HashKey Capital: Re-understand the legal currency deposit and withdrawal channels for global digital asset compliance entry


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Author: Hashkey Capital

Original title: Research on the legal currency deposit and withdrawal channels for global digital assets compliance

1. Overview and update of digital asset compliance entry channels

In the middle of last year, we sorted out the business picture of digital asset compliance entry channels. This year we saw some new trends and changes in the competitive landscape, so we made further updates. The following is the update of the participants and the classification process (blue is the update part):

HashKey Capital:重新认识全球数字资产合规入场的法币出入金渠道

In the previous report, the channels for compliant entry of digital assets were divided into four categories, namely: wallet payment terminals, compliant exchanges, payment processing companies, and stable coins. Now you can join another type of company, that is, financial institution. The classification list is as follows:

HashKey Capital:重新认识全球数字资产合规入场的法币出入金渠道

2. New trends

During this year’s development, we have observed the following trends:

Tighter regulation

On the one hand, it is to combat crimes, such as the New York State lawsuit against Bitfinex, which later involved investors in a class action lawsuit against Bitfinex, and also added Polonix and Bittrex as defendants, on the grounds that the USDT generated by Bitfinex provided a collection address. Therefore, merchants that provide digital asset entry or transactions must avoid having a relationship with the “problem” channel, otherwise there is a risk of tracing.

On the other hand, the compliance system is perfect. The VASP regulatory framework established by FATF (launched in June 2019, revised in June 2020) will likely become a universal VASP standard, and compliant exchange businesses will basically adapt to the principles of FATF, such as Hong Kong and Singapore: 1) Hong Kong After 2018, the regulation of virtual asset trading platforms was continuously deepened, and the first exchange license was issued. According to the financial affairs and treasury library consultation documents, after adopting FATF’s recommendations, any platform that participates in virtual assets, including OTC, wallets, transfer payments, custody, and related financial services (such as digital asset issuance), will be regulated. . 2) The Monetary Authority of Singapore issued the Payment Service Bill in November 2017, which was later officially upgraded to the Payment Service Act in 2019, introduced PS Notice 2 in 2019, and issued a consultation document on the New Omnibus Act in July 2020. PSN2 is an amendment to the PSA Act, which is specifically aimed at virtual asset service providers and meets FATF’s VASP requirements.

Stable coins cannot be ignored, and the central bank pays attention to the relevant impact

2020 is a year of rapid development of stablecoins. Not only USDT, but also compliant stablecoins like USDC are developing very fast. Stable coins provide a convenient, fast, and low-friction way of participation, and compliant stable coins as an entrance are also subject to strict compliance such as KYC/AML and user regions. Global regulators represented by central banks attach great importance to the development of stablecoins. You can check the reports of the European Central Bank/G7 Group/FSB on stablecoins, mainly focusing on stablecoins on payment systems, monetary policies, financial stability, and on banks. Impact.

More and more institutions are participating in digital asset admission services

This year’s institutional services are worthy of the market’s attention. Institutions are a relatively general concept. We divide them into three categories here:

One is payment institutions represented by PayPal and Square, which directly provide in-app admission, but basically only serve American customers

The second is based on the Delaware statutory fund (Delaware statutory fund) model. The entry model of digital currency represented by fund shares represents the great needs of customers behind it, such as Grayscale and Bitwise.

The third is that traditional financial institutions, especially banks that have obtained licenses in Switzerland such as SEBA/Sygnum, can provide on-ramp services to customers in full compliance.

Various institutions are still entering this field:

1) On December 10, Asia DBS and Singapore Stock Exchange SGX established a digital currency exchange, which can trade digital currencies, securitize digital assets, and provide custody services. Recognised Market Operator, a fully licensed institution under the MSA, can also trade stocks, bonds and private equity funds.

2) On December 9th, Bitwise’s Bitwise 10 Crypto Index Fund has been traded on the largest OTC market OTCQX (the highest level of pink sheet market transactions) provided by the US OTC Markets Group, which is the same as Grayscale’s 6 funds, but It has not become a SEC reporting company like GBTC and ETHE, so the redemption period is still 12 months instead of 6 months.

3) The Swiss Stock Exchange (SIX) announced plans to launch a digital asset exchange through SIX Digital Exchange (a digital asset exchange under SIX) and Swiss digital asset custody agency Custodigit (SIX is also a major investor), as well as communications company Swisscom and bank Sygnum. Asset gateway. It will give banks and their customers the ability to directly access digital assets.

Individual investors/institutional investors are becoming more and more interested in cryptocurrencies, and there are various entry channels

We found that institutions have a wide variety of admission channels. Here are some well-known cases:

  • Traditional investor Paul Tudor Jones bought bitcoin futures directly through the exchange CME
  • MicroStrategy discloses the purchase of Bitcoin through Coinbase Prime
  • MassMutual Insurance Company purchased $100 million worth of Bitcoin for General Investment Accounts, which was completed through NYDIG, a New York fund management company.
  • Square’s Cash App purchased only 180 million bitcoins in the third quarter of 2019. By the third quarter of 2020, the single-season bitcoin purchases had increased to 1.63 billion, an increase of 8.3 times. The MAU of Cash App is estimated to be in the order of 30-40 million, and it will be 15 million in 2Q 2019. The purchase volume is much faster than the user growth. Square disclosed several OTC service providers in the U.S. that use Venue to purchase bitcoins on its balance sheet: itbit, Genesis, and Cumberland.

HashKey Capital:重新认识全球数字资产合规入场的法币出入金渠道

  • PayPal has obtained an exclusive Bitlicense issued by the New York State Monetary Authority, which is consistent with the licenses of Coinbase’s many compliant cryptocurrency exchanges. PayPal and Paxos Trust Company cooperate to provide cryptocurrency trading and conversion services. At present, customers can already purchase cryptocurrency on Paypal, but they cannot make cryptocurrency payments and transfers yet. In 2021, PayPal will allow customers to make payments to merchants with digital currency through Veemo, and Paypal will complete the intermediate settlement.
  • Ark investment, a well-known investment fund managed by the female stock god Catherine Wood, has been optimistic about Bitcoin since 2017, and its flagship fund ARKW has obtained cryptocurrency positions by holding GBTC.

Auxiliary services for investors are gradually being available

Entry is not only a transaction issue, but also other factors and auxiliary facilities, including insurance, storage, accounting, taxation, etc., have also created many tools and businesses, so this article will not elaborate. See Square’s discussion on methods of participating in Bitcoin.

3. Update of participants

In last year’s report, we sorted out the situation of 17 digital asset entry service providers. We will not repeat the list here, but will introduce some characteristic service providers that we have recently learned.

Coinify-Europe’s most compliant digital asset entry company

Coinify is a company that provides digital asset compliance entry services in Europe. Its business is divided into two parts, the Payment service for corporate users and the Trade service for ordinary investors. The business volume ranks first in Europe among the same type, and covers countries and regions such as Europe, the United States and Southeast Asia.

Complete business

Coinify has six types of services: three types of Payment, merchant payment, virtual currency prepaid card, receipt/invoice service. There are three types of Trade, the withdrawal of virtual currency to legal currency, integrated currency trading services, and currency trading services in the wallet. Coinify currently supports more than 20 legal currencies and more than a dozen digital currencies.

Global compliance

Holding various types of promised licenses, the current license structure has allowed business in more than 70 countries, and will continue to apply for local licenses in major countries around the world.

Innovation cooperation

Coinfy cooperates with the Swiss online retailer Galaxus and the Swiss Sygnum Bank to provide platform support for the payment of the Swiss franc stable currency DCHF issued by the Sygnum Bank in Galaxus. DCHF is issued by Sygnum, and each DCHF has a corresponding Swiss franc stored in Sygnum as collateral. At present, the service is only available to parts of Switzerland. In addition to banks, Coinfy provides solutions for up to 65 payment service providers, and also provides embedded services for many exchanges and wallets.

Xanpool-advanced P2P mode digital asset entry company

Xanpool uses the P2P model to exchange digital assets for compliance entry. Xanpool has established a fiat currency and digital currency exchange network. Users can choose local fast payment methods for fiat currency payments, and liquidity providers provide digital currencies. The API and key management tools provided by Xanpool perform operations such as pricing and digital asset transfer in the middle, similar to Alipay’s conditional payment. Xanpool has developed rapidly recently, and the number of users has increased by about 17 times compared with the beginning of the year.

Fiat currency payment using local shortcuts

Xanpool’s user fiat currency level transfers all use local fast payment methods in Southeast Asia: 1) Hong Kong FPS, Alipay HK; 2) Singapore Paynow; 3) Malaysia: DuitNow; 4) Philippines: instaPay, Cebuana; 5) Thailand: Prompt Pay ;6) India: UPI; 7) Indonesia: Go Pay, Mandiri; 8) Vietnam: Viettel Pay. Using threshold points, users get started quickly.

Can realize cross-border payment

Xanpool further combines the on ramp and off ramp of digital currency to achieve a form of cross-border payment. The process is shown in the following figure:

HashKey Capital:重新认识全球数字资产合规入场的法币出入金渠道

The initiator of the transfer purchases the digital currency from the digital currency provider A (LP A), and LP A sends the currency to LP B. After receiving the digital currency, LP B sends the local currency to the recipient by using a local shortcut. Complete the entire process.

P2P model has network effects

The P2P model can make extensive use of LP’s liquidity and infrastructure. The model that provides API interfaces has a relatively fast start. The growth of liquidity is exponential. The more liquidity of the network will attract better LPs. Whether on the legal currency side or the digital currency side, the optimization of technology and services can rely on partners, and the overall network effect has a leverage effect.

Bundle-Cash App in Africa

Bundle is a digital asset compliance entry company in Africa. Bundle’s positioning is similar to Square’s Cash App, which is a wallet with cryptocurrency and local cash services. Through the Bundle, users can buy, sell and store digital currencies such as BNB, BTC and ETH, and deposit and withdraw digital currencies and local currencies such as NGN (Nigerian Naira). The transactions in the Bundle can be processed through various payment channels, such as bank cards, bank transfers and mobile payments, and can also be stored securely in the Bundle’s smartphone.

Direct bank account

After the user opens an account in the Bundle (KYC is required), a local bank account will be provided, and cash can be deposited and withdrawn through the local Cash Merchant in Nigeria. Bundle digital currency accounts can be connected to the banking system to achieve compliance entry of digital assets.

Prime Trust

U.S. Trust License

Prime Trust is an American digital asset custody company with a trust license from chartered in Nevada.

Rich business

Prime Trust provides a variety of services, provides legal custody and operational monitoring for exchanges, and provides mortgage fiat currency trusts for stable currency issuing companies. Prime Trust has also begun to provide digital asset entry services, called Coin Ramp, which can provide embedded exchanges and wallets, as well as widgets for websites.

CoinRamp can realize the real-time settlement of 6 major legal currencies, and supports multiple payment methods such as bank cards, bank transfers, and checks. Among them, bank card payments can support 163 legal currencies. The payment processing behind will automatically select the optimal payment channel. Liquidity service providers provide Liquidity API, which can support the exchange liquidity of BTC, ETH, and USDT. Will connect dozens of platforms (B-side customers)

Convenient admission service

PrimeTrust only provides APIs for admission. The legal currency side can use ACH, Fedwire credit cards, etc., and does not bear the risk of cryptocurrency fluctuations. APIs can also be customized according to the website and have the function of identifying customers. Customers have high demand in this regard.

Good customer base

Prime Trust has 300 customers, and CoinRamp will also support dozens of customers. The admission service comes from the actual needs of the customers and matches the custody business, which is a natural fit.

Thinking on the Competitive Territory of Digital Assets Compliance Entry

Ease of use and stability

The entry channel completes the exchange between legal currency and digital currency on behalf of customers. If you do not consider the difference in product categories, the process of entry and online e-commerce shopping is not much different. One side is for customers who want to buy goods, and the other is for selling goods. Merchant (or user). Therefore, the basic capability is to ensure smooth payment methods for customers, ensure timely delivery by merchants, ensure that there are no problems with products (such as KYC/AML coins), and can handle large-scale exchanges (compliance). Because the rate is not a key factor in the early stage, users cannot compare prices everywhere, and it is impossible to try all channels because of regional regulations. There is a natural similarity between admission and payment.

Currently more prominent business features

  • Have a huge customer base, such as Square, PayPal
  • Have a strong network and access to the richest liquidity provider
  • Have better technology
  • Have a certain compliance / license basis

Future competition situation-institutional approach, regional leader, variety

  • The entry of digital currency itself will become an infrastructure in the future, and if it becomes an infrastructure, the cost must be moderate. For example, Alipay cannot charge excessive fees as a payment infrastructure, and even needs to be free. For example, the digital asset custody fee was more expensive in the early days, but after that the fee became lower and lower, and there were more and more service types.
  • Competition is not a purely technical competition. Competitors are diverse, involving various factors such as customer type, market, local license, and customer base. Due to the existence of the division of licenses and markets, leading regional leaders will be born. This is the same as the blockchain industry other than the public chain.
  • In the future, compliance will be improved around the bank, the customer center. Generally, when it comes to the flow of legal currency, there will be local payment licenses. For example, in the United States, all companies apply for the state Money Transmitter License, Europe will have EMI and PI, and some non-developed countries and regions have digital currency licenses. Banks have the most customer assets, and banks can only cooperate with compliance channels.
  • It is a trend for traditional institutions to enter the market with customers and compliance advantages. In addition to the banking/custodial category, do not underestimate traditional payments such as Visa and Mastercard, as they tend to sink to a lower level of infrastructure. Visa announced a partnership with Circle Internet Financial to integrate the stable currency USDC into the Visa payment network. Circle currently joins Visa’s Fast Track project. If graduated successfully next year, Visa will be able to issue a credit card with USDC payment function. Any merchant using this credit card can accept USDC payment. This reveals some of Visa’s ambitions. Assuming that the crypto entry/payment service network will continue to be incorporated into Visa in the future, in fact crypto can be seamlessly connected to the traditional payment network, and Visa will become the gateway for crypto clearing and settlement. Earlier, Visa and many blockchain companies such as BlockFi and Coinbase have announced their cooperation and announced the joint issuance of credit/debit cards that can be paid in digital currency. Visa’s model may be more favored by crypto native companies.
  • Due to the natural similarity, pure digital asset compliance entry can extend to the payment industry, and Coinify and Xanpool have this trend.
  • We expect that 2021 will become an important watershed. In the past, digital asset compliance entry was mainly to serve crypto native companies or projects, and after 2021, it will mainly serve traditional institutions. The market changes, competitive landscape and business opportunities in the middle it goes without saying.

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