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Saving on Money Transfer Fees with Cryptocurrency: It's Not So Simple

Saving on Money Transfer Fees with Cryptocurrency: It's Not So Simple

Traditional methods of transferring money across borders come with a variety of challenges— high fees and lengthy processing times being chief among them. This begs the question: can crypto currencies play a role here? Before answering this question, it is important to understand the Fiat-to-Crypto-to-Fiat Process in international transfers and the associated fees on crypto transfers. 

TL;DR

  • Sending money abroad using cryptocurrency "may" offer a more cost-efficient approach than traditional banks.
  • To get started, you'll need to use a crypto exchange like Binance or Coinbase, similar to an online forex bureau, to buy cryptocurrency.
  • The cryptocurrency is then sent to the recipient's digital wallet, where they can convert it back into their local currency using another crypto exchange.
  • The final amount depends on various fees such as gas fees, exchange/transaction fees, deposit, and withdrawal fees.
  • We illustrate these points with a real-life example of someone from the UK sending money to family in Kenya, detailed below in the article.

As you may have noticed, banks and money transfer services often charge high fees for international transactions. Additionally, it can take days for the transferred amount to reflect in the recipient's account. This begs the question: can cryptocurrencies play a role here?

Before answering this question, it is important to understand the Fiat-to-Crypto-to-Fiat process in international transfers. (Fiat money is just a fancy word for traditional currency like, pounds, dollars or shillings, backed by a government rather than a physical commodity like gold.

Fiat-to-Crypto-to-Fiat Process

In short: you need to buy cryptocurrency using your local fiat currency (e.g., GBP, USD, EUR). Then, transfer the cryptocurrency to the recipient's digital wallet. Finally, the recipient converts the cryptocurrency back to their local fiat currency. Simple, right?

However, it's not that straightforward. Several costs are associated with making these transactions:

  • Deposit Fees: Often minimal to none, especially for bank transfers to well-known exchanges. Using a debit or credit card could incur fees of 2-3%.
  • Exchange/Transaction Fees: Range from 0.1% to 0.5% depending on the exchange and the volume of the trade.
  • Gas Fees: Can vary but generally range from £1 to £10. They go to network miners for processing and validating transactions.
  • Withdrawal Fees: Range from 0.1% to 1%, and some exchanges also have a flat fee.

The difference Between Transaction and Gas Fees

Transaction Fees go to the exchange whereas gas fees go to the crypto chain's (network) miners for processing and validating the transaction, assumed to be £3 in our example.

A Real-World Example

Let's consider a case involving a £1,000 transfer from the UK to Kenya to understand the impact of fees. Suppose you work in a bank in England and are looking to send £1,000 to your parents in Kenya. How much will they actually receive if you use traditional banking versus cryptocurrencies like Bitcoin or Ethereum? We break down the costs for you.

Traditional Banking Method: Calculations

  1. You deposit £1000 to your account for wire transfer.
  2. Outgoing wire fee £20 charged by the sending bank, leaving £980 for transfer.
  3. Exchange rate margin: Mid-market rate is 1 GBP = 180 KES, but the bank offers 173 KES. So, £980 converts to 169,540 KES.
  4. Incoming wire fee: £10 or 1,800 KES charged by the Kenyan bank.

Final amount your parents receive: 169,540 KES - 1,800 KES = 167,740 KES.

Cryptocurrency Method: A Detailed Look

Let's assume: 1 GBP = 0.000047 BTC  and 1 BTC = 3,864,589.63 KES, BTC is an abbreviation for bitcoin. 

Costs/Fees

  • Deposit fee: The cost to deposit GBP into a crypto exchange, often zero in the UK.
  • Transaction/Exchange Fee: Assume the UK exchange charges a 0.5% fee for buying Bitcoin, costing £5.
  • Gas Fee: £3 equivalent in BTC. This is a network fee paid to the blockchain to process and validate your transaction.
  • Exchange/Withrawal Fee in Kenya: 0.1% fee for converting BTC to KES.

Calculations

  1. You deposit £1,000 into a crypto exchange, which gets converted into 0.047 BTC. 
  2. The exchange deducts the 0.5% transaction fee, leaving you with 0.046765 BTC (0.047 BTC - (0.047 BTC * 0.005)).
  3. You transfer 0.046765 BTC to Kenya. Let's say the gas fee is £3, which would be 0.000141 BTC (3 GBP * 0.000047 BTC/GBP). This leaves the Kenyan wallet with 0.046624 BTC (0.046765 BTC - 0.000141 BTC).
  4. Converting 0.046624 BTC to KES: 0.046624 BTC * 3,864,589.63 KES/BTC = 180,243.74 KES.
  5. Applying the 0.1% exchange fee in Kenya: 0.1% of 180,243.74 is 180.24 KES, leaving your parents with 180,063.5 KES.

There you have it. Using the updated exchange rates, a £1,000 transfer through traditional means could result in 167,740 KES, while using cryptocurrency could result in approximately 180,063.5 KES. About 80 GBP of savings. 

However it is not that simple - using cryptocurrency for transfers isn't risk-free. There are legal considerations, and the volatile nature of cryptocurrencies poses its own set of risks and rewards. A few but not all:

  • Cryptocurrency prices (or exchange rates) can be volatile.
  • Gas fees can change, affecting the total amount.
  • Both methods require using reputable financial institutions to mitigate risks.

Action Steps

  1. Research and choose a reputable crypto exchange.
  2. Create a digital wallet.
  3. Buy the chosen cryptocurrency.
  4. Transfer to the recipient's wallet.
  5. The recipient converts it back to local fiat currency using a local exchange