White Star Capital Digital Assets Fund - Newsletter #151
Lessons from Fiat Part 3: The Crypto Payments Industry and the Race to Volume
Lessons from Fiat Part 3: The Crypto Payments Industry and the Race to Volume
White Star Capital Digital Asset Fund - newsletter #151
Last week, I looked at how blockchain technology offers unique go-to-market strategies to help solve for the Catch-22 dilemma facing payments companies: most customers choose the lowest fees; yet the lowest fees are ensured by the most customers. This week, for the final part of this payments series, I’ll look into how companies who do manage to secure early volume can optimise their businesses to build a sustainable moat.
Part 3: Building a Moat through Bundling and Optimisation
Here is the payments stack diagram from Part 1 again:
From this you can see two important insights for crypto payments companies:
Firstly, going after one part of the value chain — ie. just trying to be a cross-chain liquidity pool, or a stablecoin, or even an on-chain monitoring/KYC provider — is extremely difficult to scale when both margins and volume are so low
Secondly, becoming a card issuer or other payments solution that redirects crypto capital into the customer/issuer bank (instead of the merchant/acquirer bank) simply adds more fees into the existing fiat fee structure. Binance Card, for example, handles crypto to fiat conversion and then holds the funds in their own account, thereafter interacting with the existing fiat rails
The only way to ensure a crypto payment is cheaper than a fiat one is to aggregate these offerings.
Exchanges
As seen above, a key point in the crypto chain is in the conversion to stablecoin and off-ramp providers. Rarely will one relationship with a third party be the most optimal here — the main exceptions being if the company is itself also operating the exchange in the backend (e.g. Binance Card and Binance Exchange) or if they own or have a relationship with the stablecoin issuer (e.g. Coinbase is a shareholder of Circle).
Payments start-ups cannot use volume to negotiate better rates with market makers and CEXs who can be parasitic with their terms. DeFi alternatives should therefore theoretically be preferable for pricing. And with increasing scalability solutions like Layer 2s, the marginal cost of DeFi trading in the backend will only decrease, particularly as, contrary to percentage based exchange fees on CEXs, gas fees remain constant relative to trade volume. Unfortunately, however, for the majority of assets, liquidity is too low for the kinds of volumes that payments companies need to be doing, meaning slippage is high.
That’s where aggregation solutions come in, where players can be a one-stop application for routing liquidity into different crypto primitives. Aggregators like Paraswap (WSC portfolio company), for example, split up orders into multiple exchanges to keep orders below 1% slippage.
Given the significance of optimising for conversion routes, liquidity and pricing, aggregators are therefore also better placed to move upstream into embedded finance companies than stablecoin issuers, card issuers, or wallets.
Acquirer Banks
In the fiat world, some of the most successful companies were built on owning the acquirer bank piece of the stack, recognising that most merchants require multiple acquirers to accept each point of sale. This will often be a more efficient model than card issuer models where fees are simply added on top of the existing stack. This is because in these models, crypto funds are exchanged into fiat currencies and then deposited in an issuer bank before being sent along fiat rails into the merchant’s acquirer bank, thereby costing the usual processor, interchange, and card scheme fees on top of the crypto fee stack.
There are two types of businesses owning the acquirer bank relationship:
Payment orchestration platforms, e.g. APEXX: route payments to the most efficient acquirer for each individual transaction based on different variables to maximise acceptance rates and minimise costs. These payment orchestrators are essentially marketplaces for acquiring banks or gateways who will then have the relationships with the acquiring banks. Ripe Money, for example, spins up new wallets to which a customer sends their crypto as ‘proof of intent’, whilst Ripe then sends fiat from one of its own bank accounts to the merchants account, keeping the crypto funds themselves.
Payment service providers, e.g. Stripe: offer a full stack solution by becoming the payment gateway, acquirer and risk management service provider all in one, meaning merchants can operate with one payment solution rather than managing and having to integrate different solutions and multiple acquirer bank relationships. These companies eventually win out by getting their own banking licence, enabling them to operate as an acquirer bank rather than relying on banking partners to handle settlement. BoomFi (WSC portfolio company), for example, is a payments service provider handling the end-to-end conversion and settlement on behalf of its merchants.
All of this payments data is valuable in aggregation, to the point where having enough of it becomes the competitive differentiation for any business as it enables them to optimise their chosen flow of funds model. Take remittances businesses which use crypto rails in the backend to most efficiently convert — for example, 1) USD → 2) USDC → 3) Cryptocurrency → 4) Pesos. With enough data on these conversion points with exchanges, market makers/off ramp providers, and acquiring banks, they will compete by building proprietary trading algorithms to determine the optimal route from 2) → 3) → 4) in real-time. The best of these will optimise for live price movements, volume and exchange rates with different assets and exchanges to the benefit of both the end user and their own margins.
Final Thoughts
There’s currently $124bn in stablecoins sitting in people’s wallets, waiting to be spent. Cryptocurrencies will only work as well as fiat currencies if, firstly, stablecoins can earn equivalent yield, and, secondly, moving between crypto and fiat becomes price and time efficient. The ability to pay for products falls into the latter problem set. So far, these businesses are clumsily aggregating a stack of fees which are untenable for both merchants and their customers. And as we’ve seen, this can only be lowered by attracting, growing, and securing volume. As with most of B2C fintech, this is all a data game, and the winners will be those that position themselves to benefit from that; whether that be through promising merchants increased customer insights, optimising their own backend trading routes, or monetising that payments data for third parties.
Eventually, this data aggregation layer opens up entire new business models. Three such directions are:
Selling aggregate data for insights into assets and their price movements. Target customers could include traders and hedge funds, research and analytics companies, or companies developing LLMs for trading purposes. For this to work, there needs to be an interpretive layer to on-chain data which is publicly available, or an ability to give insight to private transaction data.
Early access to orderflow. Target customers would include exchanges and market makers who want to pay for order flow, much like the Revolut and Citadel model. For this to work, regulation needs to continue to allow payment for order flow (PFOF), which both the EU and the US’s SEC has been contemplating banning.
Credit facilities between component parts to bridge between, for example, the redemption time from stablecoin issuers, or the request for swap and the gas-optimised time for swapping. This could be particularly interesting for payments companies who focus on optimising for gas fees by batching and timing money movements from customer wallets to aggregate deposit addresses to merchant wallets. For this to work, the delay and cost thereof needs to be considerable enough for at least one party to be willing to bear interest costs.
This remains a competitive and dynamic space in a race to solve one of the largest existing pain-points in the industry. If you’re tackling it, or want to discuss any of the above, please reach out at marthe@whitestarcapital.com.
🔦 White Star & Portfolio Spotlight
BoomFi secures registration as a Virtual Asset Service Provider (VASP) in Poland
BoomFi has secured registration as a Virtual Asset Service Provider (VASP) in Poland, allowing them to facilitate the exchange between virtual and fiat currencies. This achievement, aided by LegalBison, underscores BoomFi's dedication to regulatory compliance and innovation in digital payments within Poland's progressive cryptocurrency regulatory landscape, providing vital services to EU businesses.
Liquality has introduced Honey Pots, a blockchain-based tool for revenue sharing
Liquality has introduced Honey Pots, a blockchain-based tool that enables creators to set conditions for revenue sharing with their supporters, creating a mutually beneficial relationship between artists and collectors. They also plan to implement Hive Bonuses, cash prize raffles, and anticipate collaborating with other organizations, enhancing the incentives for collectors and promoters of creative content.
Cometh's Muster, a promising Layer 3 rollup solution for Web3 gaming
Cometh successfully tested a Layer 3 rollup solution named Muster in collaboration with Alt Layer during the technical alpha phase of their game, Cosmik Battle. The impressive transaction speed observed in the test is a promising indication for the future launch of Muster on Arbitrum's mainnet, suggesting exciting advancements in web3 gaming that could significantly improve user experience and scalability of blockchain-based games.
Eyeball Games is leveraging AWS Activate Credits for growth and scalability
Eyeball Games is a partner of Immutable, which grants them access to AWS Activate credits for utilizing AWS's microservices. These credits, provided by Amazon Web Services, help Eyeball Games efficiently scale their operations and leverage AWS's established infrastructure. This support enables cost-effective utilization of AWS services, aiding Eyeball Games' growth and scalability.
Automated ETH Exposure Tool: The Index Coop CoinDesk ETH Trend Index (cdETI)
The Index Coop CoinDesk ETH Trend Index (cdETI) is a powerful tool designed to automatically adjust users' Ethereum (ETH) exposure based on the price trends of the cryptocurrency. Leveraging CoinDesk Indices' Ether Trend Indicator, cdETI strategically manages its holdings between wETH and USDC to capitalize on ETH's price momentum. This innovative tool has demonstrated a strong track record during volatile periods, although it's important to note that past performance does not guarantee future results.
Oamo partnered with Transpose Data for enhanced data privacy
Oamo and Transpose Data have partnered to create a consumer engagement model that prioritizes privacy by leveraging Transpose Data's secure data infrastructure. This collaboration highlights the potential of on-chain data and emphasizes the importance of data privacy in shaping a more data-empowered future.
Trident’s CEO discusses risks for digital asset firms in traditional banking
Trident Digital's CEO, Anthony DeMartino, discusses the challenges and risks faced by digital asset firms when accessing traditional banking services, particularly in light of concerns about commercial real estate defaults impacting smaller banks. He highlights the potential impact on uninsured deposits and advises cryptocurrency players to opt for safer banking alternatives and minimize cash holdings, emphasizing the importance of risk awareness and management in today's evolving financial landscape.
Exclusible on Forbes discussing their anticipated growth strategie
In a recent interview with Forbes France, Exclusible, a startup that initially focused on NFT projects, discussed its transformation into a B2B partner for brands seeking immersive experiences. The company's CEO, Thibault Launay, shared their plans to integrate AI into their projects, expand their team's expertise through the acquisition of Polycount, and develop tools for clients to measure the impact of their immersive experiences.
🏦 Enterprises & Institutions
PayPal approved by UK's Financial Conduct Authority (FCA) for crypto services
PayPal has received approval from the UK's Financial Conduct Authority (FCA) to provide cryptocurrency services. However, the FCA has placed limitations on customer onboarding and the crypto activities of existing customers. This development highlights the growing importance of the UK in the cryptocurrency industry and its preparedness for business operations.
Adidas web3 platform auctioning off limited-edition Bugatti-inspired shoes
Adidas and Bugatti have joined forces to auction 99 limited-edition soccer shoes on Adidas' web3 platform. These shoes, which draw inspiration from Bugatti's car design, will be available for bidding via MoonPay. This unique collaboration combines physical products with digital assets, creating a connection with the crypto community.
HSBC and Ant Group test tokenized deposits under HKMA sandbox
HSBC and Ant Group collaborated to test tokenized deposits, exploring the potential for real-time treasury fund movement within HSBC's network using blockchain technology. During the test, HSBC connected to Ant Group's blockchain platform and its banking partners, focusing on the issuance, transfer, and redemption of deposit tokens, aiming to drive efficiencies and innovation in corporate treasury management.
Trading giants like Jane Street might support Blackrock’s BTC ETF
Some of the largest market-making firms in the world, such as Jane Street, Virtu Financial, Jump Trading, and Hudson River Trading, are currently in discussions with BlackRock regarding the provision of liquidity for BlackRock's upcoming Bitcoin ETF, subject to regulatory approval. These firms are potentially interested in acting as market makers, which involves facilitating trading activities and ensuring there is enough liquidity in the ETF's market.
Saudi mega-project commits to $50M investment in Web3 gaming firm Animoca
Saudi Arabia's NEOM initiative plans to invest $50 million in Web3 gaming and investment company Animoca Brands as part of its alignment with Saudi Arabia's Vision 2030 strategy. Half of the investment will come through convertible notes, with the other half used to acquire Animoca shares from the secondary market. Animoca Brands will collaborate with NEOM to develop global Web3 business services, focusing on technological growth in Riyadh and the NEOM area, an ambitious project aiming to become a hub for innovation, technology, and sustainable development in Saudi Arabia.
⚖️ Government & Regulation
EU’s MiCA regulation defers decisions on DeFi
The European Union's Markets in Crypto-Assets Regulation (MiCA) is not directly applicable to decentralized finance (DeFi) protocols unless they are "fully decentralized," meaning that no person or company controls the platform. The European Commission will assess DeFi and decide on potential regulation after a detailed report is developed over the next year or so, with the current focus of MiCA being on stablecoins and centralized exchanges.
Spain brings forward MiCA crypto rules by six months after EU pressure
Spain is expediting the implementation of the EU's crypto law, MiCA, by six months. This will have an impact on crypto firms that are already registered in the country, such as Binance, Kraken, and Coinbase. The objective of this move is to establish a reliable and consistent regulatory framework. It also aligns with the recommendation of the European Securities and Markets Authority to reduce the transition period in order to avoid potential loopholes in consumer protection.
Hong Kong advances CBDC pilot, bringing e-HKD trials to phase 2
The Hong Kong Monetary Authority (HKMA) has completed the first phase of its e-HKD pilot program and is now entering the second phase. This program aims to assess the commercial viability of an in-house central bank digital currency (CBDC) and focuses on various aspects of digital payments. In the next phase, the HKMA will explore new use cases for e-HKD and consider designs based on distributed ledger technology for interoperability and scalability.
Kenya to introduce digital IDs for citizens by year-end
Kenya aims to introduce digital IDs for its citizens by December 2023, following a two-month testing period, as announced by President William Ruto. This initiative, in conjunction with the Maisha Namba lifelong personal identification system, seeks to digitize registries and enable citizens to access government, education, and medical services more efficiently, while also reducing instances of fraud.
Turkey to propose fresh crypto asset legislation in line with FATF standards
Turkey is preparing to introduce new legislation on crypto assets as part of its efforts to be removed from the Financial Action Task Force's (FATF) "grey list" of countries with inadequate anti-money laundering measures, according to the country's Finance Minister, Mehmet Simsek. The move follows the FATF's downgrading of Turkey in 2021 due to concerns about money laundering and terrorist financing risks, particularly related to its geographic location and various illicit activities.
💰 Funding & Exits
Uniswap's DAO considers $12M investment in Ekubo Protocol for governance stake
Uniswap's DAO is contemplating an investment of $12 million in Ekubo Protocol, an automated market maker (AMM) on Starknet, in exchange for a 20% stake in its upcoming governance token supply. This innovative approach to DAO treasury management addresses the challenge of capital deployment, particularly for well-funded DAOs, by enabling early investments in various projects or protocols to diversify their holdings and avoid potential issues related to asset liquidation.
Jump Crypto and Bain Capital Crypto bet $8M on Gauntlet founder’s new startup, Aera
Tarun Chitra, known for founding Gauntlet, a crypto risk management platform, and co-founding Robot Ventures, is back with a new project called Aera. Aera is a decentralized protocol aimed at helping decentralized autonomous organizations (DAOs) manage their finances efficiently. Chitra revealed that Aera has secured $8 million in a cryptocurrency pre-sale, with Bain Capital Crypto leading the funding round, offering DAOs a solution for responsible treasury management without compromising on speed or decentralization.
Web3 game studio Moonveil Entertainment secures $5.4M in seed round
Web3 game studio Moonveil Entertainment has secured $5.4 million in a seed funding round, with Gumi Cryptos Capital and Arcane Group leading the investment. Moonveil is developing games like Astrark, a mobile tower defense game, and Project B, a multiplayer strategy game. The company promotes a meritocracy approach in gaming, allowing players to choose games freely, without platform restrictions, and plans to leverage tokenomics and NFTs to reward players for their contributions.
Surf Protocol raises $3M to develop first permissionless perpetual DEX
Blockchain company Surf Protocol has raised $3 million in a funding round led by ABCDE Capital, with significant participation from OP Crypto and C2 Ventures. The funds will be utilized for developing the first permissionless perpetual decentralized exchange (Perp DEX) to be launched on Base. Surf Protocol's goal is to provide a diverse range of tradable Perp assets while maintaining low fees to enhance the competitiveness of Perp DEXs compared to centralized exchanges.
Anboto Labs secures $3M in funding, launches non-custodial trading platform
Anboto Labs has secured $3 million in funding and revealed an institutional-grade non-custodial trading platform. The investment from backers, including Kronos Ventures, Cherry Crypto, Mechanism Capital, XBTO, and Matrixport, follows last year's $1.9 million funding, bringing the company's valuation to $35 million. The recently launched platform, which has achieved a trading volume of $4 billion across 20 exchanges and blockchain networks, provides execution algorithms and advanced security features.
Kana Labs secures $2M in seed round to fuel growth and expansion initiatives
Kana Labs has raised $2 million in seed funding to fuel its expansion in the Asian market, with backing from investors like MarbleX, Nexus One, Klaytn, Gate.io, and a grant from the Aptos blockchain. The company specializes in blockchain infrastructure and tooling, aiming to streamline user onboarding, improve user interfaces, and enhance cross-chain liquidity. The funds will support product improvements, user growth, and international expansion, with a focus on the Asia-Pacific region, including markets such as Korea, Japan, Hong Kong, and Taiwan.
🚀 Project Launches & Updates
Coinbase crypto futures for retail US traders goes live, includes 'nano' bitcoin trading
Coinbase has recently introduced its crypto futures trading service for eligible retail customers in the U.S., which now includes "nano" bitcoin contracts. This development comes after receiving regulatory approval from the National Futures Association, enabling Coinbase to provide leveraged crypto futures contracts specifically designed for retail traders. Nevertheless, the company acknowledges the increased downside risk that comes with futures trading.
Solana launches tools to make it easier to create crypto games
Solana Labs has launched GameShift, a beta toolkit to streamline the integration of Solana blockchain into video games, offering a unified API that handles blockchain complexities, freeing up developers to focus on game creation. GameShift aims to facilitate the development of blockchain-powered gaming experiences on the Solana network, potentially boosting the adoption of Web3 games by simplifying blockchain integration.
Worldcoin's crypto wallet claims more than 1 million monthly active users
World App, introduced by Sam Altman's Worldcoin project six months ago, now boasts over 1 million monthly active users, becoming a popular crypto wallet. It also reports 500,000 weekly active users, 100,000 daily active users, and over four million total downloads, ranking it sixth in CoinGecko's self-custody crypto hot wallet list. Despite facing scrutiny, Worldcoin remains committed to cooperating with regulators, protecting user data, and offering a simplified platform for digital identity and finance.
ATP Tennis Tour offers customizable 2023 Finals posters via NFT Drop
The ATP Tennis Tour has partnered with Artchild to launch customizable NFT posters for the 2023 Nitto ATP Finals. Fans can customize these posters using artist-curated color palettes, and both physical prints and NFT collectibles on Polygon will be provided. The original poster by artist Honor Titus will be available during the finals for $50, with proceeds supporting a green space initiative in Turin. Singles players in the tournament will create unique poster versions for charity auctions.
🔥 Other Bits We're Excited About
How Bitcoin has evolved since Nakamoto’s white paper debut
Since the publication of Satoshi Nakamoto's white paper on Bitcoin 15 years ago, the cryptocurrency has undergone significant transformations, expanding beyond its original purpose as digital cash. These changes include the rise of mining pools and specialized hardware, network improvements like Segregated Witness (SegWit) and Taproot, the introduction of financial products such as ETFs, and the emergence of DeFi and NFTs for unique digital collectibles and inscriptions on the blockchain's smallest unit, satoshis.
Stablecoins set to succeed where BTC, ETH failed: Pantera
According to a Pantera Capital executive, Bitcoin and Ethereum, while successful, have not fulfilled the initial expectations for cryptocurrencies due to concerns related to speed, scalability, and volatility. In contrast, stablecoins are positioned to become a fundamental aspect of peer-to-peer value transfers and have the potential to offer money market yields. This could potentially result in a new surge of cryptocurrency adoption and contribute to the growth of the ecosystem.
In crypto's 'Autonomous Worlds,' creators are architects and users are stakeholders
Autonomous Worlds (AWs) represent a notable departure from Web 2.0. Here, creators are not just content contributors; they assume the role of architects, shaping entire digital realms. In AWs, consumers cease to be passive viewers and instead become active participants, stakeholders, and even co-creators. This shift enables true ownership, fosters collaboration, and blurs the lines between creation and participation.