The underlying technology behind cryptocurrency-based products is systematically finding application in virtually every industry these days. Companies in social media, travel, and even healthcare have leveraged blockchain technology. However, one particular use case that can never be overemphasized is the facilitation of payments and remittances.
Bank for the unbanked
A report in 2020 suggested that nearly a quarter of the world’s population or roughly 1.7 Billion adults don’t have a bank account. This astonishing figure is often due to a combination of issues that varies from strict requirements from the governments of various countries, geography, and tedious KYC requirements from the banks.
This large number of unbanked population was part of the motivation behind the creation of XRP cryptocurrency by Ripple and then further down the line, Stellar in 2014.
Ripple Labs(XRP) originated sometime in 2012 and was created to be a real-time gross settlement system, currency exchange, and remittance network. In recent times, the company has been embroiled in a lawsuit with the SEC. However, in 2014, Stellar forked out of Ripple to form a more open-source and decentralized remittance platform.
Stellar or sometimes referred to as Stellar Lumen is a blockchain protocol established in 2014 through the joint effort of one of the cofounders of Ripple called Jed McCaleb, Joyce Kim, and a dedicated team that also includes a former executive of Mozilla called Denelle Dixon.
The company also has a host of partners that includes two American companies, IBM and ICICI, as well as partnerships with Deloitte and Barclays in the UK. In the crypto industry, Stellar also partnered with another cryptocurrency-based remittance platform called Travala. Travala facilitates the booking for over 3 million travel products including flights and hotels.
Just like Stellar, Travala seeks to improve the mainstream adoption of cryptocurrency in society. Seemingly a match made in heaven, the partnership ensures that XLM can be used to access all the travel products that Travala booking service covers.
The native cryptocurrency of Stellar protocol is Lumen and it is easily identified on exchanges with the code XLM with a $2.3 billion market cap at the time of writing. The network was launched alongside Stellar developmental foundation and initially distributed 100 Billion coins amongst individuals that signed up through invitation link, various project partners, XRP holders, and then a 5% portion was kept back for operational purposes.
In a bid to create a frictionless and low fee transaction across geographical zones, Stellar employs the localized and open-source Stellar Protocol Consensus. The protocol embodies all the fundamentals and integrity of secure financial transactions but deviates from the traditional closed structure by providing an innovative solution that is commonly found on the internet today.
In a world filled with billions of people performing sophisticated tasks with phones, laptops, and other electronic devices, it is a tad bit fascinating how tedious it is to make financial transactions across borders. If you throw in the boom in social media applications, then having a simplified and frictionless payment solution becomes even more important for people today.
Bitcoin is the foundation of the decentralized payment solution industry and it still sets the tone in terms of transactional traffic and market capitalization. However, it still suffers from a host of setbacks that includes longer transaction time and high energy consumption due to the proof of work consensus from miners, to say the least.
A Stellar job
The Proof of stake approach employed by Stellar consensus protocol that drastically cuts down the power requirement of running nodes also solves the other major problems facing decentralized remittance and payment by providing low latency, secure and flexible trust system.
These features of Stellar are the underlying reasons why it has performed over 450million operations for nearly 4 million accounts since its inception in 2014. This is because Stellar makes it easier and offers one of the fastest ways to create and trade digital representations of all forms of money.
So in theory, one could create a digital representation of any currency including the Dollar, Bitcoin, Ethereum, or Euros on Stellar. Then this digital representation found on Stellar could be exchanged for the said currency at a specified rate, and then exchanged. The created token or representation originating from Stellar invariably derives value from the original token that was deposited in the first place and so, it can also be used for performing transactions.
As mentioned earlier, the lumen or XLM is the governance token of the Stellar protocol. It is very important to Stellar’s ecosystem due to the fundamental design of the ledger system and it is the pathway to accessing the various benefits within the blockchain.
Considering how easy it would be for the system to be abused, XLM was introduced to deter bad actors that would potentially use the system for frivolous payment systems and spam. This is why there is a basic requirement for users of the protocol to hold at least 1 XLM and a nominal transaction charge of 0.0001XLM that ensures easy accessibility but deters large-scale bad behavior.
The initial design of the blockchain-enabled a 1% inflation per year, but a community vote in 2019 stopped inflation in 2019. Out of the 50 Billion tokens in existence, after a community consensus reduced the supply, about 20 Billion were in circulation on the open market, while about 30 Billion currently with the development foundation will be eventually eased into the market.
The remittance landscape
One key feature about Stellar’s use-case is that it facilitates cross-border transactions, and creates an enabling environment for easy money transactions. These key features are the underlying factors behind the large number of blockchain-based remittance companies that sprang up in recent times.
By October of 2020, it was estimated that there are over 90 cryptocurrency remittance platforms and startups in existence. Companies like Wirex(UK), Circle(US), Metal pay(US) and a host of others are among the numerous companies that leverage blockchain technology and cryptocurrencies to facilitate payments.
Outside western countries, the Caribbean, in particular, has become a hotspot for cryptocurrencies, mostly due to the loose financial restrictions that have made it a tax haven for many companies, and the enabling environment provided by central banks of countries like Jamaica, Bahamas, and some Eastern Caribbean States.
Another factor that has hastened the adoption of cryptocurrencies as a payment solution in parts of the Caribbean is the peculiar geography. In an area where a large population of unbanked individuals lives in isolated islands scattered within the region, the importance of cryptocurrency payments is accentuated.
In the Bahamas for example, the central bank already released its own cryptocurrency called the Sand Dollar backed by cryptographic technology used in blockchains. For a large population of people living in the Bahamas, just like most parts of the Caribbean, these simple mobile wallets with minimum friction for onboarding is a solution to financial challenges that businesses face in the region.
On the surface, it is actually a masterstroke to employ a frictionless payment solution in the region, considering that the major source of revenue is tourism. Pushing for mainstream adoption and crypto friendliness within the region will invariably have a positive effect on commercial activities, particularly as the Covid-19 vaccine gains traction and international travel restrictions are loosened.
As cryptocurrencies gain popularity and seep into the mainstream, blockchain payment solutions like Stellar, Ripple, and Travala will experience an increase in mainstream appeal. Their simplicity, ease of access, geometric growth, fast and frictionless transactions, amongst other benefits, is an indicator of a crypto-dependent future for payments and remittances.
Por Marino A Marrero Báez
Abogado – CEO
Mercantil Financial Group
www.mercantil.com.do
mmarrero@mercantil.com.do
Sources
- https://www.fintechfutures.com/2020/03/the-global-unbanked-shoppers
- https://tracxn.com/d/trending-themes/Startups-in-Cryptocurrency-Remittance
- https://www.coindesk.com/crypto/stellar-xlm
- https://www.stellar.org/papers/stellar-consensus-protocol
- https://www.stellar.org/learn/intro-to-stellar
- https://medium.com/the-capital/what-you-need-to-know-about-stellar-the-altcoin-thats-out-of-this-world-eb165c92f051
- https://blog.travala.com/travala-com-adds-stellar-xlm-as-payment-option-to-book-at-1-65-million-hotels-globally/
- https://www.bnamericas.com/en/features/spotlight-cryptocurrency-innovation-in-the-caribbean
