to be a government body (i.e. Thai Post is).

That is only half the story. Western Union has it set up so that when your local grocery store or Post Office handles Western Union remitances, they don't need a Money Service Business license. The local outlet simply acts as a franchise following Western Union procedures/fees. That way, they can use Western Union's Money Service Business License instead.

As far as I can tell, Bitcoin will have a hard time following MSB requirements unless the regulations are chanaged. For example, you are required to send customer details along with the electronic transaction. Only certain bank wires are exempt. Bitcoin would need its own exemption. Even if you expend resources to embed this information in the block-chain, you would be running afoul with privacy legislation.

All the more reason why Bitcoin dealers shouldn't be in the money transfer business. They should be like pawn shops buying/selling Bitcoins. Leave the xfer up to each person to do in private at home or in the local restroom. Maybe pawn shops should get into dealing - they're usually on the fringes anyway.

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