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January 25, 2023 | Crypto Education

Can bitcoin be used for cross-border payments?

In 2008, an anonymous researcher (or team of researchers) called Satoshi Nakamoto published a nine-page research paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System.” The document, known as the Bitcoin white paper , presented a new type of digital currency that users could use to transact without relying on financial intermediaries.

Soon, people around the world discovered that blockchain transactions, specifically cross-border transactions, were faster than most international bank transfers. The blockchain could settle a bitcoin transaction in just a few minutes as compared to the 2-3 business days needed by traditional services. By removing banks from the process, Bitcoin mitigated the high costs often associated with cross-border payments.

How bitcoin payments work

Bitcoin network and blockchain

Bitcoin (BTC) , the protocol’s native digital currency, circumvents the banking system by relying on a series of interconnected “nodes.”

Volunteer users operate these nodes on the Bitcoin network and help maintain it by using their computers to perform various tasks. These machines are connected to the Bitcoin blockchain — a special type of ledger system used to verify and record transaction data.

You can think of these two concepts – the Bitcoin network and blockchain – as a globally distributed group of people all working together on an open Google Document. Whenever new information is added to the document, everyone else has to first make sure there are no errors in it. The document is also totally accessible to anyone who wishes to view it – not just those working on it.

In exchange for fulfilling energy-intensive roles like data validation, nodes can earn rewards paid in newly minted bitcoin.

How a transaction works

When a person wishes to send a bitcoin transaction to someone, they first have to broadcast it to the rest of the network. Nodes then independently check the validity of the transaction and compete to win the right to add that and a batch of other transactions into a new block on the blockchain.

If you want to learn more about the process of validating transactions and adding them to the blockchain, you can check out our Learn Center guide What is bitcoin mining?

Once we add a transaction to the blockchain, it’s finalized. Because there are no intermediaries involved, it doesn’t matter whether the recipient is in the same country or on the other side of the world. In theory, all transactions take the same amount of time to process. You can think of it as sending an email versus a hand-written letter.

These properties are why cryptocurrencies like bitcoin are ideal for frictionless remittances and cross-border transfers.

Barriers to bitcoin payments adoption

There are several advantages to using bitcoin over traditional currencies. A 2021 survey found that only 13% of U.S. customers preferred to use bitcoin and other cryptocurrencies when sending overseas payments. This low level of preference occurs despite figures showing that 42% of surveyed people paid an average fee of 6.2% when sending traditional remittance payments.

So what’s holding people back? It is possible people are put off by several misconceptions surrounding bitcoin payments.

Privacy

Bitcoin transactions aren’t usually anonymous. When you use an exchange to transfer cryptocurrency, you must submit something called Know Your Customer (KYC) data. This data often includes your personal information and a copy of your passport. KYC is important because it makes sure that transactions are legal and regulated.

Illicit activities

For many years, criminals have abused the pseudonymous nature of bitcoin payments to fund nefarious activities. While it’s impossible to know exactly what percentage of payments are involved in illegal ventures, advancements in detection, tracking, and enforcement have made fraud far less attractive.

A recent report by Chainalysis estimated that crooks used around $10 billion, or 0.34% of all bitcoin transactions, to fund criminal enterprises.

In comparison, United Nations figures found up to 5% of global GDP is involved in money laundering and other criminal practices per year. This equates to around two trillion U.S. dollars.

High energy consumption

It’s no mystery that the computational power committed to securing the bitcoin network — around ~100 TW/h — is extremely high. However, it’s important to note that this figure represents the energy consumption of a complete financial system, including issuance and transaction settlement.

In fact, nobody has tried to measure how much energy a major currency consumes per hour. Think about the U.S. dollar and how many banks, money printers, ATMs, card payment devices, and security vehicles are needed to support just one currency. Now think about how much energy those combined items consume – potentially a lot more than the Bitcoin network!

Volatility

Bitcoin is renowned for being a particularly volatile asset class. This volatility means its price can fluctuate dramatically within a short time.

For remittance payments, the volatility may lead to the recipient receiving less than the intended fiat-denominated amount once the transaction is completed. However, this volatility works both ways and sometimes during bullish market movements, recipients can receive a higher amount.

The sender can also mitigate the effects of bitcoin volatility and transaction speeds simply by taking a few precautions. These involve trading during weekends when network congestion is low and avoiding sending remittance payments during particularly bearish episodes.

Overall, while some people may not want to use bitcoin for cross-border payments, it boasts several key advantages over traditional currency. These are speed, cost, and transaction finality. Keep in mind that after bitcoin has been sent across borders, it can quickly and easily be converted back to a government currency using a crypto exchange like Kraken.

Need help understanding how to use Kraken to manage your assets? Stop by our Support Center where our support team is available 24/7.

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These materials are for general information purposes only and are not investment advice or a recommendation or solicitation to buy, sell, or hold any digital asset or to engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the cryptoasset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your crypto assets and you should seek independent advice on your taxation position.

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These materials are for general information purposes only and are not investment advice or a recommendation or solicitation to buy, sell, stake or hold any cryptoasset or to engage in any specific trading strategy. Kraken will not undertake efforts to increase the value of any cryptoasset that you buy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the cryptoasset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your cryptoassets and you should seek independent advice on your taxation position.

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Posted by Jack Read more Comments (15) 2024.12.12 21:08