by Richard Grogan-Crane
The movement of money between crypto currencies and fiat currencies is essential to the continued growth and acceptance of crypto currency. Enabling these flows efficiently, quickly and compliantly is a critical component in growing customer trust and confidence both in cryptocurrency exchanges and the cryptocurrencies themselves.
Empowering customers with the fluidity to transact easily while moving monies between these disparate monetary systems is essential to moving beyond the investor class to the consumer class over time. So why not start now?
Security, of course, is paramount. One look no further than the recent hack of New Zealand crypto exchange, Cryptopia. This crime may ultimately be solved – or not. But it will likely put a bit of a damper on new client acquisition for other crypto exchanges. However, the impact of this breach, if any, will likely be short-lived.
What’s a much longer lasting impediment for many is the difficulty and the cost of moving moneys from fiat currencies (wire transfers, ACH, credit cards, etc.) and equally important moving moneys from crypto back into fiat currencies. And that gives rise to a completely different set of security and compliance considerations that, to date, that can make doing so a bit clumsy or costly.
The Burden of Compliance
Much of this clumsiness (and therefore many of the cost-drivers) relates to the Know Your Customer (KYC) regulations tracing back to the Anti-Money Laundering (AML) mandates in the USA PATRIOT Act of 2001. These required financial institutions to implement Customer Identification Programs (CIP) which dramatically increased the administrative burden required to open new accounts.
Banks, savings associations, credit unions, private banks and trust companies all were required to develop robust CIPs. Each new account, company or personal, had to be carefully vetted to confirm identity and checked against lists of bad actors before provisioning an account.
Since those days, technology has made quantum improvements to the point that now it’s relatively simple to enable these verifications are done in near real-time via APIs, which, by extension, means that it is now as easy, if not easier, to execute such checks on transactional level rather than an account level.
Unfortunately, that leap forward hasn’t caught up with the account opening processes of most traditional banks (and many online banks).
With today’s tools & APIs, real-time monitoring of lists of bad actors makes it possible to provide dynamic rather than point in time checks
Dynamic Account Provisioning
Unlike traditional financial institutions, a payments platform takes a tiered or staged approach to collecting required KYC information. Upon collecting a minimal amount information for either Personal or Company user that’s more akin to the information associated with a sales transaction, the platform creates a pending account type.
Similar to a buyer in a sales transaction, a pending, or provisional account is able to place funds on deposit on the platform account but would not be able to conduct any other transactions types – send, transfer, FX, etc. until all the KYC requirements have been met. If they do not meet the threshold the only available option for them is to have the funds that were placed on deposit returned.
The payments platform can then apply a tiered approach to any potential risk permitting increasing velocity and volume of transactions while also continuously checking for bad actors.
FX exchanges have made consumer transactions much simpler. Cryptocurrency exchanges (CX) are wise to think likewise. In simplest terms, CX exchanges can make digital asset exchange simpler by relying on the payments platform to handle payments (withdrawals to fiat currencies.
Managing fiat funds received in an aggregated or master digital wallet and then using those funds to fulfill fiat currency withdrawal demands, can provide a currency exchange with considerable flexibility. Payments platform APIs can be configured, and inter-organizational processes streamlined for operational efficiency.
Making the complicated simple, then, is the fastest pathway to both operational efficiency and speed as well as customer acceptance. Simplifying administrative burdens while maintaining compliance lowers costs as well as improving speed. Providing full transparency for the fiat fund withdrawals ensures customer trust. Enabling FX currency exchange on the payments platform, can simplify CX requirements by providing this as a self-service feature at lower than market rates.
So, how can all this be accomplished?
Master Crypto Accounts
Enabling funding sources to use a specific path and/or multiple pathways is a matter of design.
Incoming funds, of course, must be valued in a specific currency, e.g. US$ or Euros, to be aggregated within a master digital wallet. Using a payments platform, funds can either then be managed by creating multiple, currency-specific digital wallets or by converting the originating currency to the incoming account currency prior to acceptance. .
Look at the incoming flow of monies from both a crypto exchange perspective and from that of its customers. Is the CX set-up to conduct business in a specific currency? Can the business process be made simplest by doing everything in the local currency, where possible, and then converting to primary currency within the platform?
CX Exchange Movement of Funds Using Digital Wallets
Once the monies have been received into a CX master digital wallet(s), how then can they be tracked and managed most efficiently using a master/subordinate digital wallet concept:
- How will the monies in the master digital wallet be tagged by source and recipient?
- How will the funds be managed and distributed amongst each of the stakeholders?
- How will we make sure that each entity has a ‘Portfolio View’ of all their incoming and outgoing activity through a single lens from their perspective?
- Will we need to enable multiple fiat currencies for maximum flexibility and , if so, which ones?
- How can we ensure fiat currency compliance and tax reporting needs are met?
Embedded Exchange Processes
Embedding an end-to-end payment architecture within the CX exchange capabilities makes it seamless to create and manage a series of Individual or Company digital wallets allowing for the withdrawal of funds from the CX into a wide choice of options – ACH, EFT, wire, prepaid debit.
And the payments architecture can handle currency FX within its managed processes at much lower rates than a CX customer would receive externally via traditional methods.
Enabling the flow of monies seamlessly between CX and FX currency is the goal shared by nearly every CX exchange and millions of their customers. Using a purpose-built payments platform with built-in compliance attributes including KYC and tax reporting, makes it possible for CX exchanges to look beyond traditional banks for these service while lowering the costs for their customers. XTRM AnyPay™ makes this possible through a unique combination of a robust, secure payments platform, embedded APIs, and consistent business processes designed to ensure tax compliance and eliminate administrative burdens often associated with supporting multiple methods of payments
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