Can Bitcoin only have a domestic use?

Bitcoin uses innovative technology to create an entirely new form of payments architecture. Coins are held in digital “wallets,” secured using advanced cryptographic techniques. To make a payment, international or domestic, the wallet owner simply sends coins directly to the recipient’s wallet. Payment transactions are collected in “blocks,” which are validated by the community of bitcoin users. A validated “block” is appended to a “chain” of blocks: once appended, it cannot be changed. The “blockchain” is thus a complete and irrevocable record of all payment transactions.

Advantages of using Bitcoin for international payments

Bitcoin settles transactions individually when they are initiated, though validation takes up to 10 minutes. It is thus just like a central bank’s real-time gross settlement (RTGS) system, save that it uses an international currency that is not issued by a government but created by the community of users. It bypasses existing intermediaries such as correspondent banks, and competes with central bank RTGS systems such as Fedwire. Unsurprisingly, therefore, central banks and intermediaries are examining Bitcoin’s technology to see if adopting it themselves would improve the timeliness and security of conventional international payment systems.

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For international businesses, purchasing and selling entirely in bitcoin eliminates the need to manage multiple currency accounts. All that is needed is a single bitcoin wallet to make payments anywhere in the world. The payments, although not instantaneous, are fast, secure and confidential. Cash flow risk is reduced because of fast settlement, and credit risk is eliminated since bitcoin payments require funds to be present in wallets at the time the payment is made. Transaction fees may also be lower than in conventional payment systems.

For businesses working in several countries, using bitcoin can streamline and simplify FX management. Using bitcoin can also be attractive for businesses working in countries experiencing currency volatility, since holding currency balances in a universal settlement currency such as bitcoin can help to protect from sudden adverse movements in local currency.

Disadvantages of Bitcoin for International Payments

However: Bitcoin is not yet widely accepted in many countries, and in some countries its use is illegal. It is thus difficult for companies to work entirely in bitcoin.7 Although businesses may accept international payments in bitcoin from their customers, there is no guarantee that customers will be able or willing to use bitcoin. So companies would probably need to offer alternative settlement in a conventional “hard” currency such as the U.S. dollar, British pound, euro, etc. And suppliers may be unwilling or unable to accept payments in bitcoin. International payments to employees and contractors, too, might need to be in local currency.

If a company is unable to work entirely in bitcoin, then using bitcoin for international payments incurs FX risk at both ends of a transaction. The sender exchanges conventional currency for bitcoin, then makes the payment in bitcoin; the recipient exchanges the bitcoin for conventional currency. Bitcoin’s exchange rate is highly volatile, so the exchange rate at which the sender obtains bitcoin could differ substantially from the exchange rate at which the recipient converts bitcoin to currency. Both therefore face potentially large losses (or similar gains) due to adverse exchange rate movements. Exchanging bitcoin for local currency immediately on receipt helps to reduce this risk, but it does not eliminate it.

Using bitcoin may also interfere with trade finance, as Bitcoin works entirely on a pre-funded basis. Proposals to use bitcoin to “transform” trade finance tend only to discuss security of payments for recipients, not payers’ need to obtain credit.8 As yet, there are few credit providers in the bitcoin world, though there are some peer-to-peer bitcoin lenders. Obtaining trade finance could therefore be problematic. It might be necessary to borrow in another currency, such as U.S. dollars, and convert it to bitcoin at the prevailing rate. This is easily done, since several exchanges offer USD-to-bitcoin conversion (and vice versa). However, converting borrowed funds exposes the borrower to additional FX risk.