Crypto companies want to build new products fast. Regulators are loading them up with new requirements every day. Now many are offloading key parts of their infrastructure to providers who see a big opportunity in helping crypto stay on the right side of the law.
It’s challenging to handle compliance, fraud checks and anti-money laundering checks on customers, as well as processing fiat payments and setting up crypto onramps across many countries — but it’s all necessary if customers are going to have crypto to spend on your app.
Stripe, which exited the crypto business in 2018, has reentered it in a big way, with FTX.US and Blockchain.com as customers. Transak has signed up a range of customers to handle compliance and payment work. And there are a range of other players, including MoonPay, Prime Trust and Wyre, which was recently acquired by Bolt.
The momentum in crypto compliance shows how the infrastructure supporting many of the largest applications has splintered behind the scenes, offloading complex, critical financial tasks to various parties for handling.
One driver of the business is the pace at which crypto regulations are changing across the globe, making an industry that promises to stay on top of compliance needs even more attractive to customers and investors. The latest big potential regulatory change is the EU’s proposed MiCA crypto bill, which could add significant new know-your-customer and anti-money laundering rules for crypto companies.
While the outsourcing of compliance work and other technical infrastructure occurs in the rest of fintech, the crypto version is newer, since bridges between traditional and crypto finance are not well established.
Catering to crypto
For the crypto industry, this bridgework is critical. But the industry is still nascent and who will ultimately win remains to be seen. Transak’s range of offerings, which compete with several other players, provides a good view into the kind of opportunities that abound.
Transak works with about 100 applications including unhosted wallets MetaMask and Ledger, games such as Decentraland and finance apps such as Cake DeFi. It handles the entire onboarding process for developers' new customers: KYC, AML and converting fiat to crypto so consumers can start transacting.
To convert into crypto, Transak connects with more than 10 sources of crypto liquidity to find the best prices and also holds some crypto on its balance sheet to offer liquidity, said Sami Start, CEO of Transak. This means that customers of Transak’s clients don’t have to leave the app to convert fiat to crypto. “It looks very simple what we do, but there's a lot of stuff underneath that,” Start said.
Because Transak, which works in over 100 countries, handles the fiat-to-crypto conversion, it also handles compliance, fraud and chargeback risks for those transactions, as well as customer service for disputes or other problems consumers face.
“We have built a lot of expertise and systems in house that can detect if a transaction is fraudulent,” Start said. “And then we also have operations to defend against chargebacks.” Many of its customers are noncustodial, which means that unlike exchanges, they don’t hold customers’ crypto and would just as soon not field customer support questions about it.
Transak automates fiat payments for users buying crypto, connecting to debit and credit cards, bank transfer and Apple Pay and Google Pay. It also connects with blockchains on the other side of the transaction such as Ethereum, Polygon and Avalanche.
Since it provides payment services, Transak also competes with some other payment providers. But Transak is not seeking to become a payment acquirer like Adyen or Stripe in traditional payments, Start said. Instead, Transak wants to remain the “merchant of record” — Transak’s name will show up on your credit card bill, not the crypto wallet or game that you’re using the crypto for.
This is a seemingly small but significant difference in the strategies of companies taking on crypto payments. It determines who has the direct relationship with the customer, who is responsible for customer service and complaints and who is handling more or less of the transaction.
Stripe has focused on extending offerings popular with conventional fintech app-makers, like identity checks and payouts, to crypto developers. The pitch is similar, too, with Stripe promising that customers can “stay focused on building your wallet and DeFi products.”
Plaid, another company catering to fintech, has also courted crypto business for payments and identity verification. It signed up Circle in September as a customer for its ACH payments service, and later added Cabital as a customer.
Europe’s compliance push
The MiCA bill is an example of the types of regulatory issues that crypto companies need to navigate, which Transak and others are hoping to build their businesses on.
The provisional MiCA agreement and a related update to fund-transfer rules would extend existing regulations to digital assets and require crypto firms to collect information and personal data on transactions regardless of size.
The changes would beef up KYC and AML rules for crypto. The crypto industry has come out against it, but it appears to be moving toward final passage.
The MiCA bill would provide similar regulation across the EU, which is currently missing, said James Young, head of compliance at Transak. “At present, there is no harmonized regulatory framework in the EU for crypto asset service providers,” he said. “MiCA introduces this framework, which I am sure will be welcomed by many firms who wish to expand into the EU without having to apply to each local regulatory authority.”
The U.S. is not as far along in developing a regulatory framework for crypto, but provisions of the Lummis-Gillibrand bill would bring crypto under the oversight of existing agencies, along with their existing requirements. And the crypto industry has been developing its own compliance standards for requirements like the Travel Rule. Other jurisdictions like India, the U.K. and Singapore are moving to impose their own requirements.
It’s not clear how a prolonged crypto winter might affect demand for these products, but even skeptical regulators are behaving as if they think digital assets are here to stay. That, along with the complexity of keeping up with regulations around the world, will provide a strong tailwind for companies that promise to take the chore of compliance off of customers’ hands.
