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Potential use cases of cryptocurrencies by Posts A White Paper on Postal Financial Inclusion Berne, April 2019
Original: English
Author: Saleh Khan, Programme Manager, Financial Inclusion
Author contact: saleh.khan@upu.int
Published in English, 08 April 2019
V2
TABLE OF CONTENTS
Postal Financial Inclusion 4
Possible use cases of cryptocurrencies by the Post 6
Use case 1 - Low cost and instantaneous inward remittance 8
Use case 2 - Managing direct cash transfer projects 10
Use case 3 - Facilitating G2P payments 14
Potential challenges and risks of adopting cryptocurrencies by Posts 16
Conclusions 20
List of Abbreviations Bibliography 22
Disclaimers 23
AML anti-money laundering
CBT cash based transfer
DLT distributed ledger technology
(used interchangeably with blockchain
for the purpose of this paper)
G2P Government to Person (payments)
KYC know your customer
PFCOIN (hypothetical) Post Finance Coin,
a postal cryptocurrency
Posts generic term used to define postal
service providers, or a Designated Postal
Operator in a country
SDG UN Sustainable Development Goals
UPU Universal Postal Union
Potential use cases of cryptocurrencies by Posts | A White Paper on Postal Financial Inclusion
The Post has held a central and trusted
role in society over the last few centuries.
It has done so by leveraging one of the
largest physical distribution networks in Building on their socially-
the world – with over 668,000 post office oriented mission and
branches and employing nearly 5.2 million universal service obligations,
POSTAL
people1 – offering unprecedented last-
mile access to deliver postal, social, and
Posts are well positioned
financial solutions. to address the three main
challenges that impede
Building on their socially-oriented mission
financial inclusion: access,
FINANCIAL
and universal service obligations, Posts are
well positioned to address the three main eligibility, and affordability.
challenges that impede financial inclusion:
access, eligibility, and affordability. A 2016
study finds that most postal operators Studies have shown that Posts are
INCLUSION
are already doing so. Nearly 90% of Posts comparatively better positioned than other
around the world provide some form financial institutions to provide financial
of financial service, either directly or in services to segments of the population
partnership with other financial institutions, that tend to be excluded, such as women
targeting groups that are typically (Rao 2015), migrants, and the economically
excluded from the formal financial system marginalized. An empirical study found
(Universal Postal Union (UPU) 2016). that the Post can play a significant role
in closing the financial inclusion gap
(Ansón, et al. 2018), and that the poor, the
less educated, and those in the informal
economy are more likely to use and
benefit from a postal financial account
(Allen, et al. 2012).
1
Postal statistics can be found at: http://www.upu.int/en/resources/postal-statistics/about-postal-statistics.html
5In order to manage the currency La Poste Tunisienne partnered with a Swiss
circulation and prevent illegal FinTech company in 2015 to implement
blockchain technology that moved the
transactions, La Poste Tunisienne national digital currency, eDinar, to a new
POSSIBLE USE
platform – eDinar Plus. However, given
has full control of the circulation the current regulatory framework of the
and issuance of the eDinar country, the underlying blockchain is used
as a notary mechanism rather than a true
Keeping pace with recent innovations, the cryptocurrency. The major innovation
CASES OF
UPU is examining the role that distributed is that, unlike other virtual wallets, the
ledger technology (DLT), blockchain and use of a “blockchain-inspired transaction
cryptocurrencies can play in the postal protocol” allows interoperability between
industry, as well as the role of the UPU and various telecom providers though a single
its members in enabling efficient delivery shared ledger system (Chakchouk 2017).
CRYPTOCURRENCIES
of services. We find that there are already
Based on our current experience, we find
some examples of Posts around the world
three potential use cases that leverage the
leveraging or experimenting with DLT to
core strength of the postal network and
provide financial and logistics services.
build upon work currently being done by
BY THE POST
A leading example is the eDinar from La Posts.
Poste Tunisienne, which allows individuals
to have a digital wallet, backed by a
physical prepaid smart card, without the
need to open a bank account. eDinar
is pegged to the national currency and
functions like a digital fiat currency. In
order to manage the currency circulation
and prevent illegal transactions, La
Poste Tunisienne has full control of the
circulation and issuance of the eDinar (La
Poste Tunisienne 2019).
6 7A clear case is the use of cryptocurrencies the Burundi National Postal Service is
providing a cost-efficient remittance
USE CASE 1
to provide secure, low-cost, near- Person A
instantaneous transfer of monetary value service for the Burundian diaspora, purchases 1 XRP
(cryptocurrency)
thought cryptocurrencies. The speed and supported by the UPU’s international at the spot price
low cost of transferring monetary value money transfer service (IFS2), in in country X
LOW-COST,
through cryptocurrencies makes it an ideal partnership with the International
choice for remittances. Organization for Migration and
RIA Money Transfer (International Sends XRP
The World Bank estimates that the current Organization for Migration (IOM) 2018). directly
INSTANTANEOUS
average cost of remittances is around 7%, to the wallet
From a digital currency perspective, of Person B
which is much higher than the 3% target La Poste Tunisienne allows inward
set in the SDGs for 2030. A recent pilot remittances from Western Union to be Person B
by Ripple, a FinTech company, facilitating
INWARD REMITTANCE
transferred directly to individual pre-paid receives 1 XRP
cross-border remittances from the eDinar cards (La Poste Tunisienne 2019). in their
United States to Mexico, reduced foreign mobile wallet
currency exchange costs by 40 to 70% and With the success and uptake of these in country B
finalized the transfer in an average of two products, the Post could explore
Person B
minutes (Mejia-Ricart, Tellez and Nicoli alternatives such as cryptocurrency- goes to
2019). Offering improved transparency based money transfers. The Post, the Post to
and traceability to help overcome KYC/ leveraging its extensive network of cash out in
local Fiat currency
AML requirements, the use of DLT and physical outlets, can play the role of cash
cryptocurrencies might be the future of merchant by exchanging cryptocurrency
remittances. for fiat currency for its customers. Post converts
1 XRP to USD
The UPU is focusing on remittances as As shown in Figure 1 below, a beneficiary and USD to
a priority product as part of its financial (Person B) receives cryptocurrency (we local fiat currency
inclusion programme, and as a part use Ripple – XRP – as an example), from at the spot rate
of its priority policy for postal services Person A nearly instantaneously. Person
development. Currently, 124 of the 180 B then goes to the nearest post office,
Posts that offer financial services have where he/she is given local fiat currency
a remittance-related product (Universal at the spot rate in cash, or as a transfer Post provides
Postal Union (UPU) 2016). As examples, to their Post Bank account. This reduces local fiat currency
to Person B
transaction time and cost though the
use of cryptocurrency, where transfers
through the XRP network are near
instantaneous (Kraken n.d.). The ability
to transact at the nearest post office,
often in rural locations, also reduces the
Or directly deposits
opportunity cost for Person B.
local fiat currency
into Person B’s
Postal Account
2
UPU’s International Financial System (IFS) facilitates money orders between Posts:
Figure 1: cross-border remittances using cryptocurrency
http://www.ptc.upu.int/ps/ifs.shtml
to fiat currency transactions
9Potential use cases of cryptocurrencies by Posts | A White Paper on Postal Financial Inclusion
USE CASE 2 A recent report issued by the Better
Than Cash Alliance (BTCA) states that
direct cash transfer to beneficiaries serves
MANAGING DIRECT
predetermined objectives, but the choice
The Post already plays a key role in
of transfer methods should be flexible to
responding to natural and man-made
meet the needs of beneficiaries. Three
disasters. Posts are the last-mile service
UN agencies – UNICEF, UNHCR, and
providers to the unbanked and people
CASH TRANSFER
WFP – delivered more than half of the
without identification. Given their
world’s humanitarian cash assistance
extensive network, post offices and mail
programmes. These agencies have
processing centres can act as distribution
developed extensive mechanisms to
PROJECTS
points for emergency supplies, and postal
improve transparency on the use of the
services can help coordinate emergency
assistance, and minimize the potential for
aid operations and provide much needed
fraud and corruption. The same report
money transfers to victims in affected
states that cash-based transfer (CBT)
areas, as well as a basic means of
programmes are steadily increasing in the
communication3. Thanks to this network,
light of the humanitarian crisis around the
augmented by on-the-ground staff
world, and increasingly the transfers are
presence, the Post can play a key role in
made to mobile wallets or bank accounts
facilitating the delivery of, and monitoring
with debit cards (Better Than Cash
the effective use of, CBT programmes.
Alliance (BTCA) 2018).
As a potential use case, outlined in Figure
2 below, we hypothesize the creation of
a closed loop cryptocurrency – a Post
Posts are the last Finance Coin or PFCOIN – a hypothetical
mile service providers stable coin tethered to the local fiat
currency. Using these PFCOINs, the Post
to the unbanked can play a financial intermediary and
monitoring agent role for humanitarian
and people without assistance agencies in post-conflict or
identification. post-disaster scenarios.
3
Role of the post in responding to disasters: http://www.upu.int/en/activities/disaster-risk-manage
ment-in-the-postal-sector/about-disaster-risk-management-in-the-postal-sector.html
11The salient points are:
1
2
1 The Post plays a financial
intermediary and monitoring agent Post transfers
PFCOIN to
role, where the donor transmits a beneficiaries'
beneficiary list and correspondent Beneficiary list
smart phone
and cash transfer
funds to the Post, which then issues
an equivalent amount of PFCOIN to
the beneficiary’s mobile wallet.
The PFCOIN are exchanged for
2 Creates a fixed
goods (food, clothing, supplies) or amount
services (school fees, other fees) at of postal
designated businesses. The use of cryptocurrency
(PFCOIN)
PFCOIN ensures that the funds are Beneficiary
Donor from
spent at designated businesses for identification
HQ approves
humanitarian assistance purposes, & monitoring
grant amount
preventing diversion to non- and beneficiary
intended or illegal use, as can be list
Receives equivalent fiat currency
the case for cash.
Transfers PFCOIN to Post
5
Real time verification
The PFCOIN are redeemed at the
3 of spent & use of funds
Post by the businesses, in exchange
for fiat currency.
4 The entire transaction – from
transfer of PFCOIN to purchase – is
recorded on a DLT that the donor PFCOIN transfer
can monitor and verify, thereby 4 in exchange for
3 goods & services
reducing the risk of fraud or misuse
of humanitarian assistance funds
by diversion to non-intended DLT
Beneficiary
purchases.
purchases
goods & services
at pre-approved
On the ground, postal staff can business with
5 PFCOIN
perform KYC/AML and identity
verifications, as well as monitoring Transaction recorded
the use of PFCOIN transactions in on blockchain
approved businesses.
Figure 2: Closed-loop postal cryptocurrency solutionUSE CASE 3
UPU figures show that 87 postal operators
worldwide provide checking or savings
accounts to their clients. Together, Around the world, governments are
these Posts hold 1.96 billion accounts already using mobile money solutions
FACILITATING G2P for a total of about 1 billion customers
(Universal Postal Union (UPU) 2016). These
postal accounts are often held by the
as an efficient means to transfer G2P
payments to beneficiaries. Enabling
these G2P transactions through a DLT
Some G2P payments, such as agro-
subsidies that already rely on closed-
marginalized and vulnerable segments
PAYMENTS
will allow an added layer of transparency loop systems, could be paid out though
of the populations, and serve as an and traceability for salaries, pensions PFCOIN, redeemable at partner agro-
efficient route for government-to-person and benefits. Cryptocurrency-based G2P dealers. Similarly, PFCOIN could be used
(G2P) payments such as salaries, benefits, payments could be made through any of to ensure that education allowances are
pensions, and subsidies. The UPU’s study the following channels: only spent at approved bookstores. This
shows that 108 out of the 180 Posts that
could help prevent the potential misuse
offer financial services to their clients
digital fiat currencies (which of funds, or purchasing sub-standard
provide cash agent services for G2P
provide the safest protection products.
payments (Universal Postal Union (UPU)
2016). against cross-currency fluctuation
for economically vulnerable
As examples, Egypt Post facilitates the populations);
payment of civil servant salaries and
pensions through postal accounts. These
UPU figures show that
accounts are operated though over-the- stable cryptocurrencies, directly to 87 postal operators
counter cash withdrawals, debit cards and the e-wallet of the beneficiaries; or
ATM transactions, or though credit cards worldwide provide
issued by the Post. Similarly, in Nigeria, checking or savings
to further the government’s efforts to local postal cryptocurrency
provide a social safety net, Nigeria Post (PFCOIN, as outlined above),
accounts to their
(NIPOST) is the dedicated cash handling
and transfer agent in three states for
providing a closed-loop benefit clients. Together,
system for beneficiaries.
National Cash Transfer payments (The these Posts hold
Nation 2019).
1.96 billion accounts
for a total of about
1 billion customers.
15Since the inception of Bitcoin in Volatility: as a currency that can be Adoption / Acceptability:
2009, and in the 10 years since, exchanged for goods and services in the cryptocurrencies are starting to make
cryptocurrencies have attracted the physical world, cryptocurrencies need an entry into mainstream financial
attention of investors, consumers, to be readily and reliably exchanged discourse. Bitcoin, the most famous of all
tech adopters, and of course against fiat currencies, which the most cryptocurrencies, is almost a household
POTENTIAL
regulators. But, by their very definition, major economies rely on (USD, EUR, and name now. The use of cryptocurrency
cryptocurrencies remain outside so on). Because cryptocurrencies are not as a medium of exchange, however,
the purview of any single national under the purview of any single regulator, is still limited to early adopters. As
financial regulator. In recent times and because there are no mechanisms the movement grows, the technology
CHALLENGES AND
they have spurred much debate on to manage price volatilities versus other matures, and use cases develop, more
whether these new forms of currencies currencies, the value of cryptocurrencies merchants will be willing to accept
are a store of value, or a medium against fiat currencies remains at the cryptocurrencies in lieu of fiat. Until mass
of exchange that is an alternative to mercy of market forces, and is susceptible adoption happens, users are likely to
physical currency and e-currency. to external news and misinformation immediately cash out into fiat currencies
RISKS OF THE
(Bank for International Settlements (BIS) when receiving a cryptocurrency transfer,
There are some inherent limitations 2018). Large intra-day movement in the in order to have more flexible options
to the use of cryptocurrencies as a exchange value against fiat currencies of spending their funds. This might
medium for financial value exchange. can translate to exchange rate risks pose a liquidity issue for Posts that offer
There are numerous publications that being passed on to either party in a cryptocurrency-based services, calling for
ADOPTION OF
outline the challenges and limitations transaction, should they choose to store more mature treasury management.
of the most common cryptocurrencies, the cryptocurrency for any length of time.
but we will focus on four key aspects Digital fiat currencies, however, should
that might directly impact their use by While cross-currency devaluation is not have a quicker acceptance curve with
Posts: unique to the cryptocurrency world, almost zero treasury risks for Posts.
CRYPTOCURRENCIES
the large intra-day volatility typical Uptake would be limited only by the
of cryptocurrencies means that Posts capital investment needed for point-of-
would have to put in place and monitor sale (POS) machines, and underlying IT
effective hedges to manage their treasury infrastructure.
operations.
BY POSTS
Through their presence in rural
communities and peri-urban areas, and
by leveraging their existing financial
literacy programmes, Posts could help
make communities and individuals
aware of the uses of cryptocurrencies,
mechanisms to do so, and the advantages
of using digital currencies over paper-
based currency, thereby increasing uptake
and adoption across a wide segment of
the population.
17Regulatory framework: regulators Platforms & technology:
are starting to put in place mechanisms cryptocurrencies and digital currencies
to safeguard both individuals and offer a mobile-first approach towards
monetary systems. A key risk in current managing finances and facilitating
cryptocurrency technology is the commerce. This allows client service
irreversibility of transactions, which providers, such as Posts, to leverage
do not offer client protection against cloud-based software-as-a-service
fraud or theft. The absence of national (SAAS) and platform-as-a-service (PAAS)
or international regulatory oversight offerings to minimize hardware and
on cryptocurrencies, coupled with the infrastructure investments. However, there
absence of a central clearing house to are investments to be made in digitizing
monitor/restrict cross-border currency back office and treasury functions, training
flow, is a challenge for economies that staff, and creating client interfaces to allow
have non-convertible currencies, as well a seamless user experience.
as those that have restrictive monetary
policies. Posts that are already providing digital
financial services (DFS) to their clients will
Posts that wish to offer services in the be able to capitalize on their investments
digital currency and cryptocurrency space to easily provide digital currency solutions
will need to pay attention to current and to their clients. Others will have to
emerging regulatory guidance. Often, continue on their path towards digital
this might mean building in the agility transformation, with the assistance of
to respond to regulatory requirements the UPU, which has already started to
without incurring large capital implement the Digital Transformation
investments. Posts should weigh the risks Agenda recognizing the potential of ICT
of regulatory guidance before offering for development4.
these services.
4
More about UPU’s electronic services: http://www.upu.int/en/activities/electronic-services/about-electronic-services.html
19There are potential use cases for Posts to
leverage cryptocurrencies, digital currencies
and fiat digital currencies to provide The need for an evidence-driven business
financial services to their clients. In most case becomes more compelling when
cases, these will augment and provide cost- one assesses the growing number of
effective alternatives to current products innovative initiatives that leverage the
and services. In certain cases, using DLT inherent strengths and merits of DLT
and blockchain, the Post can provide an and cryptocurrencies to address human
added layer of transparency, accountability development challenges, with limited
and traceability to its services.
CONCLUSIONS
evidence on the actual development impact
There is also a clear case for governments of using such technologies (Burg, Murphy
and development partners to leverage the and Pétraud 2018).
core strengths of the Post to deliver cost- To fulfil its mandate as a global,
efficient, transparent, accountable social intergovernmental development
and financial services. organization, the UPU intends to strengthen
But Posts should not rush into these its partnerships with key stakeholders in
services and technologies for adoption’s this emerging area, in order to better serve
sake only. There needs to be a clear and its member countries and constituents.
sustainable business growth driver behind The UPU will strengthen and build upon its
each new product or service offered. current technical assistance and knowledge
advisory programmes in financial inclusion
and postal technology, to become a centre
of excellence for financial service delivery
by the postal industry.
Using DLT and
blockchain, the Post
can provide an added
layer of transparency,
accountability, and
traceability to its
services.
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DISCLAIMERS
Accounts. Washington DC: The World Bank. Paying across borders - Can distributed ledgers bring us closer This White Paper does not represent an endorsement
together? . 26 03. https://blogs.worldbank.org/psd/paying- of any specific cryptocurrency, technology, or product
Ansón, José, Alexandre Berthaud, Leora Klapper, and Dorothe by the UPU, the UPU International Bureau, or any of
across-borders-can-distributed-ledgers-bring-us-closer-
Singer. 2018. “Financial Inclusion and the Role of the Post the UPU’s member countries. It is a draft, for discussion
together.
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Asian Development Bank Institute. Bern: UPU & UN Women.
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cryptocurrency-deposits-take- .
Design: UPU Graphic Arts Unit | Sonja Denovski
Cover photo: unsplash.com | Dmitry Moraine
Photo (pages 13 and 19): unsplash.com | Markus SpiskeUNIVERSAL POSTAL UNION
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