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|Philip Ziter, a lawyer in the Ho Chi Minh City office of US-backed consulting firm Russin & Vecchi|
Most legal cross-border payments are made via a network of correspondent and intermediary banks or money transfer operators (MTO). There is no central clearing system and these transactions can only occur during regular banking hours. Transactions are subject to processing fees from multiple intermediary banks. MTOs such as Western Union are a faster but more expensive alternative, often used by the unbanked.
Blockchain technology changes all of this. Based on distributed ledger technology (DLT), each transaction that occurs on a given network is recorded. A perfect, identical record of each transfer is maintained on each network’s computers or “nodes”. Transactions are grouped in “blocks” and chronologically recorded in a “chain”. All parties on a network can review prior entries.
Blockchain provides irrevocable, real-time, cross-border transmission. With low banking penetration, strong demand for financial services, extremely high mobile penetration, and a developing financial infrastructure, the case for remittances using blockchain in Vietnam is strong.
Safe cross-border money transfers rely on banks and MTOs. Unregulated, alternative remittance channels (meaning the Hawala system) have long existed but these are based strictly on trust.
According to the World Bank, the average cost to send a remittance worldwide by any method was 6.94 per cent in the first quarter of 2019. Remittance fees are specific to each remittance corridor (meaning a source country and destination country pair, for instance the United States-Vietnam). Using banks affords a high level of trust, but the costs are high. Exchange rate losses and processing fees total on average 9 per cent of the transfer value. Using banks to remit is not always an option for largely unbanked populations in developing nations like Vietnam.
A transaction a few weeks ago underlines blockchain’s major advantage over banks or MTOs. A transfer of more than $1.1 billion was sent with an indelible footprint in 10 minutes. The fee was $84.
MTOs do not require access to a bank account, but are both inconvenient and expensive to use. Workers who send their salary home often queue up for hours.
Blockchain powered transactions using DLT reduce costs by removing multiple intermediaries. Blockchain-based remittance providers, like Coins.ph, have been successful in the Philippines. Homegrown Vietnamese companies have started to make headway but have yet to enter the mainstream.
A blockchain remittance can take many forms. For example, a sender with a bank account begins by loading a crypto wallet (essentially an app) provided by the remittance company. Fiat currency is used to purchase cryptocurrency from the remittance company or a third-party exchange. An amount of cryptocurrency is then transferred to the recipient’s wallet in another country. Funds are then changed back to fiat and transferred to a bank account.
If either party does not have a bank account, the flow changes. In some circumstances, an unbanked sender or receiver can interface with a cash point (for example convenience store chain, telco top-up card), bitcoin ATM, and even traditional ATMs. Recipients use codes which allow them to withdraw cash without a card and even without a bank account.
No matter the flow, issues which involve knowing your customer and anti-money laundering rules are real and must be addressed. Regulators take different approaches and, of course, the legal framework varies by jurisdiction. Vietnam’s legal framework is not yet complete.
With blockchain, users can easily and very safely remit money to family members or business partners in a matter of minutes, at a fraction of the cost. The remitter, in an instant, can confirm his transaction, without any third-party intervention, assured that it cannot be changed. When compared to traditional bank transfers, with slow processing times, working hours, and transfer fees, the value proposition is stark.
Market players are already moving into the space. Most notably, MTO market leader Western Union has connected with blockchain startup and crypto wallet Coins.ph, enabling residents of the Philippines more easily to receive remittances. Japan’s SBI Ripple Asia Co. and Vietnam’s TPBank are co-operating to launch a money transfer service on the Vietnam–Japan corridor using blockchain technology. Broad opportunities exist for co-operation between nimble fintechs and traditional financial institutions.
Vietnam is among the top 10 countries by volume of receipt of remittances ($16.7 billion in 2019), amounting to 6 per cent of Vietnam’s annual GDP. As a point of reference, in 2019 Vietnam exported a total of 3.6 million tonnes of crude oil and received payment worth $1.9 billion.
The key remittance corridors are topped by the US, which is home to around 2.2 million overseas Vietnamese. Cambodia hosts 600,000, Japan 371,000, France 350,000, Australia 300,000, Canada 250,000, Taiwan 200,000, Germany 170,000, and South Korea is home to 170,000. This group is the main source of remittances to Vietnam.
Meanwhile, Japan hosts the most Vietnamese overseas workers with around 200,000 employees. Taiwan and South Korea hold the second and third spots with around 60,000 and 50,000 workers, respectively. The average monthly income of Vietnamese workers in Japan and South Korea is roughly $1,000-1,200, with monthly salaries in Taiwan of $700-800. When multiplied by the number of workers, this amounts to approximately $3.6 billion per year – a significant portion of which is remitted to Vietnam. But workers are faced with inconvenience, and expensive or risky options. Alternatives with lower costs and less friction can increase net remittances.
If blockchain remittance solutions can save overseas Vietnamese, overseas workers between 6 and 9 per cent in fees, then in 2019 the net additional remittance received in Vietnam would have been $1-1.5 billion based on the same amount remitted.
Vietnam’s regulatory framework is incomplete. In November the State Bank of Vietnam issued an updated draft decree amending Decree No.101/2012/ND-CP on non-cash payments.
An “international payment” is defined as one made between an offshore payment service provider and a payment service provider in Vietnam for the purpose of money transfer/payment between a money remitter/payor and a beneficiary/payee. Unlike the current decree, the draft decree expressly regulates international payments by remittance companies.
Under the draft decree, parties to an international payment transaction are subject to Vietnamese laws on cyber security, tax, anti-money laundering and anti-terrorism financing, consumer data protection, laws on foreign exchange control, and treaties signed by Vietnam on payment. Tightening requirements should make it easier for the government to support blockchain for remittances.
Crypto-fiat conversion (the exchange from crypto to state issued money and vice-versa): The worldwide economy is still based on fiat currencies. By including a third currency (meaning crypto) in a foreign exchange transaction there is a conversion expense. But peer-to-peer transactions by blockchain removes the need for a bank transfer, so bank fees are saved, greatly reducing the overall transfer costs. Private solutions with seamless onramps and offramps (meaning converting from fiat to cryptocurrency and back to fiat) will be critical to mass adoption – this is an opportunity for investors.
Complexity: Understanding and using cryptocurrencies and DLT is complicated. But experience will teach consumers to navigate using cryptocurrencies. With time and experience, frankly, the need for users to understand how it works will diminish – an ideal solution just works without necessarily knowing how (think email or your mobile phone – most people do not know how they work; they just work). This too presents an opportunity for investors.
Policy recommendations: There appear to be no major roadblocks for blockchain-based remittance providers to provide a route for inward remittances. However, the legal framework is not stable and not complete. Existing law does not prohibit DLT powered remittances in Vietnam, assuming funds transferred as cryptocurrency are not spent as cryptocurrency. Even so, regulation of cryptocurrencies is incomplete. We are optimistic that additional government guidance and a legal framework will be provided in the medium term. In the interim, the government should implement a fintech sandbox for innovative technologies including crypto/blockchain.