Blockchain or Database – Remittances between Malaysia and Pakistan

In their April 2019 report “Migration And Remittances”, KNOMAD, an initiative of the World Bank that conducts research focussing on migration and development issues, presents trends in migration, remittance flows and costs. A major source of foreign income in Low- and Middle-Income Countries (LMIC); remittances in 2018 have surpassed foreign direct investments, private debt & portfolio equity, and are now more than three times the size of official development assistance of 2017.



Global generalisations in this field should be treated with caution because of the heterogeneity of remittance corridors and channels. Money transfer costs are partially dependent on the respective region’s service providers’ ability to minimise risk. With increasing risk, lack of competition, and high compliance costs, remitters are the ones who must cover the costs which, naturally, decreases the amount of money that can be sent. In 2018, these costs would amount to 6.9 percent – 36.5 billion dollars in low- and middle-income countries (LMICs), and hence reneging on the SDG goal of 3 percent. In a press release on Monday, 8 April 2019, the World Bank reports a record high of $529 billion in remittances flowing into LMICs. This 9.6 percent increase to the previous year may be attributable to efforts challenging the aforementioned risks and monopolisations, as well as economic growth.


Of the estimated $19.6 billion in remittances Pakistani diaspora living and working worldwide have sent in 2018, about $1 billion – 5 percent – are coming from Malaysia. From a macroeconomic perspective, the overall received remittances make up some 6% of Pakistan’s Gross Domestic Product (GDP) which is equivalent to more than 50% of its trade deficit. As they are highly dependent on the effective and efficient inflow of these remittances, Pakistan’s government is working on ways to disincentivise the use of informal and illegal channels, and hereby gain control over monetary inflows.


To alter the status-quo by enhancing speed and reducing costs of remittance services, Pakistan’s Telenor Microfinance Bank, in partnership with Valyou of Malaysia, have invested their efforts in the establishment of a blockchain-based remittance service. This joint project came into being earlier this year with the involvement of China’s Alipay, a subsidiary of Ant Financial, who delivered the blockchain technology and waive transaction fees for one year.


The promises are clear: ensuring money transfers are highly secure and transparent, removing expensive intermediary costs, and speeding up the process altogether. These possibilities usually are enabled through the decentralised functionality of the technology. Here, uploaded information is encrypted, mathematically verified and stored by all connected participants contributing their computing power. The more of these nodes that exist, the more efficient this process can be carried out and scaled. For their time, effort, and expenses, the participating entities are remunerated, usually in cryptocurrencies.


It seems, however, that in the case of this newly devised remittance system based on blockchain there remain several unanswered questions. It is not yet clear how many nodes this blockchain has, which is a fundamental aspect. Since the level of decentralisation – and therefore the level of efficiency – is depending on the number of individual computing stations that confirm the correctness of pending transmissions, it is essential to inquire further into this. Concomitantly, no information is available as to what the remuneration looks like. Neither Alipay nor Telenor’s Easypaisa offer any information regarding the issuing of a new cryptocurrency or the usage of an existing one. With Alipay running the blockchain, the economic perspective would be that this is a new and cheaper money transfer service than on a more complicated traditional database.


This not only contradicts the definition of a blockchain but is also dangerous from an investment perspective. A lack of information surrounding blockchain topics makes it difficult for large institutions and investors alike to understand whether funding and implementing this technology indeed adds the intended value to existing systems or is a marketing trick to attract gullible money. While the showcased example enlarges competition amongst remittance services, it does so by making use of its competitive advantage – that is abundant financial means. The cooperation with Alibaba’s Ant Financial - who charge no fees in the first year - allows this business to establish itself in the market, inter Alia by undercutting their competitors’ prices which is achieved not only by switching to the blockchain technology but by replacing the intermediary banks as well.


Later this year, given the availability of more data regarding these projects, FCI will present a comparison of what will have been achieved and by what means with the aim of fostering better knowledge and understanding of the blockchain technology and its applications and implications.


Author: Patrick Lehner

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