Stablecoins & Fiat-to-Crypto Payment Ramps
Note: This several part series is the result of a paper I wrote in January 2019. Rather than publish it, I thought it’d be most helpful to break things down and share it with the broader crypto-community. You can find the long form PDF version of the paper here and each part here:
- The Problem of Social Sector Transparency and an Introduction to Stablecoins (Pt. 1)
- Stablecoin Market Trends & Societal Obstacles the Present (Pt. 2)
- Stablecoins & Central Banks (Pt. 3)
- Stablecoins & Fiat-Crypto Payment Ramos (Pt. 4)
- Stablecoins & Improving Donation Transparency (Pt. 5)
- This is a much longer post….my bad..
- One of the biggest pain points within the public blockchain ecosystem is the poor usability of decentralized applications
- Contributing factors toward such a poor user experience when purchasing and using cryptocurrencies include (I) Market misinformation about the alleged, widespread criminal use of cryptocurrencies in the media, (2) The high learning curve and complex process of owning and using cryptocurrencies, (3) Regulatory uncertainty governing legal use of cryptocurrencies, (4) The prohibition of cryptocurrency by major payment gateways, (5) The insecure nature of cryptocurrency exchanges in contrast to its traditional counterpart in public stock exchanges, and (6) Poor user experience whilst leveraging cryptocurrency wallets
- Download the full paper here
Fiat-to-Crypto Payment Ramps
“As long as confirmation on transaction’s probable finality takes longer than taking my debit card out my pocket and paying for something, I’m using the latter.” — Yours Truly 👌🏾
One of the biggest pain points within the public blockchain ecosystem is the poor usability of decentralized applications. The latter is particularly true for tools charged with the responsibility of transferring value (i.e. cryptocurrency). Contributing factors toward such a poor user experience when purchasing and using cryptocurrencies include
- Market misinformation about the alleged, widespread criminal use of cryptocurrencies in the media
- The high learning curve and complex process of owning and using cryptocurrencies
- Regulatory uncertainty governing legal use of cryptocurrencies
- The prohibition of cryptocurrency by major payment gateways
- The insecure nature of cryptocurrency exchanges in contrast to its traditional counterpart in public stock exchanges
- Poor user experience whilst leveraging cryptocurrency wallets
The next sections, denoted by 1.x.x, will highlight major factors instrumental in developing the current ecosystem of fiat-to-crypto payment ramp solutions.
1.0 Market Misinformation & the ‘Brand’ of Cryptocurrency
For newcomers into the cryptocurrency arena, the perceived brand of the ecosystem is completely enveloped by one word, ‘Bitcoin.’ As the first entrant within the decentralized cryptocurrency market, bitcoin exercised its advantage as the crypto-incumbent by more regularly making mainstream headlines as a mysterious and contentious innovation.
As early as 2012, major production studio CBS first exposed the existence of bitcoin mainstream viewers through their popular series, ‘The Good Wife’ in the television show’s third season. During the episode, ‘Bitcoin for Dummies,’ the main characters faced off against the US Treasury Department whilst aiding aiding Dylan Stack, a lawyer who represents the creator of Bitcoin. Stack was being pressured to reveal the name of the anonymous Bitcoin creator so that the government could prosecute him for creating what they believe to be a currency in direct competition with the US Dollar.
Media coverage worsened when, in 2013, USA Today inextricably linked the use of bitcoin on the Silk Road as the primary purpose for the virtual currency (that is, to conduct illegal transactions), and thus an anti-bitcoin sentiment spread across mainstream media. As bitcoin’s price, along with other ‘alt-coins’ (other cryptocurrencies) began to become a subject of mainstream obsession, frequented ‘market crashes,’ news of illicit use, and overall public miseducation soured international sentiment around the crypto-market. Per Clovr, a blockchain-focused research company, technology media outlets, as well as the media outlets that skew conservative and centrist, demonstrated more negative sentiment in their coverage than positive. Conservative media outlets had the highest level of negative sentiment — 88.7% negative versus 11.3% positive. On centrist media outlets, the proportion of bitcoin coverage deemed negative was 68.2% versus 31.8% positive. With regards to technology publications, the percentage of stories with negative sentiment was 57.7% against 42.3% positive.
As international attention slowly pivots from cryptocurrency and bitcoin to the usage of blockchain technology as an emerging solution in fin-tech and social innovation, sentiments seem to be shifting toward ‘neutrally undereducated,’ as media outlets frame their own narratives to fit what’s trending in popular culture.
1.1 Currently Securing Cryptocurrency Assets
The typical on-boarding process of mainstream consumers into the crypto-community to become ‘HODLers,’ or individuals that own cryptocurrency and maintain their long-term investment in digital assets, consists of the following:
- Learning about cryptocurrency and what quantities they can buy and how they can use it
- Finding a cryptocurrency exchange they trust (typically the first exchange consideration is Coinbase for most cryptocurrency newcomers)
- Creating an account on the crypto-exchange
- Verifying their account via email
- Learning how to connect their bank account to the exchange
- Determining which cryptocurrency to buy and having confidence that the asset is held somewhere secure
- Determining the tax implications of possessing digital assets if they benefit from capital gains
The process has an extremely high learning curve, and, with widespread misinformation about which crypto-exchanges are secure, which crypto-vendors are legitimate, and which cryptocurrencies are associated with a legitimate venture, many consumers have been victims of fraud and or theft at least once within their crypto-community experience. Common fraud experiences include stolen funds from the use of an illegitimate, online vendor, lost funds from using a ponzi-scheme platform (e.g. Bitconnect, BCC Cash, etc.), and stolen funds from using a fraudulent or insecure cryptocurrency exchange.
The current on-boarding process assumes that the consumer has done prior due diligence about cryptocurrencies and the trustworthy agents within the community (vendors, exchanges), has access to traditional financial services (i.e. a bank account or debit card), has a basic understanding of cryptocurrency wallets, and is able to read and write.
1.2 Regulatory Uncertainty
The use of cryptocurrency, from the inception of Bitcoin, has been plagued with regulatory uncertainty, particularly with regards to how the asset is taxed. The token sale craze of 2017 pressured regulatory bodies like the U.S. Securities and Exchange Commission, the Monetary Authority of Singapore, and the Swiss Federal Tax Administration to quickly determine what attributes made certain cryptocurrencies securities, how digital currencies should be taxed, and whether cryptocurrencies were considered as legal tender. Such decisions, as you might imagine, have not been made overnight, and the in-between time has left a sense of legal ambiguity for mainstream consumers and investors alike. Currently, the global climate for cryptocurrency regulation can be summarized as follows:
In the context of the social sector, traditional money transfer laws, largely guided by anti-money laundering and anti-terrorism financing sentiments in the West, have left nonprofits in a state of confusion as whether it is legal to accept cryptocurrency donations, how to properly do so, and how might the tax implications differ for philanthropic gifts provided in cryptocurrency. Innovative NGOs are still determining how cryptocurrencies fit within the context of traditional cash aid and struggle with determining the geopolitical implications of providing ‘crypto-aid’ to those in need from countries that might be facing internationally levied sanctions.
Whichever the case, it seems that use case provisioning, research, cases of fraud, and expansive experimentation across both the commercial and social sectors will better inform the development of legal policy. Until then, the regulatory uncertainty of how to leverage cryptocurrency will remain ambiguous, and organizations wishing to participate within the crypto-community must complete their own due diligence as to not upset regulatory bodies.
1.3 Payment Processor Prohibition
There are around 13 billion payment cards worldwide, which in 2015 transacted $21.6 trillion globally. China’s UnionPay recently overtook Visa as the world’s largest form of card payments by transaction value and number of users and together with MasterCard, all three account for 89% of worldwide expenditure. After the Initial Coin Offering (ICO) craze in 2017, where hundreds of cryptocurrencies flooded the global market and spurred instances of fraud, unregistered security sales, and misplaced commercial investments, payment processing companies like VISA and MasterCard banned transactions involving cryptocurrencies and the participation in zed ICOs. MasterCard instituted a ban on transactions to forex, binary, crypto brokers and ICOs transactions beginning in October 2018, while VISA soon followed, banning similar transactions in December 2018. Both companies were cited as deeming cryptocurrency related transactions as high risk.
The cryptocurrency prohibition policies aren’t necessarily motivated by an effort to protect consumers from misinformed investment decisions or credit card debt. In 2017, the gambling and lottery industries contributed toward an estimated $400 Billion in losses, and 78% percent of all reported online fraud involved credit card numbers. In essence, many consumers have already fell victim to vehicles existing in the traditional financial ecosystem, and these tools have not been banned or considered high risk by payment processing companies. Rather, potential competing interests held by payment processing giants to leverage private blockchain networks and centralized cryptocurrency schemas may motivate a seemingly conservative position of prohibiting consumers from freely participating within the crypto-market.
The existing user experience expectations of modern-day consumers is also a major disadvantage to cryptocurrency innovations, and positions payment processing companies in a position of privilege. Visa already provides a cashless, touchless way of paying with Paywave technology and integrating that with the leading digital payment providers like Apple Pay and Google Pay customers can wave their iWatch or smartphone in front of a payment terminal. Currently, over 1 million merchants accept Visa via Apple Pay. As one of the largest businesses in the world with a brand value estimated around $145 billion, Visa has over 20,000 members and is used at over 20 million merchant locations by over a billion people. It will take some persuading to convert these people for whom transaction times and user experience aren’t an issue.
Whichever the motivation, the massive prohibition on the processing of cryptocurrency purchases has directly contributed toward the issue of securing cryptocurrency assets by complicating the existing on-boarding process and forcing substitute innovation to work around these bans. Consumers must work around not being able to use debit cards and credit cards and experience an extended KYC (Know Your Client) registration process that includes connect their bank account direct to the method of exchange they’ve chosen to use to purchase and trade cryptocurrencies. The extended registration funnel causes the off-shed of mainstream consumers entering the crypto-market and, even worse, completely prohibits marginalized communities, who could greatly benefit from innovations like the use of stablecoins and micro-finance focused decentralized applications, from participating within the ecosystem at all.
1.4 Insecure Cryptocurrency Exchanges
In addition to mainstream media bias, long exchange registration processes, regulatory uncertainty, and prohibitive payment processing policies, mainstream consumers and investors have to be due diligent in which cryptocurrency exchanges they choose to leverage in fear of insecure platforms. Between January and May 2018, over $1.1 billion in cryptocurrency tokens were stolen by hackers. Each and every major exploit of a cryptocurrency exchange intimidates mainstream audiences from engaging within the crypto-market. Regulatory bodies are then pre-empted to respond with stricter policies, and thus minimize the potential capabilities of constructive crypto ecosystem that can bring further innovation to the social sector.
As we can see in Figure 2.0, over $8.8B over the course of six years has been stolen via cryptocurrency exchange hacks. Given the $123B market capitalization of the global cryptocurrency market, the figure represents an approximately 8% loss of the entire market’s assets. Such losses dishearten the narrative that cryptocurrency operates beyond the limitations of online fraud and small market capitalizations.
Despite major concerns about how cryptocurrency exchange hacks can undermine the legitimacy of the blockchain market, and the legitimate use of digital currencies, the current downtrend in the amount stolen per exploit seems promising. Since the nearly $7B stolen in the Mt. Gox hacks, only $1.8B has been taken by hackers (in major incidents). The decrease may speak toward the maturation of both exchange companies, as far as platform security goes, and due diligence of regulatory bodies that are shutting down some exchanges in realization that they may need a permit to sale securities.
1.5 Poor Wallet User Experience
Many of the consumer facing tools within the crypto-community inherently assume technical literacy. As product development becomes more engineer-centric, given the shrinking proximity between software engineering and business decisions, the average user interface (UI) and user experience (UX) is becoming more technical (i.e worsening). The UX implications are most apparent via cryptocurrency wallets, where users are expected to know (1) how to properly manage their wallet private key, (2) how to purchase and transmit cryptocurrency into and from their wallet, (3) how to manage multiple wallets that can hold various cryptocurrencies, (4) how to understand the intended use of the cryptocurrency outside the context of an investment, (5) how to understand how their hexadecimal public address works, and (5) how to read and write (consumer literacy). In some cases, the UI of cryptocurrency wallets even assumes that the user understands the conversion rate between the cryptocurrencies the wallet can hold and that consumer’s native fiat currency.
The UX is very divergent from the traditional mobile money experience that’s presented by financial service firms (i.e. banks), and even that sector relies upon terrible UX/UI practices. However, the incumbent technology provides users with immediate settlement times (in the front end), user password support, live customer support to remedy consumer concerns (or at the least misdirect consumer frustrations). These traditional expectations must be infused into the existing cryptocurrency wallet UX at a minimum if we are to expect any mass adoption of the technology.
Overall, wallet developers will need to adhere to the following UX constraints to better re-invent the cryptocurrency wallet in preparation of mainstream user adoption (and hopefully adoption of marginalized community members as well):
- Use passwords not private keys: Leverage managed wallet architecture so that users can recover their wallet password (instead of forcing private key management)
- Show quantity of capital in fiat currency: The primary money ticker in any wallet should show the fiat currency amount first, and then, underneath it, the cryptocurrency equivalent
- Never show hexadecimal addresses: Users do not need to see or know their public addresses, because the majority of users will not remember them (nor should need to), and the UI of a public address intimidates the UX. Rather, usernames or contacts should obscure the public addresses they’re associated with
- Provide alternative user interfaces for consumers unable to read or write: If wallets hope to go the extra mile and create an inclusive environment for all potential users, then consumer literacy can also not be assumed
- Maximize user coverage: Provide simple methods of purchasing cryptocurrency through the wallet with traditional methods of purchasing
- Usage of stablecoin as a default store of value: Introduce users to liquid stablecoins as a default store of value to enable payment for external services and resources the user may need access to
1.6 Potential Solutions to Better Onboarding
In an effort to sustainably circumvent existing payment processor bans and improve cryptocurrency wallet and cryptocurrency exchange UI and UX, there are a few avenues we can utilize to develop more accommodating architectures so that mainstream and marginalized consumers alike can easily access, purchase, and transmit cryptocurrencies. The solutions in subsections 1.6.x denote near-to-middle term offerings that can support current issues in the market.
1.6.1 Automatically Converting to Stablecoin with Wyre
Wyre is a secure and compliant bridge between fiat currencies and cryptocurrency. Wyre The company provides a JSON REST API that supports a range of financial, cryptocurrency, and identity services. It can move money around, broker exchanges, validate KYC/AML information, and transfer to/from traditional banking systems all while remaining compliant. We offer four sets of distinct API functionality:
- Accounts: manage balances and KYC data of individuals
- Transfers: moving and exchanging funds
- Payment Methods: linking external accounts for access to funds — banks, cards, etc
- Rates: get up-to-date exchange rates
To foster a better development experience for their partners, Wyre offers a test environment in addition to production. Any transfers made in the test environment will never hit the actual blockchain network or incur any fees. In addition to their API, Wyre provides a web module widget that allows developers to deploy a stylized KYC/AML widget to your web-supporting application. This involves prompting the customer for their name and address, banking information, uploading any necessary documentation (such as passports scans or video authorizations). The result is a private, secure profile the customer may use to prove their compliance status and gain access to gated services. As a partner developer, you will not in general have direct access to the customer’s personal information. You instead receive a guarantee of a specifically-compliant identity from Wyre. The underlying personal information is exposed only in response to demands made to Wyre lawfully (or, in some cases, in support of security authorization).
To best align each component to properly interact with Wyre’s API and or widget, there are several required agents within the Wyre operating model:
- Wyre: Wyre, as a service provider, verifies users off-chain and maintains the status of their on-chain Compliance Tokens. We serve liquidity to partners verified by Wyre, and only serve liquidity to users that are verified token holders. We do not disclose their personal information unless in the event of a regulatory intervention as requested (e.g. subpoena, etc…)
- Partners: DEX, Dapps, etc. The is the implementing client building the application. You have users, some of which are verified via Wyre, some of which are not. It is your job to check the verification status of your users on-chain and enable or disable different features depending on their status. Verified users may be able to access features such as: Bank Deposit, Cashout, Bitcoin, etc.
- Users: DEX, Dapp end users. They are the ones getting verified and getting the experience from you. Wyre’s part in this is purely to onboard them, and facilitate on/off ramps into your application for them
The user flow for leveraging the Wyre module, in-application, is as follows:
- The user will first login to the DEX or dApp. When they first land here they will be exposed to limited functionality, based on what they can do without being KYC/AML verified
- The user will click on the “Get Verified” button which will open the Wyre KYC/AML compliance module
- The verification module will guide the user to fill out their KYC information which automatically gets sent to Wyre (See animation below)
- We currently use Plaid to fund the Ethereum wallet via ACH transfer. In the test environment, the user can select any bank vendor. For username, type in user_good and for password, type in pass_good which are the Plaid test credentials
- Our compliance team will review the KYC information and issue a Compliance Token once approved
- When the user visits the DEX/dApp again, there will be additional functionality enabled, based on the existence of the Compliance Token
Of course, such a user flow only achieves a few of the ideal usability constraints discussed in Section 3.6, but the innovation does allow for mainstream consumers to more easily participate within the crypto-ecosystem despite traditional payment processor prohibition. It is uncertain which cryptocurrencies Wyre’s API supports exactly, but the company is open toward supporting newcomer stablecoins in the space. It is very possible that the application could be used in tangent to existing, commercial and or bank sponsored stablecoin platforms if inquired.
1.6.2 Usage of Fiat-Collateralized Tokens
The second method to improve on-boarding is to leverage a fiat-collateralized token model. Such a model could leverage existing payment processing APIs, like Strip, Paypal, and Plaid, to facilitate the purchase of fiat-backed tokens, which could then be utilized on the developed platform. This wouldn’t be much different than selling ‘dollar credits’ in an online game, but the core differentiator would be the immutable transaction and accounting saved on the underlying blockchain. The core difference here, between online credits and fiat-collateralized tokens, is that organizations cannot commit fraud by changing transactions in their database when transactions are recorded to the blockchain.
Of course, implementing organizations would still need to closely track their finances and provide quarterly bank account audits to consumers to maintain their trust. Administrators would need to prove that their organization is not misusing fiat funds that should serve as collateral to each token sold. Many of the ACH transactions would need to signal on-chain transactions so that the transmissions of funds between bank accounts and blockchain accounts is as in-synch as possible. Developers would also need to overcome (1) the payment of transaction fees, depending on which blockchain their organization is building upon, and (2) sustainable transaction throughput in an effort to not inconvenience users. The proposed user flow would be the following:
- The user logs in to the application using the organization’s preferred method of authentication
- The user connects their bank account and or debit/credit card to the application via a web-module provided by an API like Plaid
- Now with their method of payment connected to the application, the user purchases tokens in the app to fund their desired activity (sending money, purchasing services, etc.).
- All of their transactions from this point on are immediate, and the implementing organization handles the ACH transfers necessary to ensure every token disbursed is backed by fiat.
Industry examples of a fiat-collateralized initiatives, include Project i2i, by ConsenSys and UnionBank, the Utility Settlement Coin consortium led by UBS, and Project Ubin of the Monetary Authority of Singapore. If access to one of these projects’ platforms is possible, then developers can build atop their foundational layer, which provides access to the fiat-collateralized cryptocurrency, and build financial access applications on top of it. Potential users would need to onboard into the specific stablecoin ecosystem that supported the application, and thus their transactions would be limited to the community that adopted the platform (i.e. for Project i2i, the user would be constrained to transactions facilitated with Filipino vendors/consumers). The foundation layer would need to provide an API and widget resource, much like Wyre and Coinbase, for developers to efficiently build third-layer applications (since typically, the first layer of many of these projects is an existing blockchain). Strategically, offering such development resources free of charge would maximize the number of potential applications built atop the established foundational layer.
As the trend of proof-of-concept development continues, these platforms will only achieve mainstream adoption if conducted in partnership (or led by) leading institutions within the financial services market. The latter means that it may not be feasible, or strategically feasible for smaller organizations to develop their own fiat-collateralized systems in solitude.
1.6.3 Usage of Coinbase API
Coinbase is one of the world’s most popular cryptocurrency exchanges that serves as the entry point for many newcomers into the cryptocurrency ecosystem. The company offers an API that enables developers to accomplish the following within their applications:
- Generate bitcoin, bitcoin cash, litecoin and ethereum wallets and addresses
- Buy/sell and send/receive bitcoin, bitcoin cash, litecoin and ethereum
- Securely store bitcoin, bitcoin cash, litecoin and ethereum
- Retrieve real-time or historical price information
- Receive notifications when payments arrive
Unlike the Wyre API, the Coinbase API does not provide a service that gives direct financial sovereignty to users over their assets, as all cryptocurrency addresses generated are controlled by Coinbase. In addition, users are limited to purchasing cryptocurrencies registered on their exchange, and may not have access to cryptocurrencies being transacted in their local community. Users do have access to Coinbase’s stablecoin, USDC (United States Dollar Coin), which is a fiat-collateralized cryptocurrency where each token is backed by one United States dollar (USD$). Users can connect their bank accounts to your application, and, via the Coinbase API, purchase USDC tokens with their fiat capital. The conversion from fiat to USDC token is handled by Coinbase API in the backend. The company also offers a web-module widget to allow users to buy cryptocurrencies directly from your application, Coinbase Commerce functionality that allows users to access multiple cryptocurrencies offered on their exchange, and Coinbase Connect, which is an authentication layer that connects the application user to millions of other user wallets (in order to interact with Coinbase verified users more easily).
The Wyre operational structure and user flow is very similar to that of Coinbase operational structure and user flow. Depending on your organization’s sentiments on leveraging a fiat-collateralized cryptocurrency like USDC, controlled by Coinbase, or using a crypto-collateralized cryptocurrency like DAI will ultimately determine which technical resource you leverage in the long-run given each API’s similarities.
Next: Donation Transparency
In the next section, we take a look at how stablecoin technology can realistically contribute toward increased donation transparency and what considerations organizations need to make if they’re going to look to use cryptocurrencies in the future.
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I commonly write about crypto-economics and blockchain technology with a social impact focus, though I often times stray into lower-level, more technical analyses as well!