Bitcoin - The Decentralized Alternative to Cross-border - The Decentralized Alternative to Cross-border Payments
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Bitcoin - The Decentralized Alternative to Cross-border
Payments
What is the Bitcoin Position in the Cross-border payment market?
BACHELOR
THESIS WITHIN: Business Administration
NUMBER OF CREDITS: 15
PROGRAMME OF STUDY: International Management
AUTHOR: Muhammad Waqas Seddiqi & Farida Ibrahim
JÖNKÖPING May 2022
SUPERVISOR: Amin Soheili2 Bachelor Thesis Project in Business Administration Title: Bitcoin - The Decentralized alternative to cross-border Payment: What is the Bitcoin Position in the Cross Border payment market? Authors: Muhammad Waqas Seddiqi & Farida Ibrahim Tutor: Amin Soheili Date: 2022-05-19 Key terms: Bitcoin System, Blockchain Technology, Traditional Money Transfer Services, Exchange Rates, Transaction Costs Abstract The lack of innovation from banks in cross-border payments have led to the rise of money transfer services such as Western Union, MoneyGram, PayPal etc. These money transfer companies offer better services relative to banks in terms of costs, speed of transaction and convenience. Sending and receiving money has never been as easy as it is now. Bitcoin is a cryptocurrency that can be used in cross-border payments and claims to make the sending and receiver process simple and cost effective. The aim of the thesis is to research on Bitcoin and the traditional money transfer services such as Western Union, MoneyGram, PayPal, and Swedbank to evaluate Bitcoin position in cross-border payments. Furthermore, the Diffusion of Innovation and Technology Acceptance Model further explains the adaptation process of Bitcoin.
3 Table of Contents Abstract ....................................................................................................................................... 2 Definitions ................................................................................................................................... 6 1. Introduction .......................................................................................................................... 7 1.1 Background ............................................................................................................................... 9 1.2 Problem ................................................................................................................................... 10 1.3 Purpose.................................................................................................................................... 11 2. Literature Review ............................................................................................................. 13 2.1 Diffusion of Innovation Theory .............................................................................................. 14 2.2 Technology Acceptance Model .............................................................................................. 15 3. Bitcoin.................................................................................................................................... 16 3.1 Introduction to Bitcoin ............................................................................................................ 16 3.2 Blockchain: The Disruptive Technology ................................................................................ 17 3.3 Blockchain Function ............................................................................................................... 17 3.4 Blockchain Privacy & Security ............................................................................................... 18 3.5 Bitcoin Mining ........................................................................................................................ 19 4. Delimitation & Limitations ............................................................................................ 20 5. Methodology........................................................................................................................ 20 5.1 Research Method .................................................................................................................... 21 5.3 Research Design...................................................................................................................... 22 5.4 Data Collection ....................................................................................................................... 22 5.5 Data Analysis .......................................................................................................................... 23 5.4.1 Cost of Transaction .............................................................................................................. 23 5.4.2 Transaction Accessibility ..................................................................................................... 24 5.4.3 Transaction Transparency .................................................................................................... 24 5.4.4 Transaction Security ............................................................................................................ 25
4 5.4.5 Transaction Availability....................................................................................................... 26 6. Empirical Findings ........................................................................................................... 26 6.1 Traditional Money Transfer Services ..................................................................................... 27 6.1 Western Union ........................................................................................................................ 27 6.1.1 Data: ..................................................................................................................................... 28 6.1.2 Evaluation ............................................................................................................................ 30 6.2 PayPal ..................................................................................................................................... 32 6.2.1 Data ...................................................................................................................................... 33 6.2.2 Evaluation ............................................................................................................................ 34 6.3 MoneyGram ............................................................................................................................ 35 6.3.1 Data ...................................................................................................................................... 37 6.3.2 Evaluation ............................................................................................................................ 39 6.4 Swedbank ................................................................................................................................ 41 6.4.1 Data ...................................................................................................................................... 42 6.4.2 Evaluation ............................................................................................................................ 43 6.5 Bitcoin ..................................................................................................................................... 44 6.5.1 Data ...................................................................................................................................... 45 6.5.2 Evaluation ............................................................................................................................ 45 6.6 Interviews ................................................................................................................................ 46 6.6.2 Bitcoin Benefits and Problems............................................................................................. 48 6.6.3 Bitcoin Security ................................................................................................................... 49 6.6.4 Bitcoin Recommendation..................................................................................................... 50 7. Analysis ..............................................................................................................51 7.1 Cost of Transaction ................................................................................................................. 52 7.3 Transaction Security ............................................................................................................... 57 7.4 Transaction Transparency ....................................................................................................... 59 7.5 Transaction Availability.......................................................................................................... 61 7.6 Comparative Analysis ............................................................................................................. 62 8. Discussion ............................................................................................................63 8.1 Bitcoin Adaptation .................................................................................................................. 64
5 9. Conclusion...........................................................................................................66 10. Acknowledgement ...........................................................................................67 References ...............................................................................................................67 Figures Figure 1: Cost of Transaction....................................................................................................... 55 Figure 2: Transaction Accessibility .............................................................................................. 57 Figure 3: Transaction Security ..................................................................................................... 59 Figure 4: Transaction Transparency ............................................................................................ 61 Figure 5: Transaction Availability ............................................................................................... 61 Figure 6: Overall Graph of the 5 factors of each money transfer service ................................... 62 Tables Table 1: For Cash Pickup (Western Union) ................................................................................ 28 Table 2: For Bank transfer (Western Union) ............................................................................... 29 Table 3: From PayPal to PayPal.................................................................................................. 33 Table 4: For cash pickup (MoneyGram) ...................................................................................... 37 Table 5: Bank transfer (MoneyGram) .......................................................................................... 38 Table 6: For Bank transfer (Swedbank) ....................................................................................... 42 Table 7: From wallet to wallet (Bitcoin) ...................................................................................... 45 Table 8: Interviews ....................................................................................................................... 47 Table 9: The summary of Egypt & Afghanistan by using the 5 money transfer services ............. 52 Table 10: The overall rating of the 5 criteria of the money transfer services .............................. 52 Appendix .................................................................................................................................... 75 Appendix 1 .................................................................................................................................... 75
6 Definitions Cost of Transaction: The total costs or expenses for a transaction from one party to another across- borders, costs such as exchange rates, transaction fees, and services charges. Transaction Accessibility: The transaction speed at which the receiver will be able to receive the money transmitted from the sender which could take around seconds, minutes, hours, or business days. Transaction Transparency: It describes and clarifies the method of sending money for each payment system service, if it is complex or easy, trackable or trackable, it receives through cash pickup or bank transfer, and It might show the transaction fee details for each amount of money transfer. Transaction Security: This is the security and legislation rules of each payment system service, and each service has its own instructions and requirements for the transaction and customer data. Transaction Availability: It measure convenient how convenient it is for the receptor of the transaction to receive the money and through which channels. BTC: Bitcoin BPS: Bitcoin Payment System CPU: central processing unit Pow: Proof of work DOI: Diffusion of Innovation TAM: Technology Acceptance Model WU: Western Union
7 1. Introduction _____________________________________________________________________________________ The aim of this chapter is to introduce the topic briefly of this research paper, by explaining a short background that covers the topic content which is the history of monetary system and Bitcoin development, also it is discussing the problem and purpose of the research paper, and lastly it explains from what perspective this paper targeting. ______________________________________________________________________ Money has evolved throughout human existence. The history of money process of the monetary system developed from barter to bartering with fixed mediums of exchange, to banknotes chosen to represent interchangeable products, to coins issued in precious metals, to coins printed on paper, to notes designed to represent silver or gold, to becoming returnable explicitly for gold, and finally to the end of the gold standard to the mobile banking payments and cryptocurrencies are adding two new types of currency that have emerged in the twenty-first century (Wray, 1999). Therefore, before money was invented people were using the Barter system, which has been in use for decades, people used to trade value through the exchange of valuable products and services for other people's products in return instead of money as a solution (Personal Finance, 2020). Moreover, the barter system was the most used since the Great Depression in the 1930s (Wheelock, 2007). During the recession, barter has expanded rapidly and has become the only viable option for the population (Ammous,2018). Later, barter and gold dropped out, and as the population kept rising, the government began to create more money. Thereafter, US President Richard Nixon opted to leave the gold standard in 1971, and fiat currency became the norm for the monetary system (Taskinsoy, 2019). A Fiat Currency is a government-issued and regulated money without any other backing than trust. It doesn't have intrinsic value, which indicates that the government has control over the supply of the Fiat currency. The population's trust in the producer, the government, is what gives fiat currency its worth. Therefore, most of the world's current currencies are fiat money, including the US Dollar, Pound, Yen, and Euro, however, the dollar has been recognized as the world reserve currency, and most of the other currencies including the Euro is pegged to the US dollar (Hwang, 2021). In addition, Fiat currencies gain credibility because they are backed up by the
8 government and are recognized as a medium of exchange (Ritter, 1995). The Federal banks, on the other hand, are overwhelmingly criticized for their monetary policies, which result in bubbles and inflation (Vigna & Casey, 2015). Furthermore, money was more developed as digital money by David Chaum who presented the principle of a digital edition of cash protected by a private key in 1983, the beginning of digital currency history (Visa). Therefore, Physical money such as cash, notes, and cheques has become more evolved to digital payments such as ATM/Cash cards, Credit cards, Debit cards, Master cards, and Bitcoin, the most recent invention of digital money of virtual currency and the most famous of the other cryptocurrencies (Wonglimpiyarat, 2015). After the banks' evolution of the monetary system throughout the years and the development of the electronic payment industry across borders, the transactions had a high percentage of profits during this period. Therefore, in recent decades, the banks have been impacted and the percentage of the profit of the transactions cross-borders has been reduced because of the entrance of the other traditional cross borders’ payment services into the market as competitors to the banks. The competitors such as Western Union, PayPal, and MoneyGram. These competitors have stability in the market from the customers' support and are increasingly used as payment solutions that are cheaper, secure, available, accessible, and transparent. These service providers have successfully exceeded the banks' position regarding the quality of the services that have met the customers' requirements and needs in the market. Satoshi Nakamoto's much-debated “Bitcoin: A peer-to-peer electronic cash system” paper was published on October 31, 2008, providing the basis for bitcoin transactions (Visa). Bitcoin is a form of virtual currency in which money transfers are carried out entirely through electronic methods. It is a peer-to-peer network without the use of any intermediaries by using the software systems, which are now being implemented by a considerable population of countries around the world (Wonglimpiyarat, 2015). The market has encountered a series of innovations and developments in the years, with new digital currencies, configurations, and applications appearing all the time. This is significant in terms of exploring if Bitcoin has any connections to established payment systems or the financial industry.
9 1.1 Background The idea of electronic currency existed before the introduction of Bitcoin in 2008. David Chaum 1989 introduced Digi Cash; It is based on cryptography and allowed transactions user-to- merchant only; user-to-user transactions were not possible (Abrar, 2014). The other important electronic currency systems were b-money and Hash cash (Narayanan & Clark, 2017). The idea of B-money was to distribute the transactions history to everyone participating in the network; like Bitcoin's blockchain. Proof of Work (POW) was taken from Hash cash. The POW is the fundamental confirmation method that Bitcoin has implemented and uses to verify new transactions by adding every transaction information to the blockchain (Coinbase). Furthermore, it defends against the most protracted chain attacks on the blockchain (Zhang, Xue, & Liu, 2020). This system uses computational resources to function. Like the "spam email" computational POW is used to make sure the email is not produced on a large scale. These systems contributed to creating the core foundations for digital currency. Bitcoin is the first successful digital currency that solves the limitations of previous attempts of creating cryptocurrency. In January 2009, Nakamoto successfully mined the first Bitcoin, which is also called “Genesis Block”. Bitcoin is mined by solving complex mathematical problems through computers. Miners receive newly created Bitcoins as a reward for offering computational resources to the network. The first Bitcoin transaction was to Hal Finney on January 12 when Nakamoto sent him 10 bitcoins (Peterson, 2021). It was the start of the Bitcoin payment network. At first, fewer people understood it but 2013 was the year of Bitcoin; the price of one bitcoin went from 13 USD to 1100 USD and then lost 85% of its value (SoFi, 2022). Bitcoin has been in the spotlight on both conventional and social media since its introduction to the world. The volatility of Bitcoin has been in the headlines and as the market capitalization of Bitcoin has increased exponentially there are talks about legalization problems, and hacking possibilities ( Lyocsa, S., 2020). Furthermore, people like Bill Gates, Richard Branson, Elon
10 Musk, and Travis Kalanick have talked about cryptocurrencies in public. They have endorsed the Blockchain technology behind cryptocurrencies and in their opinion, it offers a great opportunity. It is believed that Blockchain technology has the potential to be used in a variety of different applications. On the other hand, the CEO of JPMorgan Chase Jamie Dimon considers the Bitcoin market a fraud. Warren Buffer, Charles Manager, etc. Consider cryptocurrencies as a giant bubble. The contracting opinions of well-known celebrities is an interesting phenomenon. 1.2 Problem Remittances to low- and middle-income countries reached $589 Billion in 2021 and are expected to increase further over the coming year (The World Bank, 2021). It has even surpassed foreign direct investment and overseas development assistance excluding China (The World Bank, 2021). Remittances support the householding spending on essential items, for example, food, and health education. The services used for cross-border payments are banks and money transfer services. Cross-border payments are expensive because of the different intermediaries involved in the transactions. All these intermediaries charge a fee for their services. Moreover, the conversion of currency costs and regulatory costs increases the total cost of the transaction. According to the World Bank, the average cost of sending remittances costs 6.3 percent globally (The World Bank, 2021). Although over the years, the cost has decreased, it is still expensive. Cross-border payments are not limited to individuals, they are also used by businesses, corporations, and charities. The Bitcoin payment system is based on Blockchain, a new technology that is a combination of cryptography and a public distributed ledger. This allows the transaction to be completed without the need for third-party mediation. So, people don’t need to trust one another or the financial institution for sending and receiving money but rather a mathematical system. The lack of third
11 parties has decreased the transaction cost. In recent years, a lot of research has been carried out to understand the characteristics and functionality of Bitcoin, but more research is required to further understand its different properties. The disruptive nature of Bitcoin and Blockchain technology has convinced its users that it is the next big thing in human history. But is Bitcoin money, a new cross-border payment service, investment, a speculative bubble, or it's the next big technology that will disrupt the current financial systems? 1.3 Purpose The purpose of this paper is to clarify and discuss the working process benefits and risks of bitcoin compared to the existing payment systems. Also, to evaluate and develop the understanding of the study of the banking sector's connection with Bitcoin and traditional payment systems. Furthermore, the research paper will discuss and compare the five payment services mentioned previously, each service will be explained its values and its procedure for sending money to each identify the differences, and who will have a better qualification in the transaction’s payment methods. The research paper will clarify the pros and cons of the transaction processes of Bitcoin, Western Union, PayPal, Swedbank, and MoneyGram, then a comparison will be made to identify who offers more value to the customers in terms of the Cost of the Transaction, Transaction Accessibility, Security, Transparency, and Availability. Therefore, with further discussion and comparison of these payment systems with Bitcoin, will clarify which has a better impact and is mostly used in the market as a helpful and secure payment system. Additionally, it clarifies if Bitcoin virtual system could be an alternative or an additional option for paying as the traditional money transfer payment systems and examine if the merchants will accept or reject it for further transactions. It will analyze from different perspectives, which is explanatory, focusing on analyzing and comparing the pros and cons of each of the traditional systems such as banks and other service providers in the same industry for supporting the blockchain technology for adoption and be as part of the transaction payment cross-borders.
12 The theory that will be used in the research paper is the innovation diffusion theory (DOI) and Technology Acceptance Model (TAM). The theory of innovation diffusion deals with the process of the invention on a regular basis and has been used in interactions to express that how popular concept or product spreads over time through a population or social structure. This theory clarifies that individuals adopt a new thought, attitude, or product as part of a social structure because of this diffusion (LaMorte, 2019). The purpose of the DOI theory is for adapting and supporting the BTC as a payment system for diffusing through a social system in the market soon as the traditional payment systems. Technology Acceptance Model (TAM) becomes one of the most popular study methods for estimating how individuals would utilize and adopt information technology and systems. TAM has been extensively researched and confirmed through various studies that have looked at acceptance and use of technology behavior in various information system structures (Surendran, 2012). The purpose of the TAM Model is for clarifying and examines if BTC will meet the customers' needs of the transactions cross-borders in the market by determining the customer attitudes toward evaluating the acceptance of new technologies. The research question is “What is the Bitcoin Position in the Cross Border payment market?” 1.4 Perspective This is from the customer perspective because they mostly use these traditional payment services and banks for transferring money cross-borders to their families and friends weekly or monthly. Therefore, the customers always looking for services that have the least costs of a transaction, are easy to use, available, and accessible worldwide. This research paper discusses the costs of
13 different services to compare them with Bitcoin transaction fees for having a variety of different perspectives and options for customers that could meet their needs. 2. Literature Review _____________________________________________________________________________________ The aim of this chapter is to clarify the theoretical background to the topic of Bitcoin and other cryptocurrencies market development and suggesting two theories for the research are Diffusion of innovation theory and Technology Acceptance Model. ______________________________________________________________________ This part of the study discusses different cryptocurrencies but specifically Bitcoin and other traditional payment systems. It also discusses the establishment of Bitcoin and the process behind its use from the Nakamoto paper. The keywords used are cryptocurrencies, Bitcoin system, traditional payment systems, banks, exchange rates, and transaction fees. The research paper began by reviewing articles, books, and journals about Bitcoin as a payment system from several websites such as Primo, Google Scholar, and Jonkoping University library. There are many articles used for a wide vision to prove and support the research paper's main purpose. Literature on Bitcoin was scarce in the beginning. But as its acceptability increased, different research has been carried out to understand the new disruptive phenomenon. Kroll et al. (2013) examine the motivations behind individuals for participating in the Bitcoin network, particularly the incentives that miners receive. Therefore, in the economics of the Bitcoin system, it was not expected that the transaction fees would represent a substantial long-term influence, underneath the existing regulations. Before service charges may contribute significantly to the Bitcoin economy, users suggest that rules must be changed to be more flexible. It clarifies that the transaction fees have two important functions in the Bitcoin system. First, it generates new coins for miners to provide their computational resources. Second, it operates as the ultimate arbiter of importance in the congestion of communications to be evaluated by miners. Cheah and Fry (2015) argue that if Bitcoin is to be considered money it shouldn't be this much volatility. Bitcoin's average annual return from 2011 to 2021 is 230 percent, this high volatility of Bitcoin
14 resembles financial bubbles. Yermack (2015) finds Bitcoin's historical prices and argues that price volatility behavior doesn’t resemble a currency according to the models used by the economists but resembles a speculative asset. Gandal and Halaburda (2014) analyze how different cryptocurrencies are competing with one another. Halaburda and Sarbary (2016) studied the cryptocurrency market development and the future technological possibilities of blockchain technology. Catalini and Gans (2020) also studied the opportunities offered by blockchain technology. Huberman et al. (2019) compare the service provided by the Bitcoin payment system and the service provided by a firm. Cong et al. (2018) analyze the dynamic cryptocurrency pricing with adaptation models that focus on how the adaptation of cryptocurrency is more valuable. Sockin and Xiong studied and created a pricing model for a platform through which individuals can pay for goods and services if they own the platform’s coin. Athey et al. (2016) studied the usage of Bitcoin and the value it offers as currency. Schilling and Uhlig (2018) evaluate the Bitcoin prices compared to fiat currencies and the implication it can have for monetary policy. Markarov and Schoar (2018) find the arbitrage opportunities across different cryptocurrency exchanges across regions. Isksen (2018) argues that Bitcoin technology will benefit banks in the cross-border payment segment. The argument is that countries do not use a standardized money transfer system, Bitcoin and Blockchain technology could offer a solution to the problem by being the standard globally. Gulled and Hossain find that Bitcoin is an alternative option for people who live under strict money control, restrictions on money transfers, or even without access to financial services to get connected to the global economy. 2.1 Diffusion of Innovation Theory The theory discusses the social structure that has a role in the diffusion of innovation, the system's social structure has a variety of effects on innovation, and the social structure acts as a borderline between innovation and lack of growth. Furthermore, it examines the influence of the
15 system's social and culture on spreading, the effects of criterion on diffusion, the characteristics of thought leaders and decision makers, and various structures of innovation decisions (Simonds & Rudd, 2016). The theory argues most elements that include invention, communication methods and networks, time, prospective implementers, and the social structure, these majorities have an impact on whether an invention is adopted by a certain group (Simonds & Rudd, 2016). In addition, it illustrates diffusion as a method through which an invention is distributed to participants in a social system over a period through specific methods. Regarding the lack of authority or group decisions, each participant in the social structure must determine their own innovative decision. 2.2 Technology Acceptance Model Davis (1989) established the Technology Acceptance Model (TAM), which was started as a widely used research method for estimating specific users' use and adoption of technological tools (Surendran, 2012). The TAM model has been extensively researched and validated in several studies that look at individuals' technology adoption behavior in various information management structures (Momani & Jamous, 2017). Therefore, the model utilized in consumer attitude theory, the evolution of the Wide Web, the learning of communication networks, and the examination of consumer motivations for using free Wi-Fi, digital banking payments, and e- commerce in general. Through the years, there have been several types of research that have resulted in revisions to the model that was first presented. Taylor and Todd presented a new model termed the combination TAM-TPB model, which linked the Technology Acceptance Model with the Theory of Planned Behavior (1995). TAM2, a new edition of TAM presented by Venkatesh and Davis (2000), incorporated additional variables to the previous model (Surendran, 2012). Therefore, the application of TAM in the examination of internet technologies is so widespread that Davis and colleagues have expanded the TAM model to include concerns specific to the World Wide Web, inclusive of trust, data protection, threats, and social consciousness. This extended approach has
16 been used to analyze consumer privacy and trust-related concerns in smartphones with great success (Consumer Acceptance). There are a variety of factors that should be improved to increase Bitcoin's technological acceptability, as well as dangers to eliminate along the process. It illustrates the team's ability to analyze features of new technology and opens the path for more research into the development of Bitcoin and similar blockchain technologies. 3. Bitcoin _____________________________________________________________________________________ The purpose of this chapter is briefly explaining what Bitcoin is, blockchain technology and how it is working _____________________________________________________________________ 3.1 Introduction to Bitcoin Technological development over the past decades has created new opportunities for businesses to offer goods and services on the online marketplace. The benefit of digitalization is the ability it offers to businesses to reach much wider customers. While in physical stores, customers can pay in cash for goods and services without the need of any financial institution; it is not possible for online transactions. Customers and businesses are dependent on the financial institution to process electronic payments. Trust and mediation of a third party for the transactions to carry out are required. Bitcoin eliminates the need for third-party involvement by introducing an electronic payment system that operates on a peer-to-peer basis. The transactions for the first time are irreversible; once the transaction is done no one can reverse it (Nakamoto, 2008). Bitcoin made it possible for two parties to make a transaction with one another directly without the meditation of any financial institution. Anyone can send Bitcoin, electronic coins, to anyone they want. The Bitcoin system requires computational resources to function rather than a centralized authority to monitor all the transactions (Nakamoto,2008).
17 The maximum supply of Bitcoin is 21 million and the last Bitcoin will be mined in 2140 (Cachanosky, 2019). Therefore, the price of bitcoin will most certainly vary in response to all the movements taken by the major financial actors as they compete for ownership in a declining supply scenario (Reiff, 2022). Despite price changes, Bitcoin's value has increased since its launch in 2009. Since its creation, Bitcoin has gone through incredible growth. 3.2 Blockchain: The Disruptive Technology Blockchain technology is a hybrid of distributed ledger technology with cryptography. It allows keeping a record of all transactions taking place on the network without the interference of a third party. Although at present, Blockchain technology is primarily used in the financial industry and is well known as the driving technology behind Bitcoin, the potential of the technology is much wider. Blockchain technology has stored all the Bitcoin transactions since its inception. All the transactions are trustworthy as they have gone through the timestamp server and nodes must show "proof of work". Blockchain is a distributed system in which data is recorded using hashing, which is a cryptographic signature that cannot be broken. Blockchains, like Bitcoin, is constantly expanding as new blocks are updated, considerably increasing the security of the ledger. Bitcoin is referred to as a decentralized system (Gowda & Chakravorty, 2021). 3.3 Blockchain Function Blockchain technology is a combination of a long chain of blocks. Each block in the chain stores transactional data: the history of the transfer of ownership of the Bitcoin (Nofer et al.2017). All these blocks are connected making a chain of networks. The blockchain expands with the addition of new blocks to the network. Expansion of new blocks to the blockchain network is done through proof-of-work methods (Nofer et al.2017). The proof-of-work consensus requires computational resources and as anyone can participate in the network to offer the resources, the network rewards Bitcoin in return for the resources. The new blocks are validated in the
18 blockchain network through cryptography. In addition to the transactional history of Bitcoin, the block has information about the timestamp, nonce, and hash value of the previous transaction. Timestamp server stamps information on the block when a transfer of the Bitcoin has taken place. A nonce is a random number to verify the hash. The hash value is information about the previous transaction. The hash value of each transaction is unique, any attempt of fraud will immediately change the hash value and the consensus mechanism of the blockchain would not allow the new block to the network as the nodes must verify the validity of the block before adding it to the Blockchain network. Blockchains might become permissionless or permissioned, as well as public or private. Permissionless: There are no requirements for processing transactions other than the ability to pay trading fees. Everyone is willing to take part in the verification process to ensure they are chosen as a validator (Solat & Calvez, 2020). This is accomplished by functioning as a network node. Permissioned blockchain is shared ledgers that are not accessible to the public. Users with permissions are the only ones who can download it. Therefore, users may only conduct activities that the ledger administrators have permitted them, and they must establish themselves by qualifications or other digital means and they enable one or more nodes to function as miners and monitor transaction history (Helliar, Crawford, Rocca, Rocca & Veneziani, 2020). 3.4 Blockchain Privacy & Security Blockchain has a high-security technology system which makes it harder for hackers to hack or make changes in the network due to some characteristics that blockchains have. The blockchain system is based on a decentralized digital ledger and encryption algorithm which indicates that the blockchain is unaffected by hacking attempts because it has redistributed over peer-to-peer
19 networks that are upgraded and held in sync on a regular basis and it records any type of value transaction which causes difficulty for attackers to go through all the processes. A "proof of work" process is a technique that is used to verify each of these transactions. A data "block" is a collection of validated transactions that have been cryptographically locked (Miles, 2017). Therefore, if honest nodes control most of the central processing unit (CPU), the honest network will be successful and will expand the quickest and outperform all other chains. An attacker must replicate the proof-of-work for a prior block to upgrade it, as well as all subsequent blocks, and afterward meet up with and surpass the honest nodes' effort. To make such changes in the Bitcoin network, the fraudulent actor must have control of 51 percent computational resources of the whole network. when more blocks are added, the chances of a slower attacker catching up reduce rapidly (Nakamoto, 2008). 3.5 Bitcoin Mining Everyone with a computer and a high-speed internet connection can participate in Bitcoin mining. However, Bitcoin mining became widely used and has grown so intense over the years that miners often require costly hardware and limited electricity to benefit from it (Duggan, 2022). Bitcoin mining is the process of verifying and recording Bitcoin transactions on the blockchain networks. Bitcoin miners utilize specialized hardware to perform difficult mathematical calculations known as hashes, which are used to validate bitcoin transactions. The miner receives a predefined number of bitcoins when a bitcoin is safely mined (Baker, 2022). Bitcoin mining produces new Bitcoins as incentives to the miners for offering computational resources. Furthermore, confirming transactions in a trustworthy, decentralized ledger system that keeps track of all network transactions. Although miners must prove that they have done the job of completing these complicated mathematical problems to gain the ability to validate a new block of Bitcoin transactions, this technique of transaction verification is referred to as proof of work. Bitcoin miners often employ
20 dedicated graphics processing elements due to the incredibly high processing capacity required to resolve these mathematical problems (Duggan, 2022). 4. Delimitation & Limitations _____________________________________________________________________________________ The purpose of this chapter for clarifying the planning of the research paper. _____________________________________________________________________ The authors have chosen Western Union, MoneyGram, PayPal, and Swedbank for this thesis. There are many other services that offer cross-border payments, but it is not in the scope of this thesis. Some of these other services may offer better value in some areas of the transaction. Furthermore, Bitcoin now is considered as a store of value asset rather than to be used as a money transfer. There are over four thousand cryptocurrencies that offer different services to users. Although there are cryptocurrencies that offer better value in cross-border services, as Bitcoin is the first functional and widely accepted cryptocurrency, it is chosen for the research. The aim of the authors was to conduct more interviews with businesses that offer their product and services in both fiat and bitcoin and to study the practical experience and compare it with the findings of these. But due to whatever reasons, businesses were not willing to help in the research. Since interviews are to see if the findings of this thesis are in line with the practical use of these services businesses are substituted with two individuals that are randomly selected. The authors have sent only 1000 SEK from Sweden to Afghanistan and Egypt with all these services. The transaction process and fee structure are supposed to be the same, however, Bitcoin costs more when the amount increases 5. Methodology _____________________________________________________________________________________
21 The purpose of this chapter is briefly discussing the method process that this research paper will be conducting for the analysis part by clarifying the collecting data, research method, research design, and data analysis. _____________________________________________________________________ 5.1 Research Method This thesis has two parts. First is the comparative analysis between Bitcoin and traditional money transfer services. Second is the adaptation of Bitcoin as a payment system by the market. The comparative analysis is focused on five criteria i-e cost of the transaction, transaction accessibility, transaction security, transaction transparency, and transaction availability. The study will measure these criteria on a scale of 1-7 to explain the position of Bitcoin in the money transfer market. The next step of the comparative analysis interviews. This will further support the comparative analysis finding from a practical point of view. The adaptation phenomenon of Bitcoin as a money transfer is another part of the thesis that needs to be discussed. This thesis will explain Bitcoin adaptation with the Diffusion of innovation theory and the Technology Acceptance Model. 5.2 Research Philosophy The research philosophy describes the plan of the researchers to collect data, analyze it, and use it to answer the research question. The five research philosophies are positivism, critical realism, interpretivism, postmodernism, and pragmatism. After studying all these research philosophies, the authors have chosen positivism as the research philosophy. Positivism is a philosophical research method that defines that the existence of anything can be verified with the help of experiments, observation, statistics, and logical evidence (Clark, 1998). This method of research eliminates the human feelings and subjective interpretation of the data. An essential element of comparative analysis is to avoid subjective disengagement from research, and the positivist philosophical approach helps in this regard.
22 5.3 Research Design The thesis is based on primary data for empirical findings. Data has been collected from Western union, MoneyGram, PayPal, Swedbank, and Coinbase official websites. The data includes a method of sending/receiving transactions and the cost of the transaction. For the interviews, the aim is to choose companies that offer their product and services in fiat and Bitcoin. The individual interviews are chosen randomly, the criteria were that the interviewees must have used Bitcoin a couple of times and the mentioned cross-border payment services. All the interviews are semi-structured with the focus on the transaction process of Bitcoin. The participation of interviewees is voluntary and before conducting the interviews, the authors gave a brief introduction of the thesis and the research work. The interviews were conducted at the” Zoom meeting” and notes were taken during the interviews. Furthermore, all three of the interviewees have decided to keep their identities anonymous and agreed to share their opinions in the thesis. 5.4 Data Collection The cross-border payment service providers are chosen based on their popularity and market share. PayPal is the biggest money transfer service followed by Western Union and MoneyGram comes in fourth (Yahoo Finance, 2021). It is practically infeasible for this thesis to calculate the cross-border payment for all Swedish banks, the solution chosen was to focus on one bank and base the findings on that bank only. The authors choose Swedbank for the study purpose; Swedbank is one of the oldest and most well-known banks in Sweden. Finally, the Bitcoin transaction was done via Coinbase; one of the big and well-reputed crypto exchanges (the balance, 2022). The authors are from Afghanistan and the Arab Republic of Egypt and to get first-hand experience of the overall process of sending money, they have sent money from Sweden to Afghanistan and Egypt using the service providers mentioned above. Additionally, the top five remittance-receiving countries in dollar terms are chosen to collect more data. These countries include India, China, Mexico, the Philippines, and the Arab Republic of Egypt (World bank,
23 2021). The rest of the four countries; The United States, the United Kingdom, Australia, and France, are chosen primarily because they are more developed economies relative to the top five remittance-receiving countries. The second reason is to see if the process and transaction fee of sending money between developed countries are different and convenient relative to others mentioned in the list. 5.5 Data Analysis The thesis will use the qualitative analysis method to collect and analyze data to understand concepts, opinions, and experiences. The rationale behind choosing a qualitative or quantitative analysis method is that the comparative analysis is designed in a way that every step in cross- border payment requires an explanation. Each of the five criteria is rated from 1-7 and then given a final rating, in the end, to see clearly how these services are compared with one another. For “Cost of transaction” is the average cost per transaction that is rated in the final table. Furthermore, interviews are opinions, and experiences of the interview that can only be analyzed with the help of qualitative analysis. The adaptation phenomenon of Bitcoin as a money transfer service is explained through deductive study. Different theories explain how innovation is adopted by the market. This thesis will explain Bitcoin adaptation with the Diffusion of innovation theory and the Technology Acceptance Model. 5.4.1 Cost of Transaction Rating the cost for each of the 5 payment systems services (BTC, Swedbank, MoneyGram, WU, and PayPal) from 7-1 “7-Highest1-Lowest” 7 Less than 1 percent 6 Less than 2 percent 5 Less than 3 percent
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4 Less than 4 percent
3 Less than 5 percent
2 Less than 6 percent
1 More than 6 percent
5.4.2 Transaction Accessibility
Rating the speed of transaction for each of the 5 payment systems services (BTC, Swedbank,
MoneyGram, WU, and PayPal) from 7-1 “7-Highest1-Lowest”
7 Transaction takes less than 5 minutes
6 Transaction takes less than 15 min
5 Transaction takes 1- hour
4 Transaction takes less 1 business day
3 Transaction takes more than 1-3 business days
2 Transaction takes more than 3 days but less than 1 week
1 Transaction takes more than 1-week
5.4.3 Transaction Transparency
Rating the simplicity of transaction for each of the 5 payment systems services (BTC, Swedbank,
MoneyGram, WU, and PayPal) from 7-1 “7-Highest1-Lowest”
7 Easy to send (take less than 5 minutes), the sender can send it through bank
account and agent, trackable transaction, clear transaction cost
6 Easy sending process (sending takes less than 5 minutes) and the sender can25
send it via bank account only. the trackable transaction, clear transaction
cost.
5 Medium sending process (sending takes less than 15 minutes and the sender
has the option of bank transfer/agents) trackable transaction. clear
transaction cost.
4 Medium sending process (sending takes more than 15 minutes but sender
has the option of bank transfer only) trackable transaction. clear transaction
cost
3 Slow sending process (sending takes less than 1-hour and the sender can
send it via agent/bank. trackable transaction and clear transaction cost.
2 Slow sending process (the sender can send it through app/website takes less
than 1 hour). Unclear transaction cost and Untraceable transaction.
1 Slow sending process (sender must go to the agent to send the money, the
sending process takes more than 1 hour, can only send through an agent)
Unclear Transaction cost. Untraceable transaction
5.4.4 Transaction Security
Rating the security or safety of data transaction for each of the 5 payment systems services
(BTC, Swedbank, MoneyGram, WU, and PayPal) from 7-1 “7-Highest1-Lowest”
7 High security: two-step authentication login method, store user information
safely, highly trustable, require additional information for sign up
6 High security: two-step authentication login method, store user information
safely, highly trustable, additional information not required
5 High security: trustable service provider but doesn’t offer extra security
measures, sharing user information to complete the transaction, use
additional information for sign up
4 High security: with good customer service to solve the problem but the
service is slow. Collect and share users’ data.
3 Medium security: user trusts the service provider, but user information is
sent to receiving service provider to complete the transaction26
2 Medium security: user trusts the service provider but if the receiver
information is incorrect, the transaction could send to another receiver
1 Low security; Not trustable public opinion about the service.
5.4.5 Transaction Availability
Rating the convenience of transactions for each of the 5 payment systems services (BTC,
Swedbank, MoneyGram, WU, and PayPal) from 7-1 “7-Highest 1-Lowest”
7 Offers both cash pickup and instant bank transfer worldwide
6 Offers fast cash pickup and slow bank transfer
5 Offers slow cash pickup and slow bank transfer
4 Offers instant bank transfer
3 Offers only cash pickup services (fast - within an hour)
2 Offers only cash pick up (slow - takes at least one day)
1 Offers only bank transfer 1-3 days
6. Empirical Findings
_________________________________________________________________________
The purpose of this chapter is explaining each traditional money transfer service, its
requirements of making a transfer cross- borders, and it discusses the 5 criteria for each service.
Therefore, there is a data collection for each service by mentioning 10 countries and explaining
how the three interviews has been done. Also, it is analysing the interviewees ‘responses about27 their perspectives of the Bitcoin as a payment method, the benefits and problems, security, and recommendations of Bitcoin. ____________________________________________________________________ 6.1 Traditional Money Transfer Services 6.1 Western Union In 1851, Western Union was established, and it is an American company. Western Union is one of the most well-known brands and most famous and efficient companies that specialize in offering consumers multinational money transfer services all over the world (Treebold, 2022). It is a fast and secure method of transferring funds between individuals and businesses, delivering a massive international network of more than 550,000 agencies in more than 200 countries (Western Union). It has a substantial market share, enabling it to impose its will on users in terms of transfer costs and terms. Given this, it is a frequently costly alternative that can nevertheless be useful for individuals who need to move money quickly instead of international banks that take a couple of days or weeks for transferring money from one country to another. While it has limited business applications, it is a useful component of personal usage. The services and reputations of the Western Union have endured the passage of time. Their annual income exceeds $4 billion, and they let anybody with proper identification transmit money throughout the world instantly, generally within 15 minutes (Treebold, 2018). The requirements to make a transaction: 1- To Sign up for a Western Union account for transferring money from one country to another, you must fill out the form and add the picture of your ID. If transferring money through an agent, it only requires an ID card or Passport. 2- For transferring money: select the receiver's country, type the amount, and select the receiver's currency, and destination.
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3- Pick a payment and receiving options: payment: cash (in-store), bank account, or by debit or
credit card. receiving: cash (in-store), bank account, pay your bills, prepaid card, or mobile
wallet.
4- Type the details for the receiver: first & last name, middle name (optional), email address
(optional), mobile number (optional), and ask for additional information such as the purpose of
the transfer (why are you sending money?), and source of funds (what is your source of funds?).
Therefore, the receiver could pick up cash from any near WU agent site.
6.1.1 Data:
Table 1: For Cash Pickup (Western Union)
Country Transferring Fee (If Fee (If Exchange Exchange Exchange
Amount from credit/debit paid in Rate Rate Rate
Sweden card is used cash via (Western (XE.com) Difference
as payment an Union) (percent)
method) agent)
India 1000 SEK 20-25 SEK 25-95 1 SEK = 1 SEK= 5.78%
SEK 7.3357 7.7861
INR INR
China 1000 SEK 20-25 SEK 25-95 1 SEK= 1 SEK= 4.19%
SEK 0.6442 0.6724
CNY CNY
Mexico 1000 SEK 20-25 SEK 25-95 1 SEK = 1 SEK 8.58%
SEK 1.8993 =2.0776
MXN MXN
Philippians 1000 SEK 20-25 SEK 25-95 1 SEK = 1 SEK 5.08%
SEK 5.0548 =5.3254
PHP PHP
Arab 1000 SEK 20-25 SEK 25-95 1 SEK = 1 SEK 6.11%
Republic of SEK 1.7657 =1.8807
Egypt EGP EGP
United 1000 SEK 20-25 SEK 25-95 1 SEK = 1 SEK = 5.21%
States SEK 0.0964 0.1017You can also read
