Khan: Innovation is the tail that’s wagging regulations
By Sabith Khan
More than 90 percent of the transfers of remittances, money sent by migrants to their home countries, take place in cash. The total estimated volume of remittances is over $700 billion per year, according to the World Bank. And much of this money is not regulated in the traditional sense because it is extremely hard, if not impossible, to track the cash.
Customers — those who send money — want fast, cheap and secure transfers. They don’t care what medium is used. On the other hand, regulators need to make sure that the money sent does not end up in the wrong hands — money launderers or other criminals.
So, we have a problem here, with regulators and customers wanting different outcomes.
Technology is fast emerging as the solution. If governments around the world can work fast enough to learn how to regulate this space, there can be a win-win for all parties.
Cryptocurrency remittances are taking place between people living in Europe and parts of Latin America. Many migrants send bitcoin to their relatives or friends rather than U.S. dollars, as the latter are tracked closely.
One can end up in trouble if U.S. dollars over a certain limit are sent to some parts of the world. Cryptocurrency remittances are proving to be fast, efficient and safe for the senders and recipients.
In my research on remittances to India and Mexico, two of the countries that receive the most, I found that transfer technologies have evolved more rapidly. While human networks of the hawala money-transfer system existed and still operate rather seamlessly, they are coming under increasing scrutiny in a post-9/11 world, where any undocumented transaction is viewed with suspicion.
All these changes are taking place at a time when many governments around the world are discouraging the use of cash. Governments — including our own — want their citizens to use digital platforms and bank accounts to make transactions they deem traceable and safe.
There is an implicit understanding among money-transfer practitioners that there is a war on cash. As the war on terror became more aggressive in the post-9/11 world, cash transactions were the first to come under close scrutiny. In quasi-states or states that are failing, cash is often the only way to function. This is clearly visible in Afghanistan, Somalia and other such nation-states. One can argue that cash provides liquidity and legitimacy for those who seek to govern these places. However, it is seen with increasing suspicion due to its fluid nature. Cash cannot be easily tracked and can be counterfeited, making it harder to regulate.
As George Mason University economics professor Lawrence White explains, the war on cash is an exaggeration. Rather, governments around the world have instituted policies that discourage the use of cash as they prefer that citizens use an electronic payment system. He points to Harvard University economist Kenneth Rogoff’s assertion that there need not be a war on all cash, but only on high-denomination bills.
This is what the Indian government did in its demonetization efforts in 2016 when it announced it would take billions of 500- and 1,000-rupee banknotes out of circulation. This effort, which shocked the Indian economy and is reported to have cost over 1.5 million jobs, did not accomplish the stated objectives, including uncovering illegal cash stashed away by greedy businessmen. It is clear that the war on cash is not a great idea. Far from it.
While innovations involving blockchain and related technologies are emerging and are winning the public’s support, governments around the world seem to be lagging behind in crafting legislation and policies intended to make their functioning smoother.
My research points to the need for greater coordination among practitioners and the government sector to craft regulations and policies that are more conducive to innovation. With $700 billion at stake, it’s time to act.
• Sabith Khan is the director of the Master of Public Policy and Administration Program and an assistant professor in the School of Management at California Lutheran University.