As part of our crypto-exchange and OTC activities across the globe, we have formed a strong relationship with many crypto-native firms across South America. We see enormous potential for crypto’s important use cases in these countries, far beyond pure speculation.
Today, financial infrastructure is lacking in many South American nations, leaving many individuals unbanked and businesses struggling to find efficient payment systems and banking services.
Whether it be liquidity, operational, FX or overhead, the costs associated with local and cross-border transactions in this region are manyfold.
Further, many people in South America lack access to capital markets which makes it almost impossible for them to invest their earnings in their economy, creating a vicious circle of under-investment at the country level. Many living in these underdeveloped countries have no way of making a passive income.
Blockchain and cryptocurrencies appear as one answer to the problem. Whether through bitcoin, tokenized fiat currencies such as stablecoins, or mere blockchain implementation: many initiatives, especially in the FinTech industry, are emerging to further develop the South American financial infrastructure.
This LGO report is intended to outline the use of cryptocurrencies in South America for a variety of services such as remittance and cross-border payments, as well as LGO’s vision for the future of the payment industry.
An introduction to Remittance & Payments
When referring to the payment industry, synonymous terms can become confusing. Preamble to our analysis, it is essential to define each term properly in order for our audience to understand which process each term is referring to:
Bitcoin payment service:
As the name suggests, it enables merchants and businesses to receive payments in bitcoins from individuals for goods and services. This system presents a lot of advantages for merchants (save on credit card fees) but also shoppers (greater simplicity in placing the transaction, user anonymity, no interruptions from intermediaries, low transaction fees etc.)
Remittance / Cross Border Payments:
These terms simply refer to money that is sent or transferred to another party internationally. Today, most transfers can be sent via electronic payment systems such as wire transfers using the SWIFT network for example. Cryptocurrencies currently provide alternatives to traditional payment services. The most common examples of remittance and cross-border payments are businesses supplying a subsidiary with capital or individuals sending money back home to their family.
In the context of cross border payments, correspondent banking refers to the process by which financial institutions such as banks provide services on behalf of another to facilitate transfers. Current correspondent banking services are supported by SWIFT, a messaging network used to send and receive information such as money transfer instructions, allowing banks to initiate transactions and communicate for settlement purposes.
Now that we have defined the key terms, it is crucial to take a look at what this economy represents and, above all, the future of cross border payment systems.
Cross-Border Payments around the world: a fast-growing industry
The remittance and payments industry is a fast-growing one with a promising future. The World Bank estimates the amount of remittance flows will double from 715BN $ in 2019 to 1400BN $ in 2025. More specific to our region of interest, the South America CAGR for global payments revenue is expected to be 7% (i.e two percentage points higher than its EMEA and North-American counterparts). In an evermore globalized world, we see it as inevitable that cross-border payments volume will continue to increase as individuals and businesses continue to transfer value across the world.
With respect to traditional remittance for individuals, flows trend mainly from high GDP/capita countries to low GDP/Capita countries. These can become particularly challenging and costly when financial infrastructure is not developed, which is the case for many South American countries. For instance, a fast (2-day) Western Union 200USD transfer to MXN has a 7.07% fee (14.04$ USD fee). The cost of lacking financial infrastructure presents itself in the form of high fees passed on to individuals and businesses.
On a B2B level, wire transfers can prove costly as payments are slow to process, lack transparency and entail high transaction costs. Businesses are often forced to turn to forward contracts to hedge foreign exchange risks, and have few affordable options available to protect themselves against counterparty risks. A business using traditional wire transfer to pay for goods they have recently received from South America lacks visibility on many fronts including the number of days the transfer will take to arrive as well as the variety of additional costs the transfer can entail and potential counterparty risk. Transfer from Mexico to the US has an average transfer fee of 6.83% which can vary depending on the bank, the payment provider or tax issues. Although South Americans growth rates for cross border payments among large corporates and SME’s have never been higher, the risks outlined above are accentuated in underdeveloped markets. Businesses looking to pay bills by sending capital or repatriating capital from foreign subsidiaries need speed and cost-efficiency in their transfers.
After identifying the underlying inefficiencies of the traditional correspondent banking systems, we looked to partner with crypto-friendly institutions in South America to facilitate their payment services through the use of DLT and cryptocurrencies.
We believe that the use of cryptocurrencies will soon be implemented to a sizable portion of total cross-border payment flows which will translate into several hundred of billions of cryptocurrency flows annually (total remittance flows are currently 136 trillion annually). Our current technology, expertise, and network is exceptionally well positioned to service institutions with cross-border transactions as this new opportunity grows.
Current solutions: Correspondent Banking
As with any innovation, the use case for cryptocurrencies and the blockchain in the cross-border payments industry is based on efficient technologies looking to solve current inefficiencies. The said underlying inefficiencies of correspondent banking arise as the intermediary entities naturally require compensation for the services they provide. We will here outline the inefficiencies and costs associated with a traditional cross border flow.
The underlying inefficiency
The current correspondent banking system is based on nostro/vostro accounts requiring correspondent banks intermediate transfer in order to settle transactions. This often increases the complexity of the transfer as well as its cost as more intermediaries translates to more fees and less speed.
In order to execute these orders, financial institutions use an encrypted messaging system known as SWIFT to securely exchange transaction order information. It is important to understand that SWIFT is simply a messaging system and therefore does not eliminate the need for nostro/vostro accounts between banks. All transfers require multiple banks to exchange messages and act upon them, reducing efficiency if there is to be multiple banks involved.
Outlined below is an example of a transfer requiring a correspondent, as well as 2 FX transactions to settle the transfer. Please note that this example is simplified insofar as more correspondents can come into play for these transfers and payment providers are also intermediating the transfers.
In this example, the payment’s Sender contacts his bank (Sender Bank) to pay the Beneficiary in JPY using MXN. The Sender Bank finds a correspondent with a relationship to the Beneficiary. If both the mexican and japanese banks do not hold an account in Yen & Pesos they can settle the transaction with their correspondent in USD. Along the way, two FX transactions are settled due to the current nostro/vostro accounts setup for these entities. The lack of a main connecting network comes with many costs to the current system as complications increase the fees and duration of the transfer.
Associated costs of correspondent banking
The costs associated with this system can be thought of as both monetary and efficiency costs. The most obvious costs are the commissions taken on for each transfer. Banks charge their clients based off of the fees incurred for initiation of the transfer and add a commission on top of that. As some aspects of the transfer are partly still manual, fees can add up when including the fees of the SWIFT messaging system and the entities permitting the transfer (Western Union, TransferWise etc). These costs are inevitably passed on to the final consumer, whether that be a business or an individual.
The time delays associated with international payments are also a cost to businesses and individuals. These are due to the underlying mechanisms required to limit liquidity costs for banks. Although deferred net settlement eliminates some of the potential liquidity issues associated with the current system, the lack of settlement finality brings about a new cost related to efficiency: funds instructed to be sent out in the morning may not be received (net) until later that day when settlement occurs. In order for banks to limit the amount of liquidity parked in nostro/vostro accounts around the world, the system’s efficiency is sacrificed. Even with these systems in place, banks tend to hold & manage upwards of 500 nostro accounts and more than 50 currencies; representing a very inefficient management of liquidity.
Trust also represents an essential characteristic of a global payment system, and although transfers through the SWIFT global payment initiative and other providers have dramatically increased security, the process remains all too inefficient due to the incompatibility of many systems and the difficulty of account status tracking. Today’s reality is individuals and businesses want to be able to trust their money transfer medium with the timing of the transaction. Unfortunately, when multiple entities are involved, accounting for time zone differences, weekends, holidays and other variables, a consistently timely transfer is simply not a promise that can be made by today’s correspondent banking system.
The modern financial system requires predictability insofar as modern technology should allow 24/7 availability, total transparency, liquidity efficiency and interoperability. At LGO, we are actively looking for ways to facilitate cross border transactions for our institutional clients who seek a low-cost, secure and efficient cross border payment solution.
A solution: Blockchain
Solutions to the inefficiencies we have outlined exist and have already begun to be implemented by certain payment institutions and banks around the world. While blockchain and cryptocurrency cannot simply take over the payment industry overnight, LGO believes these innovations have been and will be the foundation of its future. It is our mission to implement existing solutions and adapt them by using our private technology and the public blockchain to provide the best possible service.
Blockchain answers essential issues in the payment industry by bringing transparency to the payment system. Through its properties, the technology allows users to be aware of any costs they may incur and confirm that the money has been received by the beneficiary. The immutability and traceability of transactions performed on the blockchain is one of its greatest strengths. The blockchain also provides an unmatched security level and faster transfers as it reduces the number of intermediaries involved in the process. Below are blockchain’s main advantages in cross border payments in comparison to traditional systems.
A frictionless future?
Can blockchain technology truly eliminate all friction within payment systems? In order to answer this question we’ve identified the use case for cryptocurrencies in payment systems, tracked its implementation through recent years and continue to monitor the future of the space.
The most common use of blockchain backed remittance is a simple transfer of funds through a cryptocurrency network rather than a banking alternative. For example, an individual or business would turn USD to Bitcoin and send Bitcoin through its network to the intended address. The transfer provides clear visibility as the sending party knows exactly how much the beneficiary party will receive along with the time frame of the transfer is limited to 10 minutes (mining rate). The transfer’s security is guaranteed by the immutability of the blockchain. Depending on the cryptocurrency of choice, the transfer time can vary as protocols vary from network to network. We’ve outlined this process in a simple illustration below:
Current cryptocurrency implementation
As technologies continue to be developed to solve the inefficiencies of correspondent banking, certain institutions offer innovative solutions to the inefficiencies discussed above using DLT. Ripple’s “Ripplenet” backed by the RTXP network, has made ripple’s XRP one of the leaders in this field as they aim to create the “Internet of Value”. The value of this network is found in it’s speed with an average transaction time of 4 seconds as well as its scalability, allowing 1500 transactions per second. These networks work with banks to provide atomic settlement and to ensure successful, fast and secure transfers.
In South America, banks such as Santander have implemented One Pay FX, allowing customers around the world to transfer fiat currencies through the ripple network. Although crypto transfers may become commonplace in the future, many individuals and institutions still prefer dealing in regular fiat currencies, but would like to benefit from the efficiency of blockchain and technologies. The service provided by Santander uses XCurrent technology to back fiat transfers across the globe in record timing. More recently, Santander launched Pago FX in April 2020, the open market version of OnePayFX, allowing customers from any bank to take advantage of the service.
Open source based payment networks backed by digital currencies have also begun to take shape for individual remittance through platforms such as Stellar. We see these innovations as the beginnings of a greater global payments revolution which will take shape as adoption becomes more widespread.
Building on the South American crypto ecosystem, many Fintech startups such as Ripio offer services that have been adopted by locals looking for access to basic financial services. For example, in Argentina, locals looking for short term loans can benefit from DLT technology and FinTech apps. These blockchain based applications create digital wallets for each client in the sign up phase which processes incoming and outgoing payments, trading between pesos and bitcoin for the most part. When customers show a good track record of debt, they are guaranteed a loan in the future. These offerings help a population of 1.7 billion unbanked adults access basic financial services.
Further, many regular businesses have begun using cryptocurrencies and stablecoins to pay clients or subsidiaries abroad. Businesses can avoid a large amount of fees from traditional providers like Paypal or wire transfer by using crypto. The fees paid for a cryptocurrency transfer will usually amount to less than a percent and the transfer can be settled within minutes, whereas fees from traditional systems average around 5%, transfers take 3-5 days to be settled and chargeback issues also occur. At LGO we have already seen demand from institutions looking to pay their subsidiaries and partners in stablecoins such as USDT, as they look to capitalize on newborn efficient remittance systems.
At LGO, our liquidity offers XRP, USDT, USDC or PAX to all institutions looking to benefit from the efficiency of the blockchain, which has already shown great efficiency in a variety of corridors.
The LGO Solution
A bridge between payments & crypto in South America
Whether it be by minimizing transaction costs or maximizing capital efficiency, our current financial system is unable to scale to the fast growing payment industry. We believe that cross-border & remittance services are one of the greatest use cases for cryptocurrencies to date. Our mission is to allow institutions to initiate cross-border transactions in the fastest, most cost-efficient way possible through our secure technology.
Why is LGO interested in South America?
We see tremendous potential in South America for the development of a crypto-friendly ecosystem. For instance, in 2017, US-Mexico cross-border payments surpassed 30bn$, making it the largest remittance flow corridor in the world. Our count also estimates over 300 companies involved in crypto on the continent. We have recently added a specific focus on countries such as Mexico, Brazil, and Colombia as demand for offshore liquidity and cross-border transactions increased in light of the recent global turmoil. We’ve enabled institutions from these countries to benefit from our platform which provides the deepest BTC/MXN liquidity in the industry.
Our research is supported by studies showing that South Americans countries are some of the most crypto-friendly in the world. This interest has been present since 2014, when Morning Consult highlighted in a survey that 21% of South Americans know and appreciate the use of Bitcoins. We feel this interest is brought on by frequent currency devaluations and unstructured monetary policy as well as desired exposure to the US dollar. Certain instances of hyperinflationary spirals result in local businesses and individuals losing the ability to trust their local currency as a store of value. This problem has affected Argentina, Bolivia and Venezuela in the recent past leading to individuals and businesses in these countries turning to crypto as an alternative store of value. In essence, faced with uncertainty regarding the value of currencies such as the Brazilian Real or the Argentine Peso, individuals and businesses are looking for ways to hedge their domestic currency through alternative asset classes.
Moreover, South Americans – both businesses and individuals – do not have the same access to financial infrastructure. More than 50% of South Americanss do not have easy access to the banking system. On the other hand, the number of internet users in South America from 2014 to 2019 is 387.2 million; over half of South America’s population. This suggests it is easier for South Americans to gain access to a crypto wallet than to integrate the traditional financial system.
Considering this environment, LGO has decided to work alongside crypto-friendly local institutions, looking to participate in the future of cross border payment. Our cross-border solution provides three major advantages:
A deep liquidity allows us to offer best price quotes.
We allow local settlement directly in local currency and access to USD/EUR markets to facilitate remittance flows.
By providing the benefits that are part of a global quality service operating as a traditional OTC desk (set-up chat, provide prices and settle t0, t+1 etc), we are able to service clients in South America with direct communication and personal service lines.
At LGO, we see this demand in South America for Bitcoin not as a mere "trend", but as the future of the monetary and financial system. It is no longer a bet but a promise and for this reason, we have identified and developed a variety of services.
Appendix: The LGO solution
We offer solutions to provide access to crypto and liquidity for local players in South America. Through our OTC platform, we offer B2B cross-border payment and remittance services to institutions around the world. Our OTC desk provides liquidity on over 25 different pairs to local exchanges looking to service their clients. We also leverage local banking relationships to offer fast and efficient currency conversions. These solutions allow our clients to benefit from instant 24/7 settlement, low transactional costs and secure transfers.
In order to illustrate, provided below is an example:
LGO acts as an intermediary between the local actor in search of liquidity and the institutions able to provide it. The process described is almost immediate and costs are minimal. In addition, the steps are secured by the blockchain and the funds are converted without risk.
With this product, we are able to serve our community with the most efficient cross-border solutions available in the payment industry. For example, using BTC, USDT, XRP or any fast settling crypto, a client can send BRL to France and receive EUR within a few minutes/hours. We are able to make this service more efficient than any other platform by optimizing two of our greatest assets: access to global liquidity and banking relationships in different countries, either directly or indirectly via partners.
Our OTC platform will be available through our Web UI and API in Q4 2020. If you’re interested to buy/sell cryptocurrencies from South America, or exchange local currencies to Euro or US Dollars in a fast, efficient and cheap way, please contact us at email@example.com or open an account.
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(see relevant footage: 26:25-30:15)
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