Satoshi described Bitcoin as a “peer-to-peer electronic cash system,” which allows users to send online payments “directly from one party to another without going through a financial institution.” “Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions,” writes Satoshi in the Bitcoin white paper. And, as practice shows, over ten years, the banking system has not changed.
On April 7, 2018, a bus carrying players from the Canadian youth hockey team collided with a truck. As a result, 16 people died, 13 more were injured. Within a few days, during the fund-raising campaign on GoFundMe, it was possible to raise $15.1 million to help the victims and their families. In August, the court ruled that the amount of payments would be $50,000 to each of the 29 affected families.
Recently, a Reddit user noticed that out of the $15.1 million of funds raised, $482,712 was spent on a fee to the operators who processed the payments (2.9% of the collected funds and 30 cents from each donation). “That’s why we need crypto,” writes a user under the nickname HaterTotsYT. He points out that the GoFundMe organization refused any deductions in its favor, “but payment operators, such as Visa and PayPal, took 2.9% of all funds raised. That is almost $500,000 that could go to the victims, not payment processors.”
Bank Transfer Fees
The commissions that banks charge for incoming and outgoing transfers can be several tens of dollars, while the fee for an international transfer is usually more than two times higher than the domestic one (within one country), and the fee for outgoing transfer is higher than for the incoming one. When using the example of Sberbank and several large American banks, the transaction fee system looks like this:
Without opening an account: 1.75% (minimum 50 rubles, maximum 2,000 rubles)
From the account: 1.5% (minimum 30 rubles, maximum 1,000 rubles)
Transfers within one tariff zone (usually one city) are free of charge.
To another bank account:
Without opening an account
From the branch: 2% (minimum 50 rubles, maximum 2,000 rubles)
Via ATM: 1.5% (minimum 30 rubles, maximum 1,000 rubles)
From the account
From the branch: 2% (minimum 50 rubles, maximum 1,500 rubles)
Online: 1% (maximum 1,000 rubles)
Incoming: 0 rubles
Outbound (within Sberbank): .7% (maximum $100) for transfer from a bank branch; .5% (maximum $50) for online.
Outbound (to the account of another bank):
1.5% (minimum $15, maximum $250) without opening an account
1% (minimum $15, maximum $250) from the account when transferring from the branch
.5% (maximum $150) from the account when transferring online
Incoming: 1% (the maximum commission for operations in rubles is 3,000 rubles, for transactions in foreign currency, $500).
Bank of America
Outbound: $35 in foreign currency, $45 in U.S. dollars
Outbound: $25 for online transfers and $30 for transfers from a bank branch
Outbound: $40 for online transfers and $45 for transfers from a bank branch
Incoming: $0 or $15 (depending on the type of account)
Outbound: $12.5 to $25 (depending on the type of account; free of charge for Citi Private Bank customers when transferring online)
Incoming: $0 or $15 (depending on the type of account)
Outbound: $20 to $35 (depending on the type of account; free of charge for Citi Private Bank customers when transferring online)
Outbound: $30 to $45
An alternative to banks in the world of traditional finance is payment operators. And while some of them really provide benefits for remittances, others act as another intermediary, this time between the user and the bank.
For example, the TransferWise payment service allows for multi-currency transfers, charging a relatively small fee of .6% + $1 for transactions of up to $135,000. MoneyGram, a major operator that announced a partnership with Ripple in the winter, is almost on a par with banks. In order to send $6,000 (the limit for online transfer) to Russia, users need to pay a $35 commission for transfer to a bank account (and it will take up to 4 business days) and $195 for transfer to Visa or Mastercard. Sending the same amount on the same conditions, for example, in the United States, California, will cost a little less than $50 and $99.99, respectively.
In general, internal transfers (within one country) are processed faster and require a lower commission, since they are made in one payment system. But even so, the deadline for such a transfer can be several working days (for example, a transfer from one account to another via Sberbank can take up to two days if the transaction is between clients of this bank and longer if transferred to another bank). International transfers require even more time since they involve a larger number of parties, including the central bank, a foreign bank, and the payment systems of both countries. Thus, the timing of international transfers through JPMorgan Chase is three to five days.
“That’s Why We Need Crypto”
If we compare bank charges with fees for cryptocurrency transactions, the latter will be lower by hundreds, and sometimes hundreds of thousands times.
Now the average commission for a Bitcoin transaction is $.25, which is exactly 100 times less than $25 for an outgoing online transfer within the USA through JPMorgan Chase. The transaction processing time is also significantly lower than when working with banks: from August to November, the average transaction confirmation time on the Bitcoin network ranged from 8.8 to 14.3 minutes. And this is despite that Bitcoin is not the perfect example, and it may not yet be the ideal cryptocurrency for everyday small transfers.
One of the most “impressive,” that is, the lowest, is the transfer fee on the Ripple network. Today, on average, it is $.0004. On December 3, a Twitter user noted a low Ripple commission for a large payment: “.005 XRP transaction fee for $175,334,767. That’s the way to heaven.”
Speaking about the relationship of cryptocurrencies and the banking system, one should pay attention to Ripple, who mainly develops payment solutions for banks and other financial institutions. “Ripple is positioning XRP as a settlement asset to go with its payment network. There’s huge value in being able to settle international payments in second with a universal asset,” says Ripple chief cryptographer David Schwartz.
Statistics on the current time of confirmation of transactions on the Ripple blockchain are not available, but at the beginning of December 2017, in a much more active time on the crypto market than now, transaction processing time with a commission of .000011 XRP–.000019 XRP (~$.00000264−$.00000456) was 4−5 seconds.
Average transaction fees for other major cryptocurrencies by capitalization:
Tether: $0 for transfers between Tether wallets; .4%, 1%, or 3% when withdrawing to fiat, depending on the amount (for transactions from $100,000); .1% for fiat deposits (for transactions from $100,000).
Bitcoin Cash: $.0045
EOS: $0 (but because of the network design, costs for other resources, such as network traffic, processor time, and RAM are required)
The Kingdom Is Not That Serene
Considering that this year, the first cryptocurrency turned ten years old, it is too early to expect stability or total absence of technical problems and restrictions from the crypto market. And if in the “financial” aspect, that is, in the matter of transaction costs, the cryptos clearly overtake the banks, then not so in the case of scale and scalability.
In particular, the size of commissions on most blockchains depends on the network load. Thus, during the period of abnormal demand for Bitcoin in December last year, the maximum transaction fee was $55, which exceeds even the appetites of banks.
In October 2017, in an interview with CNBC, one of the main Bitcoin haters, JPMorgan CEO Jamie Dimon, said that JPMorgan handles transfers worth $6 trillion a day, while he estimated the daily Bitcoin trading volume to be “probably a billion dollars a day” (in October, this figure for Bitcoin ranged between $1–$2 billion, but on the day of the interview, it was $3.6 billion). Today, daily Bitcoin trading volume is around $5 billion, which, of course, is extremely far from the performance of large banks. And, as December 2017 showed, when the trading volume increased to $10 or $20 billion, Bitcoin no longer wins over banks in terms of commission fees and cannot cope with the processing of transactions.
While the first cryptocurrency is developing its own solutions for these problems, young cryptocurrencies are already a “new generation” that is trying not to inherit the shortcomings of their ancestors and is trying to become more flexible, faster, and cheaper. On the Minter blockchain, for example, fees for transfers or exchanges of any size amount to a maximum of $.01 at a throughput of thousands of transactions per second. In addition, transfers from one cryptocurrency to another are possible on Minter without being placed on the exchange, meaning they are right inside the network. Such developments make it possible to hope that one day, blockchains will overtake banks in all respects and lead users into the intermediary-free era, as Satoshi had conceived.