Mar 21, 2024

How Bitcoin And The Lightning Network Transformed Remittances

High fees. Slow transaction times. Dependence on intermediary banks. That’s the traditional remittance system in a nutshell.

How Bitcoin And The Lightning Network Transformed Remittances

High fees. Slow transaction times. Dependence on intermediary banks. That’s the traditional remittance system in a nutshell.

Bitcoin and the Lightning network have already gone a long way to transforming this system, bringing the possibility of fast and cheap remittances to millions around the world.

How Does The Traditional Remittance System Work?

The remittance process in the traditional system has five components:

  1. The Sender: An individual, the sender, who wishes to send money to someone in another country — typically a family member or friend.
  2. Remittance Service Provider (RSP): The sender approaches an RSP, which could be a dedicated company like Western Union or a bank offering remittance services.
  3. Transaction Initiation: The sender provides the necessary funds to the RSP along with details about the recipient, such as their name, location, and contact information.
  4. Intermediary Banks: The funds may pass through multiple intermediary banks during the international transfer. Each intermediary may charge fees, and the process can take several days.
  5. The Recipient: The recipient can collect the funds from a local branch of the RSP. They may need to provide identification and transaction details.

It’s not a complicated process, but it’s not an efficient one either.

On average, fees range from 5% to 15%, and the process can take several days or even more than a week.

The more intermediaries are involved, the higher the fees and the longer the process.

Further, detailed KYC information is required which makes privacy non-existent in the traditional system.

How Does The Lightning Network Improve Remittances?

The Lightning network has already been adopted around the world precisely for remittances, bestowing the following benefits:

  • Lower Fees: The fees on the Lightning network are generally in satoshis per byte rather than a flat percentage of the transaction value. In practice, fees are often well below 1%, making more of the remittance available to the recipient and making smaller remittances viable.
  • Instant Settlement: Lightning transactions settle almost instantly, providing a faster and more efficient way for recipients to access the funds.
  • Global Accessibility: Bitcoin and the Lightning network operate globally (depending on internet connection), and can potentially provide financial services to individuals in regions with limited access to traditional banking.
  • Reduced Dependence on Intermediaries: Lightning transactions can be sent directly between the sender and the recipient, eliminating intermediaries altogether. When the sender and recipient don’t have a direct channel, the most efficient link between them will be used, increasing efficiency and lowering fees taken by intermediaries.

Why Is Bitcoin Better For Remittances?

The Lightning network brings a number of benefits to those seeking to send remittances. And some systems use the Lightning network to send currencies other than bitcoin, making it useful in its own right.

However, besides the use of Lightning itself, bitcoin has been favored as a currency in which to send remittances because of its inflation-hedging quality.

For example, in Venezuela, where the currency suffered from hyperinflation, relatives in other countries sent remittances in bitcoin because it would hold its value while the local currency rapidly devalued.

On top of that, Venezuela enacted financial controls that took a cut of money being sent into the country. Because the Bitcoin network circumvents traditional financial channels, relatives could send remittances that avoided this government theft.

Since the Lightning network is even faster and cheaper than the Bitcoin network, which is itself faster and cheaper than traditional financial channels, the combination of Lightning and bitcoin provides both the perfect system and the perfect currency for remittances.

Not only this, but Lightning does not require any KYC and is far more private than the traditional system, making it infinitely better suited for people in countries with more authoritarian governments.

In Conclusion

The traditional remittance system is slow, expensive, and has strict KYC requirements.

The Lightning network is faster, cheaper, and considerably more private.

Bitcoin is a currency well suited for remittances because it holds its value against currencies that are being constantly devalued by inflation.

Bitcoin’s peer-to-peer nature also allows people to circumvent authoritarian financial controls.

With the combination of Lightning and bitcoin, people around the world now have far superior options when it comes to sending remittances.

About the author.