White Star Capital Digital Assets Fund - Newsletter #149
Lessons from Fiat: The Crypto Payments Industry and the Race to Volume
Lessons from Fiat: The Crypto Payments Industry and the Race to Volume
White Star Capital Digital Asset Fund - newsletter #149
Judging by how most people talk about crypto, you’d be forgiven for forgetting the ‘currency’ half of the word. Tokens from ETH to SOL are bought for investment, savings, speculation, flipping, trading, borrowing, lending and more. Anything, that is, other than spending. And this doesn’t come down to design flaws. Indeed, many cryptocurrencies, particularly dollar-pegged stablecoins, have money’s full triad of features by design.
Why then, am I yet to see a customer in an Apple or a 7/11 store swiping their card and spending their cryptocurrency as a medium of exchange?
And no, it’s not for lack of 7/11’s interest either. Merchants, for their part, also benefit from accepting crypto payments. Removing intermediaries promises lower fees, instant settlement, and, therefore, instant cashflow. It also provides live traceability of funds which optimises accounting and supply chain management processes.
Accepting crypto and settling in fiat also has its benefits. Merchants are always looking to expand their customer pool, and ideally into those with deeper pockets. The benefits are the same as point-of-sale products like buy-now-pay-later (BNPL), or expensive schemes like American Express membership, in that by enabling crypto purchases crypto-native users will be encouraged to choose a specific store over other exclusively fiat-based stores. And in the next bull cycle, maybe they’ll even come with deeper pockets too.
Combined, these factors mean up to 60% of merchants are primed to accept crypto.
Why then, are only 4% of merchants currently offering crypto payments options?
Well, I’ll give you the short answer. Despite theoretical promises, paying in crypto is in fact neither cheap, nor efficient.
Almost all of the payments industry’s business models, from processors to exchanges to payment rails, boil down to fee(s) on volume. And volume is difficult to secure, especially in an open-source industry like crypto with fickle consumers, volatile prices, and liquidity providers that seemingly collapse every two weeks. This means the market is full of small and fragile players fragmenting liquidity and stumbling to their revenue-generating feet.
Volume is also the most desirable moat. Enough volume, as seen with the behemoth incumbents in the fiat payments tech stack, gives 1) negotiation power to lower fees with partners, and 2) enables new and potentially bigger revenue streams that come with the insights from aggregated transaction data.
So, given this, who will win out here and how?
Part 1: The Anatomy of the Swipe
Let’s consider how information and funds flow between the existing tech stacks behind fiat and crypto payment rails.
Fiat Payments
There are numerous resources that explain the mechanics of how this works. I would recommend starting with Stripe’s article, Siddiqui’s book on card payments, and lastly this Global Payments primer by Glenbrook if you want to dive deeper.
For now, all that’s important from the above diagram is to realise that, firstly, the actual fund settlement is often T+1 or even T+2 depending on the speed of the native bank clearing system, and, secondly, the business models of all of these parts are simply fees on transaction volume. Combined, when you swipe your card, the merchant is charged the following fees:
Processor fees (1.3–3.5%)- charged by processors for connecting to card schemes. Optimising processing fees requires high volumes and low merchant risk through a strong AML/CTF program
Interchange fees (1.1–3.3% + $0.1)- charged by issuing banks, optimised by incorporating as local merchants in different regions to not require cross-border interchange rates
Scheme fees (1.3–3.5% + $0.1)- charged by card schemes for processing the transaction on their rails
Exchange fees (1–3%)- charged by issuing banks if currency conversion required
Chargebacks (5–10% or $20–100)- charged by acquiring banks if customer disputes a transaction or if there is a fraud attempt
Now, what about if the customer wants to pay in, say, Bitcoin?
Crypto Payments
The original promise of Bitcoin and blockchain technology was the possibility of peer-to-peer transactions, making it possible to send crypto from one wallet to another without any of the above intermediaries, and at significantly faster settlement times (speed depending on block finality time of the chain).
However, in reality, this is more suitable for individuals paying one another, and a customer-to-merchant relationship requires its own infrastructure stack to formalise this at any level of scale. This falls into two types of offerings analogous to those in the fiat system: card issuers (consumer facing), and payment service providers (merchant facing).
For card issuer/processors, they are responsible for KYCing the customer, and then act as a pseudo-issuer bank on behalf of the customer’s wallet which allows them to connect directly with the card scheme. Visa and Mastercard have both publicly recognised the potential of faster settlements, and established their own crypto card membership schemes to connect with their network of 80m and 30m merchants respectively. Within these schemes, they work with stablecoin partners such as Circle and Paxos to enable stablecoin settlement (see details in Visa and Mastercard’s statements). This means that if the merchant wants to accept cryptocurrency, the settlement would be instant into their chosen wallet. If the merchant only wants to accept fiat, then the crypto would be exchanged to stablecoins and then into the respective fiat currency, before travelling along the usual rails to the merchant’s acquirer bank.
If the merchant wanted to regularly accept cryptocurrencies, it could also integrate a crypto-specific payment service provider (PSP), which, analogous to Stripe, would act as a pseudo-acquirer bank and handle both the KYC and fraud management, and the currency settlement. The merchant would then have their own dashboard overview and management system, tracing customer data and the movement and balance of funds.
So with crypto payments, although some of the fiat intermediaries (and therefore fees) are removed, we are left with the following additional fees to consider:
Exchange fees (1–5%) set by the exchanges and market makers. When charged by centralised entities, these can be negotiated but again will mostly be optimised with higher promised volume. DEX exchange fees are determined by relative liquidity.
An additional gas or network fee ($0.00025 on Solana - $0.01 on Ethereum L2s) to reward the nodes who secure and validate the network. Whether this supersedes the fiat fees depends on the chain, the complexity of the transaction and a number of largely uncontrollable variables including demand for blockspace, i.e. network congestion. But this fee is fixed rather than proportionate, meaning payments companies that aggregate transactions effectively can significantly save on this fee, but makes micropayments particularly difficult on layer 1s like Ethereum.
The payments industry — both in fiat and in crypto — is comprised of fees on payment volume. Crypto start-ups looking to disrupt the industry by offering lower fees to merchants than extractive incumbents will need to find ways to secure enough volume to negotiate their rates down or bypass existing component players in the stack entirely.
Now, because transaction volume is the main chip that merchants and payments businesses use to negotiate for lower fees, they often face a Catch-22:
Most customers choose the lowest fees; the lowest fees are ensured by the most customers.
Crypto companies have the hindsight of two key lessons from the fiat payments industry that can be applied to drive greater volume. Stay tuned for Part 2 next week.
🔦 White Star & Portfolio Spotlight
eToro partners with Index Coop to launch Web3 portfolio
eToro has partnered with Index Coop to launch 'Index-Coop,' a crypto Smart Portfolio that provides exposure to Web3 through Bitcoin, Ethereum, DeFi, and the Metaverse. The portfolio, backed by Sequoia Capital, is composed of Bitcoin (30%), Ether (30%), DeFi Pulse Index assets (30%), and Metaverse Index assets (10%). It will undergo quarterly rebalancing, ensuring diversification and alignment with market dynamics, offering investors a long-term investment option in the expanding Web3 ecosystem.
Atlendis Labs is bridging the gap between DeFi and traditional finance
Atlendis Labs, initially a DeFi-focused entity, has transformed into a hybrid company. They have created a lending protocol that merges blockchain technology with traditional finance, offering inclusivity through streamlined onboarding, KYC pools, improved legal frameworks, and rigorous underwriting. This approach bridges the gap between traditional finance and blockchain, providing secure decentralized financial solutions.
Oamo partners with Primex to offer exclusive data pools for DeFi traders and lenders
Oamo has partnered with Primex, an emerging non-custodial prime brokerage protocol, to offer exclusive Data Pools. DeFi traders and lenders can participate to earn $USDC and leverage Primex's collaboration with Oamo to enhance community growth through decentralized data initiatives.
Ledn has updated the terms for Celsius clients
Ledn has introduced updated terms for Celsius clients, offering a custodied loan solution with lower APRs for standard loans. This update also brings increased flexibility with a 12-month term, no repayment penalties, no monthly payments, and the convenience of auto-renewal for loans with an LTV of less than 75%.
ALEX integrates Swap function into OKX
ALEX has successfully integrated its Swap function into OKX, allowing users to easily exchange $STX, $ALEX, and $xBTC on the platform. Additionally, ALEX has plans to introduce stablecoins and sBTC in the near future, broadening its range of offerings.
🏦 Enterprises & Institutions
Fidelity Digital Assets becomes first enterprise client of EY's blockchain tool
Fidelity Digital Assets is the first enterprise client to utilize EY's latest blockchain analytics tool, "EY Blockchain Analyzer: Reconciler," for on-chain data queries to enhance risk management. EY's web-based tool aids organizations in sourcing and analyzing on-chain data, promoting robust internal risk management in the fast-growing digital assets market, with Fidelity Digital Assets emphasizing its commitment to security and transparency.
BlackRock CEO seeing client demand for crypto 'around the world'
BlackRock CEO Larry Fink has observed a rising global demand for cryptocurrencies, possibly reflecting heightened interest in the asset class. He suggested that the recent crypto rally might be linked to a "flight to quality" amid global uncertainties like the Israeli conflict and terrorism. However, he refrained from discussing BlackRock's status regarding the spot bitcoin ETF application.
Binance.US asks users to convert USD into stablecoins for withdrawals
Binance.US has changed its terms of service, signaling the discontinuation of direct USD withdrawals. Users are now instructed to convert their USD holdings into stablecoins or digital assets for withdrawals as Binance.US shifts toward becoming a "crypto-only exchange," citing challenges in securing stable banking partners for fiat transactions.
BAYC creator Yuga Labs completes restructuring to focus on metaverse
Yuga Labs, the company responsible for the Bored Ape Yacht Club (BAYC) NFT project, has undergone a restructuring to shift its focus towards its upcoming metaverse project called Otherside. The CEO has stressed the significance of Otherside and highlighted the ambitious nature of building an immersive metaverse platform. The impact of this restructuring on international teams is currently being evaluated, with a specific emphasis on addressing the challenges that the industry and the global economy are currently facing.
Anthropic built a democratic AI chatbot by letting users vote for its values
Anthropic fine-tuned a large language model (LLM) using "Collective Constitutional AI," involving 1,000 users who shaped the model's behavior based on their value judgments. This approach allows users to establish shared values in AI models, improving safety and usefulness by preventing inappropriate outputs and addressing the challenges of aligning AI values with user expectations.
⚖️ Government & Regulation
European Central Bank opens two-year project to develop digital euro
The European Central Bank has launched a two-year project to create a digital euro, aiming to select infrastructure providers and test prototypes. ECB President Christine Lagarde envisions a digital euro that can be used for all digital payments, while ensuring robust privacy standards. The Governing Council of the central bank plans to make a final decision on issuing the digital euro after a two-year development period, considering input from European Union lawmakers.
New EU rules require crypto firms to share customers’ tax data with authorities
Starting in 2026, European crypto firms will have to share financial data of account holders with tax authorities to combat tax evasion. This measure aims to enhance financial stability, counter terrorist financing, and prevent money laundering. However, it may complicate regulations due to the inclusion of staking practices, which were not addressed by the EU's existing crypto legislation, MiCA. This omission could potentially result in varying interpretations and bureaucratic hurdles for cross-border transactions.
NFT games are not to be considered gambling, votes French National Assembly
The French National Assembly has passed the Sorare law, which establishes a regulatory framework for video games that use NFTs and crypto-based monetization. While it still awaits approval from the Constitutional Council, this law aims to distinguish crypto games from gambling and traditional video games. If approved, it has the potential to legitimize the sector and improve user protection, with the Autorité Nationale des Jeux overseeing compliance.
DLT Securities rules are here to stay, EU official says
An official from the European Union's executive arm has announced that the relaxed securities laws, implemented to encourage the adoption of distributed ledger technology (DLT), are expected to be permanently maintained. In April, the EU eased its financial services regulations, allowing securities traders to participate in markets using DLT and granting exchanges the authority to directly register tokens without the involvement of regulated intermediaries such as brokers and depositories.
💰 Funding & Exits
Pantera, Susquehanna and HashKey back DEX SynFutures with $22M funding
SynFutures, a decentralized exchange, has raised $22M in a Series B funding round, led by Pantera Capital and joined by crypto investors including Susquehanna International Group and HashKey Capital. SynFutures is introducing an upgraded exchange with the "Oyster automated market maker" (Oyster AMM) to enhance trading efficiency by consolidating liquidity in decentralized finance (DeFi).
Account Labs raises $7.7M for new Google-enabled crypto wallet
Singapore's Account Labs has raised $7.7 million in funding, led by investors including Amber Group, MixMarvel DAO Ventures, and Qiming Ventures, coinciding with the launch of its UniPass Wallet. The wallet employs account abstraction technology, enabling "smart wallet" features like scheduled token transfers and "gasless" transactions. UniPass simplifies user access via Google logins, accepts payments through Mastercard, Visa, and Apple Pay, and plans expansion into Southeast Asia.
Elixir Protocol secures $7.5M Series A funding at $100M valuation
Elixir Protocol, a DeFi platform, has successfully raised $7.5M in a Series A funding round, valuing the company at $100M. Hack VC led the funding round, which aims to enhance liquidity on decentralized order book exchanges. Elixir Protocol's technology allows users to provide liquidity directly to order book exchanges, offering a more efficient trading environment with tighter bid-ask spreads and increased volume, ultimately improving the DeFi trading experience.
Solana-based multisig protocol Squads raises $5.7M from Multicoin, Placeholder and others
Squads Labs, the creator of Solana-based multisig protocol Squads, has raised $5.7 million in strategic funding led by Placeholder VC, with participation from Multicoin Capital, Solana Ventures, Jump Crypto, and others. Squads provides a transparent and immutable smart contract wallet system for securing and managing digital assets on Solana's blockchain, helping clients secure over $500 million in assets for 100+ clients since its 2021 launch, with plans to introduce an iOS product for retail users later this year.
opBNB-based AI platform MyShell raises funds at $57M valuation
OpBNB-based AI platform MyShell has secured $5.6 million in seed funding led by INCE Capital, with participation from Hashkey Capital, Folius Ventures, SevenX Ventures, OP Crypto, and others. MyShell, a web3-enabled AI platform launched in May, allows users to create personalized chatbots called "Shells" and aims to build a creator ecosystem on the blockchain, offering token rewards for creators and consumers.
Darewise Entertainment raises $3.5M in token presale for Bitcoin metaverse ecosystem
Darewise Entertainment, a subsidiary of Animoca Brands, has secured $3.5 million in a token presale for its Bitcoin metaverse ecosystem, which will be used in gaming, brands, and real-world experiences. "Life Beyond" will be the first gaming metaverse to employ this token for in-game assets and virtual lands. The token is expected to launch in early 2024 with support from Horizen Labs.
🚀 Project Launches & Updates
Bitcoin miner using Paraguay's Itaipu Dam for sustainable and cost-effective power
Sazmining's new facility in Paraguay, powered by the Itaipu Dam, offers Bitcoin miners an attractive opportunity. By utilizing Paraguay's surplus hydropower and benefiting from low energy costs, it provides a sustainable and cost-effective solution. This project has the potential to establish Paraguay as a significant hub for Bitcoin mining, with mining costs at $0.047 per kilowatt-hour, much lower than in the United States.
Ferrari now accepts crypto payments for luxury cars in US
Ferrari now accepts cryptocurrency payments for its luxury cars in the US, catering to wealthy customers' demands. The accepted cryptocurrencies include bitcoin, ether, and USDC, and BitPay is facilitating these transactions. Ferrari plans to expand this payment option to Europe and other regions while shielding itself and dealers from crypto price fluctuations by instantly converting the digital currencies into fiat.
Meet the company that’s helping governments detect AI deepfakes
DeepMedia is assisting governments, including the White House, in detecting AI deepfakes through its main offering, DeepIdentify.AI. This technology analyzes photos and videos to identify inconsistencies or inaccuracies that suggest deepfake manipulation. It offers a crucial tool for identifying fraudulent content and mitigating potential national security risks associated with advanced deepfake technology.
Microsoft veteran joins Matter Labs to unlock 'holy grail' of web3 with zkSync
Microsoft veteran Vassilis Tziokas has joined Matter Labs as head of enterprise business development to drive enterprise adoption of web3 through zkSync's Ethereum Layer 2 scaling solution, aiming to unlock the "holy grail" of web3. Tziokas believes zkSync is the right protocol for secure and innovative solutions, despite challenges like vendor fragmentation and regulatory clarity, and highlights recent developments like the Buenos Aires government's ZK-based digital identity solution and Walmart's venture into the NFT space via Pudgy Penguins on zkSync.
🔥 Other Bits We're Excited About
Bitcoin ETF could boost crypto market by $1 trillion
A report from CryptoQuant predicts that if Bitcoin ETFs are approved next year, Bitcoin's market cap could reach $900 billion, almost doubling its current value. Furthermore, the influx of institutional funds into the digital asset market could boost the entire cryptocurrency market cap by $1 trillion, as several major Wall Street players seek approval for spot Bitcoin ETFs from the U.S. Securities and Exchange Commission.
Tokenized RWAs could grow to a $10T Market by 2030 as Crypto converges to TradFi
The tokenized asset market, which includes real-world assets such as private equity and real estate on blockchain, could grow to $10 trillion by 2030 as traditional financial institutions adopt blockchain technology, according to digital asset manager 21.co. This convergence of cryptocurrency and traditional assets is experiencing significant growth, but challenges like regulations and standards may impede widespread tokenization adoption.
Token adoption grows as real-world assets move on-chain
The adoption of tokens is increasing as real-world assets, such as real estate and government bonds, are being digitized and transferred onto blockchain networks. This trend is driven by the growing interest from institutional investors, a demand for more transparent and sustainable returns, and clearer regulations in specific jurisdictions. Consequently, tokenized real-world assets have become an attractive investment option.