Regulators in South East Asia have become increasingly hawkish on digital assets such as Bitcoin and other cryptocurrencies. On the 9th of August, Thai Finance Minister Arkhom Termpittayapaisith announced plans to put in place tougher rules on platforms and exchanges that offer trading in digital assets. This follows Singapore’s steps to expand its own regulations, marking a potential change of its previously friendly business environment. To some extent, these are merely part of the global trend towards more government scrutiny of digital asset markets after their sudden and continuing crash. However, in South East Asia in particular, regulators should tread cautiously. Over-regulation risks stifling a promising industry whose innovations could unlock prosperity for millions by making remittances easier.
Remittances are important globally, but even more so in areas where unbanked populations prosper, such as South East Asia, where latest estimates found over 70% of the population to not have a bank account. In 2021, remittance flows totalled $597 billion. According to the World Bank, remittance flows are larger than all other capital inflows combined for all countries within the region. Even during the height of the COVID-19 pandemic, remittance flows increased by 5.2%. There are millions of families in South East Asia that would be simply destitute without the flows of capital sent from family members abroad. Remittances pay for food and medicine but also for homes and education. Any long-term development plan for the region must incorporate remittances as a vital factor.
The importance of remittances
Despite their importance, remittance flows are still constrained by two main impediments; cost and speed. A remittance of $200 can incur average fees of between 5% and 9.3%, according to the World Bank. This cost is simply too high and takes money directly from the pockets of some of the world’s neediest populations. The long waiting time to receive remittance also directly harms those who can afford it least. A standard remittance transaction takes up to five days – in the case of a sudden medical bill, for instance, this delay can mean the difference between a family that becomes indebted or manages to pay for a loved one’s medical treatment.
The expense and slow speed of remittances is largely caused by regulation and the structure of the global financial industry. International capital controls and anti-money laundering regulations added to multiple intermediaries have a very real purpose of protecting against organised crime and illicit trade but also make millions poorer.
In response to this, workers and their families have increasingly turned to blockchain technology. For instance, in the Philippines, where cash remittances account for more than 9% of total GDP, cryptocurrency wallets are becoming the preferred tool for such transfers. In Vietnam and Philippines, 21% and 20% of the population report respectively using or having used cryptocurrency. This is part of a global boom in the use of cryptocurrencies for remittances, with their use growing 900% worldwide last year.
Cryptocurrencies as a tool used for remittances
While cryptocurrencies themselves are not a perfect solution for remittances – they are volatile and complex – they are only one use of the underlying blockchain technology. Blockchain has an almost revolutionary potential to change the future of global remittances, particularly in Asia. It works by storing chunks of information as “blocks” which are added to a transactional “chain” and then distributed across a network of computer nodes for verification. For any more information to be added to the chain, all nodes must verify the information. This makes blockchain incredibly trustworthy.
This trustworthiness is important for remittance finance. A common problem for migrant families across south east Asia is the inability to access finance. As the main income earner is abroad in a foreign employment system, the family at home lacks documentation to prove to lenders that they are not a credit risk. Without finance, families can’t take out loans for life-transforming investments such as education or in the case of an emergency. However, as both the OECD and the Asian Development Bank have reported, a decentralised blockchain allows for workers abroad to record their financial and labour status simply and accurately, without even needing access to an ID. These records are trusted by banks in home countries due to the security of the blockchain. Using these records, their families back at home can, for the first-time, take-out loans to make investments that lift them out of poverty, potentially with the help of what has come to be known as decentralized identifiers.
Blockchain can also make the existing remittance system faster and cheaper. Currently, intensive anti-laundering Know Your Customer (KYC) regulations are one of the chief reasons for the cost and slow speed of remittance.
The boost given by blockchain technology
However, blockchain-based technology could enable customers to use a digital fingerprint to be used as a unique identifier and stored on a digital chain that could be distributed securely to all financial institutions once instead of the checks having to be conducted multiple times. A recent OECD report lays out how this technology could fundamentally reshape remittances.
This is a new and infant industry – there are innovations yet to be discovered and some problems will be ironed out. Despite this potential, many governments are too reluctant to take risks to unlock the power of this technology. China, Myanmar, Bangladesh and Cambodia have either officially or effectively banned the use of cryptocurrencies, inadvertently negatively impacting the role that blockchain can play in revolutionizing their economies. Even if not all South East Asian countries have followed their example thus far, the Economist expects curbs to continue to grow across the region in the next five years.
Of course, a certain amount of regulation is to be both expected and desirable. However, the current stance of many of our government goes too far. By regarding all cryptocurrencies companies – and more importantly, blockchain developers – with unstinting suspicion, we risk killing the entire industry with caution. While not perfect at the moment, a degree of imperfection and risk taking is required for innovation. And, if an innovation is achieved, it could boost remittances and prosperity for the entire region.
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