The world used to be a small place. Before the modern era, people grew up and lived in a small geographic area. Even holidays were enjoyed a short distance from home.
The 20th century changed all of that. By the 1950s, advances in flight made it possible to cross oceans in hours, not days or weeks. As we moved closer to the 21st century, the rise of computers eventually led to the internet.
The wellspring of advances that have flowed from this innovation has made a truly international lifestyle possible. We can hire low-cost contractors to scale businesses quickly. Thanks to wi-fi, we can get work done from the cafe down the street or a beach bar halfway around the world.
More people than ever are becoming citizens of the world. However, just as a parachute exerts resistance on a runner, one issue holds many back – international money transfer. Even cheap money exchanges like TransferWise are relatively expensive, adding up to hundreds or even thousands of dollars lost to fees annually.
In an increasingly globalized world, these differences hold growth back. Some are touting cryptocurrency as a mass disruptor to this broken system. Can this innovation can provide universality to the global financial system? Or will nation-states mercilessly defend the status quo? We’ll search for the answer in today’s post.
Borders are becoming less meaningful with every passing year
Up until modern times, people defined themselves in part by what surrounded them. Thanks to their collective lack of mobility, regions differed significantly over relatively short geographic distances. If you travel across Europe, you’ll pass through a half-dozen countries with just as many languages/cultures in a few hours.
As monarchies evolved into nation-states, borders developed to define these regions. While war occasionally redrew these lines, they’ve mostly delineated the boundaries of cultural homelands over the centuries.
In the post-WWII era, though, the internationalization of business and increasing migration has put pressure on this model. As Western Europe began to embrace freer trade, an obstacle to growth became apparent very quickly.
With dozens of hard borders, trading in 1950s Europe was a Kafkaesque nightmare. Each nation had a slew of tariffs, regulatory differences, and currencies. To sort out these issues, six nations (Belgium, the Netherlands, West Germany, Luxembourg, France, and Italy) formed the European Coal and Steel Community (ECSC) in 1952. By integrating these two major industries and coordinating Marshall Plan funding, growth began to flourish.
Their progress snowballed, leading to the formation of the European Economic Community, or EEC, in 1957. This organization established a formal customs union between these same six nations. As these founding members saw their economies grow drastically, other countries, like Denmark, the United Kingdom, and Greece, joined.
In 1985, integration between member countries took a historic leap forward with the Schengen Agreement. Within the Schengen area, people and goods could move freely without being subjected to border checks. In 1992, the signing of the Maastricht Treaty formally created the European Union. Shortly after, a common currency known as the Euro replaced over a dozen national currencies.
In less than fifty years, borders have ceased to have much meaning in Europe. Other parts of the world have yet to embrace integration on a similar scale. Generally speaking, however, global trade and movement of citizens has become freer over the same period.
The writing is on the wall for all to see. From NAFTA to the recent creation of the African Union, borders are quickly becoming lines on a map.
People are sick of jumping currency hurdles
Free trade/free movement agreements and the internet have made the world a more international place. However, one major blockade stands in the way of true global citizenship – a common currency.
Every time an individual or business moves cash from one country to another, expensive problems ensue. Banks and currency transfer firms charge fees in return for the privilege of sending your money abroad. And then, they offer an exchange rate that can be 5% or more off the interbank rate.
Let’s say that you’re a British citizen. You just got hired by an investment bank in the Netherlands. As such, you need to move your assets (20,000 GBP) from Barclay’s to your new ING account in Amsterdam. Right away, you’ll pay 15 GBP for wiring money to a SEPA (Single Euro Payment Area) country. Then, you’ll exchange funds at the GBP/EUR rate of 1.0951.
All told, you’ll end up with 21,885 EUR on the other end. But your problems don’t end there. If you’ve already attained Dutch residency, you may be subject to the Dutch gift tax. It could trigger if the receiving account is in your spouse’s name. Given the amount in this example, a 10% rate may apply.
That means the state could walk away with 2,188 EUR of your money. Once the dust settles, 19,697 EUR would remain. But, what if you could move your money without having to deal with fees, margins, or taxes?
As of the writing of this article, the GBP/EUR interbank rate was 1.1581. If money transfer were free, you’d have 23,162 EUR – that’s almost 15% more! Now, imagine if you’re a small business owner. Even if they’re picky with whom they move money, they still give up hundreds or thousands of GBP/USD/EUR annually!
It’s time the world adopted a global currency standard.
Will cryptocurrency become a universal means of financial exchange?
It’s January 12th, 2009. Despite the collapse of stock markets worldwide months before, the Global Financial Crisis continues to grind on. As stocks continue to decline, Hal Finney receives a historic transaction from a mysterious man known only as Satoshi Nakamoto.
Nine days earlier, Satoshi had mined the first-ever bitcoin. Based on a system known as the blockchain, it offered the world its first alternative to central bank controlled fiat currencies.
Fast forward ten years. Bitcoin and other cryptocurrencies now enjoy unprecedented acceptance. It wasn’t easy – along the way, boom/bust cycles and hacker raids hurt confidence. Yet, as we write this in 2019, 1 BTC is worth 8,156 USD. That’s about 11.6 million times its initial worth in October 2009 – a mind-boggling figure!
Financial pundits have compared the mania around BTC to the tulip bulb fiasco of the 17th century. However, it has also done more than its share of good. Take Venezuela, for instance. In this formerly wealthy country, a horrendous hyperinflation crisis has raged on for several years now. Once plush salaries, like those made by engineers, have eroded away to tens of dollars per month.
Those unable to flee have turned to freelancing. On the web, many Venezuelans perform digital tasks in return for BTC. This has allowed them to survive even as the average salary can no longer buy staples like toilet paper.
But what if you don’t live in a failing state? For the rest of us, BTC and other altcoins have benefits beyond investing. Unlike fiat currency, you don’t have to route cryptocurrencies through the global banking system.
The tollgates erected by banks comprise a considerable portion of the expense of sending fiat currency. By and large, this rent-seeking behavior does not exist on blockchain exchanges. As a result, the cost of transfers via this method is markedly lower.
Exchange margins don’t exist if you’re not converting your BTC into another currency. All you pay is a nominal fee to your crypto transfer firm – compared to the status quo, it’s a bargain.
Or, will nation states do everything they can to block cryptocurrency?
Cryptocurrencies have come a long way from their days of facilitating transactions on the dark web. However, these would-be global mediums of exchange still face barriers to universal acceptance.
While its volatility has certainly dissuaded many retail investors, government interference is also a concern. The 2018 BTC crash had many contributing factors. However, it is widely believed rumors that South Korea would ban crypto trading set the dominoes in motion.
Crypto has now become an economic force. In response, regulation talk by government officials has ramped up. To be fair, only a handful of nations have banned cryptocurrencies – none of which are in the developed world.
However, any fantasies that cryptocurrency will upend the global financial system are rapidly evaporating. The United States was quickest to respond – the U.S. Treasury recognized BTC as a virtual currency in 2013. By 2015, the Commodity Futures Trading Commission licensed it as a commodity. In April 2018, Australia recognized BTC as money, but required exchanges to register with the Australian Transaction Reports and Analysis Centre.
After reviewing the different crypto policies of nations around the world, a mass crackdown appears unlikely. However, the creation of oversight mechanisms suggests the state is woke to the reality of cryptocurrency.
In the end, the will of the people always prevails
Barring an unforeseen Black Swan event, it appears fiat currency isn’t going anywhere anytime soon. Fortunately, neither are cryptocurrencies. Authorities in most nations are keeping a sharp eye on crypto – they aren’t banning it.
As blockchain technology improves and fintech innovation progresses, crypto exchange will only get better. Sadly, travel without a passport isn’t on the horizon. Thankfully, super-low cost cash transfers likely are.