Incoming remittances have made remarkable contributions to Vietnam’s economic growth. Philip Ziter, an attorney in the Ho Chi Minh City office of US-backed law firm Russin & Vecchi, provides an analysis of blockchain remittance-related investment opportunities for the country, as well as policy recommendations.
Most legal cross-border payments are made through a network of correspondent and intermediary banks or money transfer operators (MTOs). There is no central clearing system and these transactions can only take place during normal banking hours. Transactions are subject to processing fees from several intermediary banks. MTOs such as Western Union are a faster but more expensive alternative, often used by the unbanked.
Blockchain technology changes all that. Based on Distributed Ledger Technology (DLT), every transaction that occurs on a given network is logged. A perfect and identical record of each transfer is kept on the computers or “nodes” of each network. Transactions are grouped into “blocks” and recorded chronologically in a “chain”. All parts of a network can review previous entries.
Blockchain enables irrevocable, real-time, cross-border transmission. With low banking penetration, high demand for financial services, extremely high mobile penetration, and a developing financial infrastructure, the case for remittances using blockchain in Vietnam is strong.
Secure cross-border money transfers rely on banks and MTOs. Unregulated alternative funds transfer channels (i.e. the Hawala system) have been around for a long time, but they are strictly trust-based.
According to the World Bank, the average cost to send a remittance worldwide, regardless of method, was 6.94% in the first quarter of 2019. Remittance fees are specific to each transfer lane of funds (i.e. a pair of source country and destination country, e.g. the United States). -Vietnam). Using banks provides a high level of trust, but the costs are high. Exchange losses and processing fees average 9% of the transfer value. Using banks to make transfers is not always an option for largely unbanked populations in developing countries like Vietnam.
Blockchain has major advantages over banks or MTOs. On January 16, 2020, for example, an anonymous transfer of over $1.1 billion was sent with an indelible imprint within minutes. The transaction fee was 0.00005578 BTC – which at the time was worth 0.48 USD.
MTOs do not require access to a bank account, but are both inconvenient and expensive to operate. Workers who send their wages home often stand in line for hours. The costs incurred are significant.
Blockchain-powered transactions using DLT reduce costs by removing multiple middlemen. Blockchain-based remittance providers, like Coins.ph, have been successful in the Philippines. Local Vietnamese businesses have started to make progress but have yet to enter the mainstream.
How it works
A blockchain discount can take many forms. For example, a sender with a bank account starts by loading a crypto wallet (essentially an app) provided by the money transfer company. Fiat currency is used to buy cryptocurrency from the remittance company or a third-party exchange. An amount of cryptocurrency is then transferred to the recipient’s wallet in another country. The funds are then converted back into fiat and transferred to a bank account.
If one of the parties does not have a bank account, the flow changes. In some circumstances, an unbanked sender or receiver can interface with an ATM (e.g. convenience store chain, telco top-up card), bitcoin ATM, and even traditional ATMs. Recipients use codes that allow them to withdraw money without a card and even without a bank account.
Whatever the flow, the problems of knowing your customer and anti-money laundering rules are real and must be dealt with. Regulators take different approaches and, of course, the legal framework varies by jurisdiction. Vietnam’s legal framework is not yet complete.
With blockchain, users can easily and securely send money to family members or business partners in minutes at a fraction of the cost. The remitter, in an instant, can confirm his transaction, without the intervention of a third party, assured that it cannot be modified. Compared to traditional bank transfers, with slow processing times, labor hours and transfer fees, the value proposition is clear.
Market players are already moving into space. Most notably, MTO market leader Western Union has connected with blockchain startup and crypto wallet Coins.ph, making it easier for residents of the Philippines to receive remittances. Japan’s SBI Ripple Asia Co. and Vietnam’s TPBank have cooperated to launch a money transfer service on the Vietnam-Japan corridor using blockchain technology. According to an April 29, 2020 post on the Ripple website, “Today, TPBank processes billions of Japanese yen, which equals tens of millions of dollars per month from Japan to Vietnam via RippleNet. Remittances are real-time transfers and processed 24 hours a day, 7 days a week, a revolutionary system compared to traditional banking services. Vast opportunities for cooperation exist between agile fintechs and traditional financial institutions.
The value in Vietnam
Vietnam is among the top 10 countries in terms of remittance volume ($18.06 billion in 2021), accounting for 6% of Vietnam’s annual GDP. For reference, in 2019, Vietnam exported a total of 3.6 million tons of crude oil and received a payment worth $1.9 billion.
The main remittance corridors are dominated by the United States, which is home to around 2.2 million Vietnamese overseas. Cambodia hosts 600,000, Japan 371,000, France 350,000, Australia 300,000, Canada 250,000, Taiwan 200,000, Germany 170,000 and South Korea 170,000. This group is the main source of remittances to Vietnam.
Meanwhile, Japan hosts the most overseas Vietnamese workers with around 200,000 employees. Taiwan and South Korea are in second and third place with around 60,000 and 50,000 workers respectively. The average monthly income of Vietnamese workers in Japan and South Korea is around $1,000 to $1,200, with monthly salaries in Taiwan of $700 to $800. Multiplied by the number of workers, this equates to about $3.6 billion a year, a significant portion of which goes back to Vietnam. But workers face drawbacks and costly or risky options. Less costly and less confrontational alternatives can increase net remittances.
If blockchain remittance solutions can save overseas Vietnamese and foreign workers between 6 and 9% in fees, then in 2019 the additional net transfer received in Vietnam would have been 1 to 1, $5 billion based on the same transferred amount.
The regulatory landscape
Vietnam’s regulatory framework is incomplete. In November 2019, the State Bank of Vietnam issued an updated draft decree amending Decree No. 101/2012/ND-CP on non-cash payments.
An “international payment” is defined as a payment made between an offshore payment service provider and a payment service provider in Vietnam for the purpose of transferring/paying money between a sender/payer and a payee/recipient . Unlike the current decree, the draft decree expressly regulates international payments by money transfer companies.
Under the draft decree, parties to an international payment transaction are subject to Vietnamese laws on cybersecurity, taxation, anti-money laundering and anti-terrorist financing, consumer data protection, on exchange control and treaties signed by Vietnam on payment. The tightened requirements should make it easier for the government to support blockchain for remittances.
The path to follow
Crypto-to-fiat conversion (the exchange of crypto for government-issued currency and vice-versa): The global economy is still based on fiat currencies. By including a third currency (i.e. crypto) in an exchange transaction, there is a conversion fee. But blockchain-enabled peer-to-peer transactions remove the need for a wire transfer, so bank fees are saved, greatly reducing overall transfer costs. Private solutions with transparent on- and off-ramps (i.e. converting from fiat to cryptocurrency and back to fiat) will be key to mass adoption – this is an opportunity for investors. An example is Hit mewhich allows users to send and receive instant and secure borderless payments from a smartphone at no additional cost.
Complexity: Understanding and using cryptocurrencies and DLT is complicated. But experience will teach consumers how to navigate using cryptocurrencies. With time and experience, frankly, users’ need to understand how it works will diminish – an ideal solution just works without necessarily knowing how (think email or your cell phone – most people don’t know not how they work; they just work). This also represents an opportunity for investors.
Policy recommendations: There do not appear to be any major hurdles for blockchain-based remittance providers to provide a pathway for inbound remittances. However, the legal framework is neither stable nor comprehensive. Existing law does not expressly prohibit DLT-powered remittances to Vietnam, assuming funds transferred as cryptocurrency are not spent as cryptocurrency.
Even so, cryptocurrency regulation is incomplete. We are confident that additional government guidance and a legal framework will be provided in the medium term. In the meantime, the government should accelerate the implementation of a fintech sandbox for innovative technologies, including crypto/blockchain.
As first appeared in Vietnam Investment Review, 03/04/2020. Updated February 17, 2022.