Across Latin America, a fragmented payments landscape has resulted in low interoperability, often leading to high fees for both senders and receivers of payments. Regulators in the region are working — with varying progress and approaches — to enable real-time payment options that foster greater interoperability, increase financial inclusion, generate revenue for banks and businesses and help protect economies from global market volatility. With use cases like inbound remittance flows seen as a critical component of GDP for numerous LATAM countries, identifying ways to reduce costs associated with those remittances is a key driver of regional growth.
At the same time, central banks are becoming more interested in re-examining their relationship with crypto, creating an opening for the crypto and blockchain sectors to help bring forth a unified LATAM payments system to make low-cost, faster and more seamless transactions a real possibility. Of course, not all crypto is created equal. Using a digital asset that was designed specifically for payments will be key to implementing a successful digital payments system that can handle high transaction volumes without friction.
Latin America as a region is highly dependent on the US dollar: from US remittance flows and USD as a reserve currency, to economies like Costa Rica and El Salvador that use dollars interchangeably with local bills. Some LATAM businesses even use USD as a liquidity source by routing payments through American banks to transfer funds to international accounts within the region. This reliance on USD means crypto adoption in the States is likely to have a major impact on crypto adoption in Latin America.
There are also various new fintech players in the market that are working to get involved in consumer payments. From an awareness standpoint, for example, the sponsorship of football clubs across the region by crypto exchanges is helping to bolster public understanding of how to access crypto. Public adoption and embrace of crypto as an alternative to cash holdings or bank accounts is also gaining popularity in some countries as an easier, less volatile alternative to local currency. In one case, the use of crypto as an alternative to cash is being promoted by the government in El Salvador where the adoption of Bitcoin as legal tender is significant. And there are central banks, like that of Brazil and Mexico, that have recognized the value and potential of crypto and have started developing and providing their customers with digital wallets.
Because Brazil is often a leader in Latin America in the adoption of new technology, it’s worth noting that the country is driving smart and progressive crypto use and regulation. In March of 2022, Brazil announced that it had selected nine projects to advance in its quest to develop a Central Bank Digital Currency (CBDC), indicating a real thirst for a digital future. Brazil’s central bank has also been ahead of the curve in showing public-facing interest in the potential of DeFi, NFTs and even the metaverse. And in terms of consumer adoption, Brazil is seeing crypto trading activity boom, portending a bright crypto future for the region.
From a compliance perspective, businesses in the region are able to use the same fiat compliance measures, like Know Your Customer (KYC) and Anti-Money Laundering (AML), for crypto transactions to ensure the safety of these flows and help protect the integrity of the financial system.
Barriers and Challenges to Success
Because crypto has, at times, been perceived as a threat to the established bank sector — which has historically controlled the financial markets and influenced regulatory and legal structures in the region — any major movement toward crypto is likely to encounter some level of structural resistance. As payments infrastructure is often dictated by larger banks and their governmental relationships, this could make it difficult for digital banks to compete for market share on a level playing field. But, in fact, as we’ll describe below, crypto offers all kinds of financial institutions powerful new business opportunities.
From a consumer perspective, there is also a disconnect between traditional banking and the use of money for everyday transactions across many LATAM economies. Lower incomes often equate to less acceptance of fee-based banking services, meaning that both convenience and efficiency take a backseat to value in many markets. This can manifest itself in people being more willing to wait in line to pay cash rather than incur a fee for an online transaction that might be completed in seconds. Without implementing better ways to make digital payments and financial services available, large sections of the LATAM economy are often left underbanked.
Lastly, with such a high dependency on USD and US clearing institutions, as costs rise in the States, fear and volatility in the LATAM marketplace also rise. The possibility of insulation from other regions’ financial swings underscores a major reason why achieving interoperability across Latin America and avoiding the de-risking trend in the US is so critical for LATAM economies.
Opportunities and What’s Next
There is a lucrative opening for traditional banks, fintechs and governments to increase adoption of crypto-forward technology to address this underbanked and fragmented market. These challenges will be much easier to solve once digital banks have more ready access to the market, helping drive down high fees and frictions associated with institutionally-controlled transactions. This will also help move people away from physical cash and into the digital payments space — increasing convenience for consumers and creating new markets for both businesses and banks without heavy reliance on the traditional US banking sector.
The COVID-19 pandemic has had a significant impact on both consumers and banks in the region that have historically relied on cash transactions. Many financial institutions are already seeing growth in digital payments due to an uptick in cashless transactions as the region looks for safer, quicker and more convenient payments alternatives. An Americas Market Intelligence study shows that Brazil’s banked population grew to 88% in 2021 with Chile not far behind at 82%. Argentina, Colombia, Mexico, and Peru all experienced growth that year as well. The region will need to continue prioritizing foundational infrastructures like internet connection, electricity, and institutional trust for digital payments to remain viable and financially inclusive.
Smart and progressive regulation will beget further successful regulation — leading to increased innovation and progress around crypto across Latin America. In the wake of the regulatory debate happening in the United States, there is a large opportunity for banks and fintechs to work with regional regulators to create smart public policy frameworks to ensure that all boats rise.
LATAM is a diverse and varied region, with both developed and emerging economies breaking into the digital payments landscape to varying degrees. But by finding interoperability across the region, Latin America can become more financially independent, more financially attractive to outside investment, and more financially inclusive.
Learn how Ripple’s payments solution can help absorb price fluctuations, allowing for more certainty, visibility and transparency in real-time payments.
For the Love of NFTs: VSA Partners and Rare Air Media Bring Jordan NFTs to the XRPL
Non-Fungible Tokens, or NFTs, are creating tremendous opportunities for creators and collectors of art, memorabilia, and other digital assets. Since the initial launch of Ripple’s Creator Fund, we have seen incredible momentum and exciting NFT use cases come to life on the XRP Ledger (XRPL). Creators like Justin Bua, xPunks, and Sebring Revolution continue to prove out tokenization projects and capabilities for metaverses, gaming, art and beyond.
Making Waves in Media & Entertainment
Now Rare Air Media, producer of Michael Jordan’s visual autobiography For the Love of the Game, is getting into the NFT game, too. The company is working with VSA Partners, the premier creative agency partner to Ripple’s Creator Fund, to design, develop, and market a range of NFTs on the XRPL, including a one-of-a-kind selection of digital assets covering former NBA player Michael Jordan’s life and storied career. The first batch of NFTs is expected to hit the market in Q2 2022 and will include an intimate selection of original, momentous images of Michael Jordan, accompanied by his personal thoughts and observations leading up to the photo.
As additional use cases for programmable, functional NFTs continue to be built out and tested across industries, the media & entertainment space has been among the earliest adopters of the technology: expanding NFT use cases across music, sports, ticketing, access rights, and beyond. From celebrities like Snoop Dogg and Paris Hilton, to professional athletes like LeBron James, and major brands including Disney and the Grammys — it seems there is no shortage of possibilities for NFT applications in the industry.
High-profile brands, celebrities and their agencies have specialized needs when it comes to identity and ownership of digital assets. The unique security and identification attributes of distributed ledger technology have opened up extraordinary opportunities for creators of digital content to not only assign value to their work, but to profit from it and share behind-the-scenes stories with an even wider audience. With more and more collectors coming aboard the blockchain train, both sides of digital asset commerce can be confident in the assets they purchase and create.
Why Create NFTs on the XRPL?
The XRP Ledger has ease of use and native token functionality built-in by design. Released in January, NFT-Devnet — a beta environment built to enhance NFT support on the XRPL — lowers the technical barriers to entry for those looking to get started either creating and minting their own NFTs or on behalf of their customers and their brands.
A couple of the key benefits to using XRPL for NFT creation include:
- Speed: each transaction on the XRPL takes no more than 3-5 seconds to complete.
- Low Cost: at fractions of a penny per transaction, costs are inexpensive enough to enable a wide variety of NFT use cases.
- Sustainable: the XRPL is the first major blockchain to be carbon-neutral — maintaining neutrality since 2020 — and is more efficient than leading proof-of-work blockchains.
- Simplicity: NFT capabilities on the XRP Ledger pre-program all activities that an NFT user may wish to complete, including minting, burning, trading, requiring royalties, and more.
Created for All Creators
Whether you are new to the NFT space or are looking for a new ledger to build on, the XRPL is customizable to meet your NFT needs—large or small. As one contributor to the growing XRPL community, we’re working closely with developers, creators, marketplaces, creative agencies and brands to help define the future of NFTs and the tokenization of assets in a low-cost, sustainable and accessible way.
As the Creator Fund and its supported NFT projects continue to grow and gain momentum, especially across the media & entertainment industry, it’s likely we will continue to see expanded uses and partnerships take shape—not only on the XRPL but across the broader tokenization landscape as a whole.
CBDCs: From the “Hype” to the “How” of Making Financial Inclusion a Reality – Part 2
In our recent survey of over 1,600 financial leaders across 22 countries, we uncovered some pretty astounding insights: A whopping 85% of payment leaders at financial institutions globally think their country will launch a digital currency in the next four years.
If these last two years in a pandemic have taught us anything, it’s that time flies. So this begs the question: What needs to happen between now and four years from now in order to make those launches possible? It turns out there’s quite a bit to consider, not only as central bankers and commercial bankers, but as individuals as well.
In our first post on this topic, we discussed why the term “financial inclusion” has become such a buzzword when talking about Central Bank Digital Currencies (CBDCs), and how we at Ripple succinctly define it (hint: making financial services available to people who don’t have access to them today). While the insight gleaned from our research is promising and the uptick in global CBDC exploration encouraging, there is still much to be addressed in regards to how the implementation of these digital currencies will impact society, and what primary hurdles we need to collectively overcome in order to achieve that vision of a more financially inclusive future.
Key Use Cases: A Quick Recap
As a refresher, in the first post we identified three primary use cases where we see CBDCs having the biggest immediate impact on financial inclusion across the payments and financial landscape: cross-border remittances, access to peer-to-peer (P2P) loans, and the ability to establish credit history.
If properly planned for and implemented, the application of digital currency technology to these use cases has the potential to dramatically change the landscape for the better, making the world a more accessible and inclusive place. Across all of these use cases, however, there is a consistent set of practical hurdles to solve: education, user experience, identity, offline access and security. In the first post, we covered education and user experience, so let’s dive into identity, offline access and security, and how CBDCs can help clear these hurdles.
Key Hurdles to Implementation: Going Beyond the Hype
Developed countries require a national identity to open a bank account, which poses inclusivity problems in and of itself. For citizens who don’t have a family name, a passport, a driver’s license or any other form of identification, this presents a seemingly insurmountable hurdle. We need non-traditional ways of establishing identity for those people to gain access to financial services. With the use of a CBDC, those individuals would have the ability to be associated with a digital wallet, allowing them to meet basic Know Your Customer (KYC) requirements for identity verification. For example, in places where mobile phone usage is high but access to financial services is low, leveraging registered SIM cards and mobile phones as a way of proving identity for payments without a traditional ID number could help create a threshold to meet these requirements.
Even in countries like the US, there is ample opportunity for digital currency-backed solutions to improve current processes related to payments and identity. In the case of the pandemic, governments around the world were challenged to extend stimulus funds to those without bank accounts or because of technology limitations. Funds were delayed, or had to be issued by paper check—or people slipped through the cracks altogether. With a CBDC, stimulus monies could be distributed instantly and directly to every citizen with a mobile phone—regardless of bank account or ID status—via a digital wallet using similar SIM card/mobile methods.
In order to access and use CBDCs, internet access is required. CBDC usage will grow with internet usage through mobile devices, especially given the increasing rate of smartphone penetration throughout the world. However, implementing critical telecommunications infrastructure won’t be enough to match the pace of innovation needed to ensure constantly available internet access on a 24/7 basis. This goes for both developing nations and countries like the US, where currently 7% of all Americans say they don’t use the internet.
CBDC platform design needs to consider offline access. Having internet access as a prerequisite to success may harm CBDC adoption and usage, both for those without regular access to the internet and for instances where unexpected power outages occur or devices run out of battery, for example.
With this in mind, CBDCs that provide alternate solutions—particularly those that don’t require constant charging and can run without a direct power source or internet connection for consecutive days or weeks—and can accommodate offline scenarios will be critical to implementation. One example of how to solve for offline access could be a solution that mirrors the Indian e-Rupi, which leverages digital voucher mechanisms such as QR codes that can be printed offline and scanned to make retail purchases.
This is one idea of many being piloted, and we believe even better solutions will surface. As overall CBDC adoption and usage continues to grow, it will be critical for central banks and governments to proactively think about how to enable offline access, built in by design.
While the use of digital currencies and digital wallets holds a lot of promise for financial inclusion, it also poses potential security risks. With a bigger chunk of the global population making payments, transferring funds, and managing finances on their mobile devices, new vulnerabilities arise.
These security breaches can come in both physical and digital form. For example, simply leaving your phone at a restaurant or other public place, or having it stolen on public transportation. Virtual risks can include anything from phishing scams and social engineering hacks, to Denial-of-Service (DoS) and double-spend attacks. While a lot of people already use financial apps on their mobile devices and are aware of these risks, many do not and this will likely be a barrier to entry for those people.
Luckily there are ways to avoid and mitigate these risks with the use of CBDCs. One such solution is a blockchain-based CBDC that uses a multi-signature (“multi-sig”) wallet. This means at least two other trusted parties would hold credentials to that same wallet to help ensure no unauthorized use or access. These other trusted parties could be the central bank itself and/or family members or other contacts of the mobile device owner. Additionally, by imposing spending limits and methods to track transaction frequency when the CBDC user is offline, the impact of such attacks would be greatly reduced.
Paving a Path Forward
While there is work to be done to pave the way for a CBDC-driven future, the journey ahead is an exciting one and undoubtedly promises a more inclusive, sustainable financial system. Digital currencies offer many additional benefits that are currently unmatched in today’s financial landscape, and we’re confident that central banks, commercial banks, and society as a whole can work together to overcome the hurdles and create a clear path forward as we continue to prove out the technology, pilot projects around the world, and ensure equal and equitable access.
Download our CBDC whitepaper to learn more.
CBDCs: From the “Hype” to the “How” of Making Financial Inclusion a Reality – Part 1
We recently surveyed over 1,600 financial leaders across 22 countries and discovered that 37% of senior financial institution executives around the globe consider both “financial inclusion” and “greater access to credit” as the largest potential breakthroughs for Central Bank Digital Currencies (CBDCs). This echoes the stated goals of many countries and central banks that are actively exploring CBDCs or that have already launched pilots.
Clearly, CBDCs hold a lot of promise. But to paint a picture of a perfectly utopian digital currency-driven world without addressing the hurdles it will take to get there is not a realistic or useful approach. Implementing CBDCs is no small feat, and we’d be remiss to talk about them otherwise. That being said, it’s important to take a closer look at what the real-life use cases, hurdles and implications will be — not only for us as individuals, but for society as a whole — and how we can work together to take them from hype to reality.
Is “Financial Inclusion” Just a Buzzword?
It’s almost impossible to talk about CBDCs without mentioning financial inclusion. But lately, it seems as though the term financial inclusion has become more of a buzzword than a meaningful, tangible outcome. So what does financial inclusion actually mean, and why is everyone talking about it?
Here at Ripple, we define financial inclusion as making financial services available to people who don’t have access to them today and doing so in a way that is cost-effective and net financially positive for the people using those services. In this case, leveraging CBDC-enabled solutions to provide an easy way of doing things. This includes even the most basic of financial services, e.g. sending money to a friend or family member, having a secure place to store your money, etc. Not just for those in developing countries or those who are more tech-savvy, but everyone.
What Does This Actually Look Like in the Real World?
The opportunities of CBDCs are endless, but for brevity’s sake we’ve highlighted three key use cases where we see CBDCs having the biggest impact on the payments and financial landscape.
Efficient and Cost-Effective Cross-Border Remittances
Many countries around the world are making strides towards improving what have historically been inefficient and expensive cross-border payments. One example is The Kingdom of Bhutan and its central bank, the Royal Monetary Authority: As remittances (e.g. funds sent home by migrant workers) are an important component of their economy, the country is now turning to a CBDC solution to lower the cost and time involved in making these payments. They are taking a truly digital-first approach to solve these challenges and others as part of their financial inclusion journey.
Access to P2P Loans
In many parts of the world, particularly those that are still heavily cash-reliant, something as simple as a peer-to-peer (P2P) loan, e.g. loaning money to a friend or family member, could be made much faster, more efficient and secure with the use of a digital currency sent and received via a digital wallet. For many in today’s current landscape, this simple act can take upwards of a full day (or more) to complete.
Ability to Establish Credit History
In many parts of the world, citizens are unable to borrow money or take out a loan because they haven’t been able to establish a credit history. Typically this boils down to geography, leaving many of those citizens unbanked. The use of a CBDC would not only help provide a credit history, but a broader history with always-on access to resources regardless of physical location.
Key Hurdles to Implementation: Going Beyond the Hype
Together these CBDC use cases can have a powerful impact on financial inclusion. Across all of these use cases, however, there is a consistent set of practical hurdles to solve: education, user experience, identity, offline access and security. In this first post, we focus specifically on education and user experience.
There is a global educational gap when it comes to understanding digital currencies. Not only how to use them — including the possibilities, nuances, and required technical savvy — but also the why behind them. Onboarding people into a digital currency system who are unclear on how to use that system, nor what the benefits are of using it, will run the risk of low usage rates and financial exclusion for many.
Take China’s digital Yuan as an example. As one of the first to pilot and test a digital currency two years ago, user growth is increasing but is currently outpacing transaction volume. This is being attributed to limited access and incentive for use among both businesses and consumers, especially when compared to their existing mobile payments systems.
To help overcome this hurdle, the People’s Bank of China recently improved its app to make it more customer friendly and enable more users in certain regions to sign up and start using the digital Yuan. China and other regions taking a similar approach could take it a step further by providing basic in-app education to onboard users leveraging gamification techniques — one solution that could go a long way in getting consumers up to speed quickly. A play-to-earn model that ensures people know how to use the app or digital wallet before they start handling real money and digital currencies would be one way to ease people in, granting them further access and additional benefits as they go.
Depending on where you are in the world, dominant forms of payment vary across the board. In most developed countries, digital forms of payment like credit cards are likely the most dominant. In more developing countries, for example Kenya, mobile payments have become mainstream. Whatever the preferred form of payment between individuals and businesses, it offers a certain level of trust and always-on accessibility for users. Central banks must consider how a CBDC can be leveraged in a similar fashion by individuals from all backgrounds — including both foreign and domestic — making CBDCs as easy to use as cash and credit cards are today.
On the one hand, there are un/underbanked populations who are unaccustomed to using financial apps entirely. On the other, there is the complexity of many current digital asset wallets to consider, which are not intuitive even for people who have a lot of experience with mobile banking and stock trading apps. Understanding pain points like these will be key to driving CBDC adoption, especially given the steep learning curve that individuals face when utilizing cryptocurrencies. In this respect, ensuring accessibility for all will result in the need to create an intuitive user experience for consumers to navigate.
A few solutions for ensuring UX accessibility could include: tying identities to mobile phone numbers to simplify password proliferation; providing apps and other end-user services that can best align to specific customer needs; or providing direct, programmable customer channels from central banks to end-users. For example, a CBDC could provide a customer channel or user-friendly app through which central bankers could quickly and easily distribute stimulus payments to ensure more widespread distribution, ease of access, and help stimulate the economy.
Central banks and institutions alike will need to create a seamless user experience to help increase user interaction with a potential CBDC platform.
So What’s Next?
In our next post in this two-part series on how to make financial inclusion a reality with CBDCs, we will be looking at three other primary hurdles to overcome in order to bring these use cases to life: identity, offline access, and security. We are just beginning to scratch the surface of what a digital currency-backed system can achieve, and there is no doubt that as the technology and its many applications continue to expand and evolve, so too will our ability to understand and leverage these solutions to create a more inclusive financial system — overcoming the hurdles together as individuals, bankers, service providers and society as a whole.
Download our CBDC whitepaper to learn more.
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