Why is it So Hard to Move Money? (S1E10) Transcript Samantha [0:03]: Hi I’m Samantha Yap, and I help blockchain and cryptocurrency companies tell their stories. I’m really passionate about demystifying emerging technologies and making it easy to understand for everyone.  I’m embarking on a journey to discover the history of money, in order to better understand where money is heading today. In this series we’ll explore why Bitcoin, digital currencies and decentralised finance may play an important role in our future.  Come join me on The Story of Money, by YAP Cast. Samantha [0:31]: We are only now beginning to understand the nuances of what money is, and some of the lessons we're learning can be drawn from outside the shiny towers of Wall Street and the city in London. Take for example, Hawala. Hawala is the commonly used term for the informal transfer of funds, usually across countries and mostly, but not always, among the unbanked. If you've ever tried to move money by your bank, you'll know the hassle and the expense, it's likely to take a couple of days on your pay through the nose for it often several times, both for the movement of money between places and the movement of money between currencies. You'll also be temporarily out of pocket while the money will be in the bank's hands for possibly several days.  Hawala is, therefore, popular among people wanting to send money to family overseas. It beats the banks hands down, because it's faster and cheaper. It's also less painful. A Hawaladar, the person arranging the transfer will take your money, give you a code, you pass that code on to the recipient, and they go to their local Hawaladar, hand over the code and boom, the money appears, as if by magic. So how does the system work? And why does it work so well? And why aren't we all doing it?  Samantha [2:00]: Well, the Hawala system is an informal network of individuals usually running shops doing other things as well, who essentially move IOU's around people they trust and which they settle in whatever way suits them the best. What's key here is trust. The two trust each other. Hawaladars only deal with Hawaladars they trust, so they may be family members, or friends or friends of friends. Honour is also important. Hawaladars have none of the image of money lenders or loan sharks or cheats. The system only works if everyone involved trusts the other. Everything depends on the respectability of the Hawaladar.  Hawala has become the term to use for systems and networks going back centuries, predating paper money to China's Tang Dynasty to the Arab world and South Asia, and even to Europe, where it gave rise to the bill of exchange, a cornerstone of the rise of banking. In fact, the bill of exchange is very similar to the Hawala in the sense that it's an obligation addressed to a person. When they receive that bill of exchange, they must do whatever demands pay to the recipient or pay on to some other person. South Asia beat the Italians to the punch on this with their Hundi, a bill of exchange that dates back to the times of the Hindu religious scriptures and was used by the British colonialists until they outlawed the system in the 19th century in preference of their own banking system. Hawala - it is believed to emerge from the ashes of that crackdown as an informal means of transferring money. Despite its longevity, and effectiveness, the Hawala has had a bad rep.  Samantha [3:43]: George W. Bush blamed it for financing terrorism after 911 calling it a foreign scourge. Even in India, in some ways, its homeland, it's not a popular word, and it's associated with sleazy politicians using it to transfer their ill-gotten gains. This is still going on, according to some, but it's still going strong, and despite the accusations and sleaze, it's still a very popular way to move money between countries. And that tells us something to learn from this. But Transferwise, now Wise, admired enough to model its system on it, money transfer without money movement, and some have said that Bitcoin owes its roots to Hawala. There are certainly some similarities, both bypassing the traditional banking system middlemen and capital restrictions, both aimed to remove or reduce commissions and currency exchange fees. Neither needs a trusted central authority, and they have both faced down the steely glare of regulators. So what does a wallet tell us about what money is and isn't a natural partner or precursor to cryptocurrencies? Maybe the question is whether the notion of financial inclusion and banking the unbanked misses the point? That people don't need banks because they have Hawala? If so, do they need crypto? Let's bring in George, our esteemed expert on such matters, who knows more about Hawala than he'd care to admit. George is the co-founder of Step Finance and head of decentralised finance at Yap Global. He is a returning guest on The Story of Money and is a well-known builder of the world's first crypto remittance startup.  Samantha [5:08]: George, welcome back to YAP Cast. We're so glad to have you again. George [5:11]:  Thanks for having me. So what's on the menu today? Samantha [5:13]:  So we're going to  be talking about why it is so hard to move money around the world. I'm going to be asking you why people move money, the problems with it, and looking ahead into the future, and what's the best way of moving money globally.  George [5:27]: Sounds great. Let's get started.  Samantha [5:28]: So I've lived in many different countries. I used to live in Australia, Malaysia, Singapore, and now the UK. And every time I move to a different country, I have to transfer my money over and exchange it for the local currency. I've been doing that for pretty much my whole life. So why do people need to move money around the world? George [5:51]: Well, there's some countries where a majority of the population is living outside the country. Places in Southeast Asia, South Asia are pretty predominant for this kind of thing where you might have millions of people living overseas for work, maybe they're working there for like 10 years, or even more in some cases, and they need to move money back home. So ultimately, a lot of these money flows are driven by migration. I'm here in the UAE at the moment, and I think 80% of the population is not from the UAE, they're actually migrants. So, here is a good example of a place where there's a lot of people that are sending money back to their home country, wherever that might be. Samantha [6:30]: Right. So I think an important part of this is the fact that every country right now has their own local currency. And so, with these migration flows, everyone still needs to exchange their money for the local currency. What are your thoughts on this system? George [6:49]: Often, it might vary between countries. So you'll often see some of the big companies that you might have heard of, say, Western Union or Moneygram. These are some of the key transfer mechanisms that people use when they're sending money around the world and these companies have been in business over a 100 years doing this whole money transfer thing. It might vary from country to country, but there's often similarities. Often, it's cash. When people get paid in cash in most of these places, they want to send it back to their home country. And in many cases, that's a developing country, and often, there's not a developed financial system there. So you know, people have to go cash-to-cash.  So it means that you need to go and visit some sort of local shop You give your money there in cash, you tell them where you want to send it in the world, they'll charge you some fee, and then your family will be able to pick the money up at the other end, usually in cash. We're seeing that changing, I guess. Over the last few years, with more digital payments, maybe apps coming into it. But really, the whole system is very fragmented. I was at a conference a few years ago, and they said that there's 2,000 money transfer mechanisms in the world. So that's including banking as one mechanism, and only 3% are connected together. So that gives you a reference point where there might be lots of these little local forms of payments, or however it might work there. But often, they're not really connected together, and that's one of the problems. So it's very hit and miss. Samantha [8:16]: Yeah, it's a good point you raised about how most money transfers happened with cash. In the UK and EU region, everyone's quite used to being cashless, everything is on mobile banking and online. And it's an interesting reminder that for most countries, I'd say that it's mainly cash. George [8:36]: Yeah, you'd be surprised. The last time I looked at the World Bank studies, they usually put out every year, I think it's maybe twice a year, they put out how money moves and global remittances. And they're the only source of data on these kinds of things. Generally, the vast majority of about $700 billion around the world annually, is moved via cash mechanisms. Now often that might be digitised at various stages along the way, but predominantly, it's cash. And that's because in many countries around the world, not everyone has a bank account. In Indonesia, only 10 to 20% of the population have a bank account. So, what are the other 80% doing? Well, they have to use these local payment mechanisms. But ultimately, it's usually cash. And you might think, during this pandemic times that cash would become less useful. Well, actually, if you look at the numbers, there's more cash in circulation now than there was in five years and the graph just keeps going up. So that's an interesting thing.  Samantha  [9:33]: Why do you think it's increased over the last five years?  George [9:37]: Often, it can just be hard to deal with other payment mechanisms. So for example, many of the online systems you might need identification. And in many countries around the world, people just don't have identification. They don't have a passport, they don't have a driver's licence. They don't have any digital form of identification, so they can't just go and sign up to Transferwise, or Wise, now, because they don't have any of that. So you just have to use the mechanisms which you have. And often that's cash, I guess.  One, there's a barrier to entry for people to use these digital mechanisms. And maybe number two, in many cases, kind of governments aren't really set up to go digital yet, and there's still a lot of like, remember, there's 200 countries around the world. And a lot of them don't have adequate financial systems at all. So, all they can really do is manage the supply of cash, and that's something which a lot of people are familiar with. If you have the cash, you have the cash. If you don't, you don't, it's very simple. Samantha [10:33]: Yeah, you made a good point there on how some people just don't have either identification, or passport, or perhaps even a Visa to set up a bank account. I'm here in the UK, and when I first moved here, to sort out my bank account, I needed proof of address, and then obviously, my identification. But I was still looking for a place to stay, so I wasn't able to open a bank account. But also, I wasn't able to also prove that I have a bank account to even rent. So yeah, opening a bank account in the UK has its challenges, which I imagine is the same for multiple banks around the world. George [11:13]: Yeah, absolutely, and it can get a lot worse than that. I've been to some countries where you can get a bank account in 15 minutes, and then some where it's like, "Look, forget it, you know, come back in a month's time, and then maybe you'll have a bank account". So definitely mileage may vary.  Samantha [11:28]: And in the interim, then that's why you need cash. George [11:31]: Absolutely. Like how you're going to live, what are you going to do? Or how are you going to get paid? So cash works, right? It's like you have it or you don't. Samantha [11:38]: So we spoke about the Hawala system earlier, and I'd love to hear what you know about the history of money moving around the world before banks were even created. George [11:47]: So Hawala is a word to describe a process, which has been around for 1,000s of years now, actually. It's pretty much the first form of money transfers that ever existed. I think the roots go back to ancient Mesopotamia, one of the first societies in the world. But Hawala is basically when you pay someone, and then they pay someone else, and then maybe they pay your end recipient. Because the problem often is that I'm in location A, and I need to pay someone in location B, but I can't actually go and send the money. Imagine we're back 4,000 years ago. How am I going to send the money? I need to get on a horse and go and take some gold coins 1,000 kilometres away. So often, the best way to do it is, "Look, well, I know someone who's heading that way, or know somebody, I'll pay them". And then they'll go and pay my intermediary at the other end.  So it's a trust-based system, and you often can't really track these flows as well. So I mentioned the World Bank before and the $700 billion annual that's usually transacted in remittances, that's an official channel. There have been studies that said  the unofficial channels are maybe double that number, which is huge when you think about it. Because, often, if you need to send money to a country, which is either expensive to get money to, maybe there's no banks or maybe there's sanctions or something like that, how are you going to do it? It's all through Hawala.  Samantha [13:13]: How would you know if Person A is going to  give it to Person B? George [13:16]: It's all a reputation system - do you know a guy who's a good guy who can get their money there? Pretty much, right? So, you see these reputation systems started up online over the last couple of decades: eBay rating, your Uber rating, these are all reputation systems. So reputation is an effective means of doing things. Because certainly, if your business is sending money for people on behalf of somebody else, you certainly want to keep your good reputation. Otherwise, you'll be out of business. There is an incentive there to be a trustworthy person to deal with. But obviously, there can be gaps, in any sort of trust-based system. But on the whole, given that it stood the test of time, it seems that people are willing to engage with the system, often much more than they would through banking systems. Samantha [14:03]: That's interesting. Have you seen a Hawala system carried out? George [14:08]: Oh, yeah, many times, I'd spent some time in Tajikistan with the UN and part of the job there was to look at the money transfer systems there. And in many cases, it's people that have bags of cash, and they need to send them to somebody else in another town or village. And the only way to get there really is via taxi drivers. So often, they would like to give the cash to the taxi driver, the taxi driver would physically drive to the other town, and they would go and deliver the cash. And that was better than the banking system, because people just didn't have bank accounts or they weren't connected, or some of the banks collapsed there. So just giving your money to the trustworthy taxi driver is literally a better system, and people are much more comfortable doing that. You can think of it as crazy inefficient, but, hey, this is the system which works. So yeah, that's a good example. Samantha [14:53]: Yeah, it's a good thing that taxi drivers are not driving away. But then at the end of the day, as well, if you call up B, and you're like, "Did you get the money?" and they say "No", then most likely that taxi driver has gone off with your money, and you can't do anything about it then. George [15:08]: So there's the social pressure as well as the reputation system. People in the village, they all know each other, right? And you don't want to be the one in the village that screws over somebody else, because you're probably going to get screwed over by the entire village. In that case, in many of these sorts of rural societies, you might see it where the taxi driver is going to be way more trustworthy than the local bank that's maybe 1,000 kilometres away in the capital city somewhere. Because you know that if that taxi driver drives away with your money, well, he's never going to be seen again in the village, they're going to have social exclusion applied to them and obviously, that leads into their reputation. Samantha [15:43]: Well, let's switch gears and talk more about the problems with moving money across the world. You were speaking earlier about migration flows - what are the problems with that? Because what if there's not enough people going one way or the other or not enough money flows between? George [16:00]: When you're dealing with these countries, let's say Indonesia, Indonesia has a currency, which is not globally a floated currency, the Rupiah, it can only be traded in Indonesia. You can't get a Rupiah account in London. So you have to have these intermediaries, not only on the sender side, but also on the recipient side. Often, many of them might have a pile of money at one end, and a pile of money at the other end and, essentially, balance it off between each other. And they have to do a trade with someone, maybe some intermediary company, and that's the gist of where a lot of the friction can be when you're sending money around the world. Samantha [16:37]: Right. So that's why it's so expensive to move money around the world, and banks take this big percentage cut. George [16:45]: One of the reasons markets are 24/7 in this traditional exchange world is the bank holiday example: national holiday weekends, these kinds of things. If you're a money transfer company, you get an exchange rate on a Friday. So you have to take a bet on a Friday, hoping you're not going to lose money by the time it's Monday. Again, if we're talking about cash, cash itself is difficult to move. I met a guy who once ran a large money transfer company for the Pacific Islands. He runs speed boats between islands. And that's like the official way to move money for the central banks. Their banking system is not connected really to the outside world. So, speedboats - that's the way to do it. Samantha [17:27]: What if it sinks?  George [17:28]: Yeah, exactly. Yeah. Samantha [17:29]: It sounds like a big logistical challenge moving cash around the world. But there's platforms like Wise/Transferwise that have made money transfers cheaper, that solves the problem, doesn't it? George [17:41]: Not at all. So remember, I said before that a very small percentage of the country might have a bank account. So in some countries that can be 10 to 20%. And what happens about the other 80%? Well, Wise is bank transfer to bank transfer. So literally, you cannot send money with Wise to many people of the world. So fundamentally, yeah, the problem is not solved. So then the thing is maybe we use some sort of online transfer service, which connects to the local cash providers. But often people kind of pick and choose the avenues which they want to use. That's one stage, there's all of these different forms of payment. In other stages, not everyone has a bank account. Samantha [18:19]: I guess I'm in a privileged position to say I trust maybe a platform like Wise or say, PayPal, and I think that's the safest way for me to move money, because at least there's a record of this. Using the Hawala system for moving cash around the world or moving cash by speedboats - I mean, I find it really hard to trust that that's going to get to the other end. George [18:42]: I guess it depends on what country you're in.  Samantha [18:45]: A lot of the developing world, everyone has mobile phones before they even have bank accounts. So what are the opportunities there for moving money around the world? George [18:53]: Yeah, so ultimately, having a mobile phone opens you up to a whole bunch of new potential avenues. So you can imagine in the Hawala example knowing someone who knows someone, a lot of that could be automated. If you had everyone signed up to the same mobile app or something like that, right? But then of course crypto is something which can live on a smartphone and makes things a lot easier in many cases to move money and value around the world. Samantha [19:18]: Right. Tell us a little bit about how Bitcoin can be a borderless form of payment. George [19:23]: Yeah, if I need to send you some Bitcoin right now, I don't have to visit a bank. I can do it 24/7.  Samantha  [19:30]: I don't need a speedboat. George [19:31]: Yeah, no speed boats required. So just sending one Bitcoin, it can be very easy. But converting it at other ends for something which people need for every day, that's where you need some sort of intermediary to really solve that problem for you. There's no way around it. And then the problem is really what they call the ‘last mile problem’, is just distribution. But ultimately, this system still is much more efficient and much better than the traditional ways of doing things via banks, which are only open nine to five and they have all sorts of various restrictions and problems. Maybe one day we'll live in a world where everyone just uses Bitcoin values, everything in Bitcoin takes their salary only in Bitcoin. Many people do live like that. Maybe that number will grow over time. Samantha [20:13]: But let's talk about say, you and me. If you send me Bitcoin, how can I take cash out from it? Because I can't go and pay for my lunch in Bitcoin today. George [20:25]: Well, first thing you could. There's a number of places around the world, hundreds of 1,000s of companies that are accepting crypto as a form of payment for their goods and services. So you just need to find one. Another option could be that maybe you have a crypto debit card. There's a couple of companies where you can send that Bitcoin to a debit card, and that debit card behind the scenes will convert a little bit of Bitcoin when you go to Sainsbury's or whatever, and pay for your groceries. So that's another way that perhaps you could make it useful for people in the world.  But also, if you want to get cash in your bank account, let's say that's your priority, you'd have to have an account with an exchange or some sort of company, which essentially, you're going to send that Bitcoin to, they're going to convert it for you, and then they're going to go and pay you and they can be formal institutions that have licences and pieces of paper. Or it can be peer-to-peer platforms where you just meet somebody else, you pay them. The money is maybe held in escrow until they go and pay you, like I said before, a reputation system, kind of like Hawala. Because often not every country has a local Bitcoin exchange, right? But in many cases, a peer-to-peer system is much more scalable. So there's a couple of different ways you could get that Bitcoin, if you want to pay for stuff in your life. Samantha [21:39]: So talk us through how you paid for your hotel with crypto, what did you need to use? George [21:45]: There's a lot of websites, in many cases, they will use hotels from, say hotels.com or booking.com, or something. And they will just be like this layer on top. So they will give you access to like every hotel in the world, but they're just sort of this intermediary which is converting the crypto and then booking it for you, essentially. What are Stablecoins?  Samantha [22:03]: Can I ask what crypto? Was it Bitcoin? Was it another crypto? George [22:06]: I paid and stablecoins.  Samantha [22:08]: Okay, so what are stablecoins? George [22:10]: The hint is in the name, right? It is a coin, which is stable to the local currency. So there's quite a few different stable coins mainly for the US dollar. One USD tether is one coin. It's the largest stablecoin, that's equivalent to one USD, you have one thing called a USDC, that's equivalent to one USD. So you have a lot of these coins, which essentially are the same price forever as one US dollar. So they don't fluctuate against the local currency. If your currency is US dollars. There's some other stablecoins for Euros, for Australian dollars, and New Zealand dollars.  There's a lot of these coins where the question is, well, how come they are valued at exactly the same as one US dollar? Well, there's two types of stablecoins, I would say trusted and trustless. In the case of say, USDC, we would call that a trusted stablecoin, where, essentially, there is a bank account somewhere. And let's say there's a billion dollars in that bank account. Well, that means that there's also a billion coins in circulation. So if I have a USDC coin, then I can go and redeem it at USDC, and they'll give me one US dollar from their bank account. So, essentially, it's always backed by that.  George [23:40]: The question is, well, how do we verify that trust? In the case of USDC, there is a licenced institution, they actually show you the amount of money that they have in their bank account, I think every quarter, and it's signed off by some firm or something like that. So it's still trusted. However, they try and do their best to assure you that they really do have the money that they say they do, which to be honest, is much better than some banks do. Because, where can I see the balance sheet of some banks in real time? You can't. A trustless stablecoin is instead of backed by money in a bank account, it's backed by crypto. So a good example of that is one called Dai, D-A-I, it's backed by Ethereum.  Samantha [24:03]: Wait, what is Ethereum? George [24:05]: Ethereum is another cryptocurrency, currently the number two cryptocurrency after Bitcoin. But in the case of Dai, all the information is there on the blockchain in real time. So fundamentally, I think that the trustless stablecoins are probably the better way to go. But the trusted stablecoins do serve a good purpose of having that connection to the Fiat world, and real bank accounts. There's room for both in the scenario. Samantha [24:27]: Yeah, would you say that stablecoins are the way we're going to continue to move money around the world now? George [24:33]: I would say that actually stablecoins are the best way to move money around the world, and if I want to trade USDC for Rupiah, there's literally a website I can go on to and do that right now. So that's pretty amazing, and that doesn't really exist in the traditional way to do it directly like that, which is pretty interesting. Samantha [24:51]: Yeah, I can speak from experience. I have clients around the world. We've been taking payments in USDC. And it's been more convenient because we've got paid instantly. Because if they just did a bank transfer, I will probably not see that money until perhaps 30 days later, and I have to pay my team. So actually stablecoins are quite efficient in a way as well. George [25:14]: Absolutely. Way more efficient, they don't have all of the encumbrances of the traditional banking system. They're traded 24 seven, they're some of the largest markets in the crypto world. Ultimately, my goal has always been for many years that we'll see 200 different stablecoins for 200 different countries. I think we'll probably get there one day. Samantha [25:32]: George, we've touched on a lot today from why people move money around the world, the problems with it, and also where we're heading with cryptocurrencies and stablecoins, making it easier to move money globally. It's been an interesting time speaking to you. Thank you so much for joining me on YAP Cast.  George [25:50]: Thanks so much. It's been a pleasure. Samantha [25:52]: If you’d like to watch my full-length conversation with George Harrap, head to the YAP Cast YouTube channel. I’m Samantha Yap, and you’ve been listening to The Story Of Money, by YAP Cast.