Today, we share our work with HashKey Capital to present a comprehensive analysis of the fiat gateway channels for crypto globally. This is only the beginning of our exploration to build utility on Harmony. Please read below.
Originally in Chinese: An Overview of Compliant Investing Channels for Cryptocurrencies
This article is the fourth report on global digital assets compliance by HashKey Research. It introduces compliant deposit & withdraws channels globally in detail, covering the participants, license requirements, liquidity providers and integration with the banking industry. We hope to help you better understand the compliance ecosystem of digital asset deposit & withdrawal.
Chapter I Overview of Cryptocurrency Deposit & Withdrawal Compliance
1.1 Classification of participants
Current participants in compliant deposit & withdraw channels. While there are many participants, not all of them are directly related to digital assets.
Based on client types, they can be divided into toC (directly facing clients as the endpoint of clients’ deposit) and toB (providing an interface for toC ). Some companies have both toB and toC business. For example, payment processing companies (toB) also directly provide end-users with access to cryptos, while exchanges (toC) provide liquidity to B-clients.
However, it should be noted that not all participants are directly related to digital assets, for example, some exchanges and wallets have transfer services including Wire, ACH, SEPA, and other integrations, but the integrated banks do not have blockchain or digital assets business. Some companies also have acquired banking licenses, for example, Revolut, a British wallet and credit card company, obtained a Lithuanian banking license in 2018.
Also, some credit card companies, such as Visa, MasterCard, and payment companies like PayPal and gift card companies, can all be integrated as payment solutions. But these companies are just adding digital assets to their existing business models.
Four types of companies we reviewed in this report:
a. Wallets e.g. Uphold, Robinhood, Abra, and Circle. Their customers are directly end-users and digital assets can be directly purchased in the wallet. Those digital assets are from liquidity providers, namely, compliant exchanges. These companies are benchmarked against Coinbase, which is usually seen as a compliant deposit & withdraw channel and thus emphasize less on its transactional function.
Although many wallets support the internal purchase of digital assets, not all wallets support the withdrawal of digital assets for reasons like regulation, e.g. Robinhood in the United States and Revolut in the UK. Thus wallets are more suitable for more risk-averse crypto investors.
b. Compliant exchanges. As the most common deposit channel, exchange generally support deposit in different ways: banks, credit cards, debit cards, gift cards, etc. They do not need liquidity providers since they provide liquidity to the market themselves.
Also, some banks are working with exchanges, for example, Silvergate Bank has developed Silvergate Exchange Network to provide crypto transfer service for compliant exchanges and institutional investors.
c. Payment processing companies e.g., WorldPay, Simplex, Moonpay, and White. Although they have toB business, their major customers are business users like Wallets and Exchanges. Usually, they charge exchanges high broker fees (usually between 3% and 6%), yet the demand is still high. Credit card processing companies need payment companies as liquidity providers.
d. Stablecoins. Stablecoins, cryptocurrencies backed by fiat, are also common “on-ramps”. Stablecoins like Pax, GUSD, USDC have their corresponding license, and money exchange is relatively simple, with only three participants: the bank, the client and the issuer. A client initiates bank transfer and obtains a tokenized dollar in his crypto account. All compliant stablecoins provide monthly audit reports, from which we know the amount of stablecoin issued and collateralized.
Investment opportunities: wallets and a few credit card processing companies. Exchanges have multiple roles apart from deposit channels like liquidity providers. Different companies have different valuation metrics. Exchanges usually get a high valuation and ultra-large payment processing companies such as Worldpay are estimated at $43 billion.
1.2 Brief Description of Related Licenses
1.2.1 United States
Normally participants will register as MSB in the United States, which has two layers. A company is under FinCEN’s regulations from a federal perspective. However, since FinCEN does not conduct any actual inspections, each State has its right to issue a license or permit. There are also special regulations in different states, such as BitLicense in New York, Digital Asset Act in California, and Act 5031 in Washington. But compliance cost is sometimes too high, for example, Kraken terminated its business in New York in 2015 due to the high cost of BitLicense.
However, most exchanges or wallets will apply for licenses in multiple states. For example, Coinbase, Gemini, Square, Cash, and Robinhood all have obtained BitLicenses from New York State.
License is not required for payment companies in the US, but certain security regulations apply. For example, Payment Card Industry Data Security Standards (PCI DSS) applies to any participant involved in the storage, processing, and transmission of cardholder’s information, including merchants, processing companies, purchasers, issuers and service providers. PCIDSS is initiated and managed by the security committee composed of major international card organizations.
Generally, wallets will choose to register as EMI (Electronic Money Institute) or PI (Payment Institute) in Europe. Many agencies have registered as EMI in the UK, such as Revolut, Coinbase, Robinhood, Uphold ( through other licensed agents) and Circle.
EMI’s major business is close to the banking business, yet an EMI cannot issue loans or hold deposits. It can provide IBAN(international bank account number) to clients in 27 countries, obtain SWIFT code, register new accounts remotely online and issue MasterCard, Visa, Union Pay card and other payment cards associated with clients. Customers can use 26 currencies including the U.S. dollars, Euros and pounds for global payment. Payment from any international accounts is accepted in the SWIFT system, which also supports cash deposit & withdrawal, payment transaction, payment instruments issuance and remittance.
Many agencies began to apply for EMI license in Lithuania after the Brexit referendum because of simpler procedure. Enterprises with EMI license in Lithuania have direct access to SEPA (single European payment area) (34 countries) and can issue their IBAN through Bank of Lithuania Payments API
Non-bank EMI in other regions without access to SEPA like Revolut and Simplex have obtained the Lithuanian EMI license; Google’s payment business has also obtained the Lithuanian EMI license.
Chapter II Introduction to Participants
This part mainly introduces projects we have a connection with and well-known projects in the industry.
2.1.1 Uphold-comprehensive financial product entry
Uphold is a one-stop financial service entry whose benchmark is Robinhood. Users can directly purchase digital assets in their App. In addition to digital assets, traditional financial assets such as stocks, commodities, and foreign exchange are also traded on the platform, with more than 1,000 transactions.
Client volume: users are mainly guided by Brave browser since the company did little marketing.
Deposit method: Debit/Credit Card, ACH is available for banks in the United States and SEPA in Europe, PayPal and UnionPay are also accepted
- Rate: zero fee for deposits from the bank, 3.9% for Debit/Credit Card and UnionPay, 1.05% for Bitcoin transactions, is $2.99 for digital assets drawing, $3.99 for fiat drawing.
- License: Money Transmitter and BitLicense (pending ) in multiple states and Broker-dealer license for acquisition. Licenses in countries of south America and East Asia pending.
- Other: Member of universal protocol alliance together with Cred, Brave, Berkeley Blockchain, Bittrex, Certik where Uphold can promote their App and their utility token.
- Official website: https://uphold.com/
2.1.2 Robinhood — comprehensive financial product entry
Robinhood is a financial institution (US stockbroker)company headquartered in Menlo Park, California, United States. Individual investors can buy listed stocks and ETFs without paying a commission fee. Due to the high trading volume and zero commission fee, Robinhood will transfer orders to professional brokers like Citadel and commission is paid by market makers.
In early 2018, Bitcoin was included in its product. Up to seven cryptos can be traded on the platform and it has also obtained the New York BitLicense in January 2019.
Robinhood is also a comprehensive trading platform for stocks, ETF and options, yet commodity is still not available. After E-round financing of $323 million in 2019, its valuation has reached $7.6 billion. The investors include DST, Google, Sequoia, etc.
- Client volume: 4 million active users.
- Deposit method: mainly ACH, supporting major banks.
- Rate: zero commission.
- Official website: https://robinhood.com/
2.1.3 Square Cash App — Payment Wallet
Square Cash App is a payment system launched in 2013 by Square, a mobile payment company. Users can easily transfer money via Square Cash email or App after registering a debit card or credit card on Square Cash. Now it is named Cash App.
Since early 2018, users can directly purchase Bitcoin on their APP. This business has reached $125 million in the second quarter of 2019, doubling that of the first quarter.
- Client: 15 million MAU.
- Deposit method: Bank ACH.
- Rate: No service fee for ordinary ACH deposit, and 1.5% for immediate deposit. No broker fee for Bitcoin purchase, ask-bid spread.
- Official website: https://cash.app/
2.1.4 Circle Invest-Digital Asset Wallet
Circle Invest is a wallet subordinate to Circle. Users can purchase digital assets on the platform, but the platform can only be accessed by users in America. Investors can also invest by buying a “Collection”, choosing from one of the four collections — Platforms, Payments, Privacy, and the Market. Supported by Circle Trade, Circle Invest also has a more attractive broker fee lower than that of Coinbase.
- Deposit channel: ACH, debit card.
- Rate: zero broker fee, 1.5% — 2% bid-offer spread.
- Official website: https://www.circle.com/
2.1.5 Abra-Digital Asset Wallet
Abra is originally a digital asset wallet company that gradually expanded its business into a traditional financial product. In February 2019, it launched the world’s first global investment App. Investors from over 155 countries can invest in stocks, ETF, 30 cryptocurrencies and 50 fiat currencies. 50 investments were available when Abra was first launched including stock of Amazon, Apple, Facebook, Google and Netflix, bulk commodities such as SPDR Gold Fund, ETF such as Vanguard Growth, S&P 500 Index and Russell 2000 Index.
But these products are all synthetic rather than actual. In March, Abra launched full support for direct deposits and withdrawals of Ethereum (ETH) and will support more ERC-20 tokens such as stablecoins. At present, it supports more than 40 foreign currencies.
- Deposit: ACH, cash, Wire, credit card (via Simplex), European SEPA (via Coinify).
- Rate: zero broker fee, 4% for credit card.
- Official website: https://www.abra.com/
2.1.6 Revolut-comprehensive financial product entry and payment channel
Revolut is headquartered in London, similar to Robinhood in Europe. It has obtained the FCA cryptocurrency license. Due to the Brexit referendum, it has obtained the Lithuanian banking license in 2018. Its users can freely exchange 25 fiats and 5 cryptos. Users can instantly exchange 25 currencies directly into Bitcoin, Litecoin, Ethereum, Bitcoin Cash and XRP freely.
Revolt is also a digital bank, giving its users a great discount on its credit cards issued with MasterCard and Visa. Meanwhile, Revolt cooperates with GDAX and Bitstamp on digital assets. Yet digital assets purchased on Revolt cannot be freely withdrawn or deposited but can only be transferred to other App users.
- User: 6m in total, 1.2m weekly active users, 1.9m monthly active users. The monthly trading volume of $3 billion.
- Deposit mode: Faster payment in the UK, SEPA, and SWIFT in Europe, credit card (with value-added service charge).
- Rate: Extra fee for deposit in non-European regions, 1.5% for digital assets trading.
- Valuation: $1.7 billion after its $250 million of financing in April 2018.
- Official website: https://www.revolut.com/
2.2 Compliant Exchange (and Network)
Compliant exchange is the most common deposit channel, major exchanges have similar business models.
2.2.1 Coinbase (United States)
Coinbase’s ACH is the most convenient transfer service. Despite longer transferring time(3–5 working days), ACH supports buying and selling of cryptocurrencies, deposit and withdrawal of fiat currencies, while other transfer systems have at most two of the above functions, for example, customers can freely deposit and withdraw yet they can’t initiate transactions on Wire and SEPA. Credit cards and debit cards are mainly for instant transactions.
- Charge: Free for ACH deposit, $10 for Wire deposit, $25 for Wire withdrawal, 1.49% — 3.99% for transaction.
- Official website: https://www.coinbase.com/
2.2.2 Bit stamp (Luxembourg)
- Deposit: SEPA (Europe), International Wire (outside Europe), and Credit Card Debit Card (via Simplex).
- License: Luxembourgish payment institution license in April 2016, applicable to 28 EU member states. Fincen MSB in 2018 and New York BitLicense in 2019.
- Rate: Free for SEPA deposit, 3 euros for withdrawal, 5% for credit card transaction, 0–0.5% for regular transactions.
- Official website: https://www.bitstamp.net/
2.2.3 Cex.io (UK)
- Deposit: Credit Card, ACH, and Swift,
- License: Fincen MSB, Gibraltar DLT license.
- Fee: 3% for credit card deposit, free for ACH/SEPA, 0.1% — 0.25% for transactions.
- Official website: https://cex.io/
2.2.4 Silvergate Exchange Network
Using Silvergate Bank, institutional investors can move U.S. dollars to digital currency exchanges 24/7 using Wire and ACH at no extra cost after opening an account. Silvergate Bank acquired customers through facilitating deposit & withdrawal for exchange users.
According to its S-1 document, by the end of the first half of 2019, 77% of Silvergate Bank’s cryptocurrency clients have joined SEN (Silver Exchange Network). In the first half of the year, USD transfer over SEN has reached 12.7 billion, of which 5.6 billion came from digital asset exchanges, 6.9 billion from institutional clients and 200 million from service providers.
2.3 Payment Processing Company
WorldPay is a leading global payment company, providing its clients access to almost all types of payment globally. WorldPay provides more than 300 payment solutions in 146 countries and hundreds of currencies for mobile, online and in-store merchants of different scale and e-commerce. On July 31, 2019, Fidelity National Information Services (FIS.US) closed its acquisition of Worldpay at $43 billion.
Although we still don’t know exactly the scale of its digital asset business, according to FIS’s second-quarter financial statement, “second quarter 2019 integrated revenue increased 9 percent ” while non-integrated revenue sales of FIS increased by 8%, indicating that digital assets and foreign exchange fluctuation account for 1% of the total increase.
Coinbase uses the debit card processing service of WorldPay, but the fee is relatively high at an average of 3.99%, plus extra bank fees. Hence, customers are recommended to switch to a bank account where the rate for dollar account and bank transfer is only 1.49%. WorldPay should be the largest credit card company with business in digital assets.
Simplex is an Israeli credit card payment company holding Lithuanian financial license and EMI license, yet digital assets are not covered in its business. Simplex serves as crypto deposit & withdrawal channels for exchanges and wallets. Simplex has its liquidity providers, and credit card users can purchase digital assets from liquidity providers and then transfer to exchanges or wallets.
- Rate: 3.5–6% for crypto exchange, 4–12% for purchase from an internal wallet, price varies based on the kind of crypto.
- Exchange clients: Binance, Kucoin, etc.
- Wallet clients: BRD, trust wallet, Xapo, Ledger, Abra, Myetherwallet, Bitpay, and Metamask.
- Liquidity providers: OKCoin, Bitstamp, Paybis, etc.
- License: Lithuanian financial license and Lithuanian EMI license, regulated by ECB.
- Others: Strong team with technical background, known for internet security and fraud prevention, payment guarantation.
- Official website: https://www.simplex.com/
Moonpay is a payment processing company supporting major credit cards, Applepay and 15 digital assets including Bitcoin. It partners with Wallet Edge, Bitcoin.com, Agent wallet, Scatter wallet, and various Dapps.
Users can use Moonpay on Bitcoin.com in the UK and Europe. Merchants can integrate Moonpay App with their App (such as wallets, Dapps), thus users can get their wallet address and finish payment just by one email verification.
Carbon is a payment processing company that supports ACH, SEPA, credit card, debit card, and Applepay. Carbon is backed by many famous investors including DCG, General Catalyst, etc. Similar to Moonpay, Carbon’s API can integrate with other applications. Also, Carbon has launched its stablecoin backed by USDT. At present, not many well-known applications have integrated with Carbon, and most of the integrated Apps are Tron and EOS series. Carbon is seeking more partners.
Wyre is a payment processing company that supports Wire and ACH. It does toB business and cooperates with wallets like BRD and Button Wallet.
- Other: Wyre runs its own digital asset management company Wyre Capital, with an AUM of $3.5 billion.
- Rate: 0.75% fee, with a minimum charge
- Official website: https://www.sendwyre.com/
2.3.6 White wallet
White wallet is a payment processing company. Apart from deposit service, it also has withdrawal business, integrating with merchants including Amazon, Uber, Apple iOS, Starbucks. White Wallet also supports transfer between small businesses and purchases of luxuries.
- Products: Stablecoin White Standard, White Pay, White Wallet, White Card, White Market, and White Capital.
- Edge: transaction volume per user is larger than Coinbase; no limit for a single transaction ( not required by FinCEN)
- Liquidity providers: cooperates with major exchanges, such as Coinbase Pro, Bittrex, Gemini, etc.
- License: MSB issued by the US FinCEN, EMI issued by the British FCA.
- Deposit: GBP, USD, and Euro.
- Official website: https://thewhitecompanyus.com/
Fiat-24 provides compliant withdrawal services for users, but only accepts Bitcoin deposits. The name registered on Fiat-24 must be the same as the owner of the bank account. Individual users are divided into three categories based on trade volume, with transaction costs of 1.5%, 1%, and 0.5%.
Chapter III Comparison Between Bank Deposit Channels (Wire/ACH/SEPA/FPS)
Inter-bank payment system in the US consists of five parts: large-value transfer system, check clearing system, automated clearing house, card payment system and federal reserve clearing house.
There are two clearing houses for large-value transactions: Fedwire and Chips, for example, Wire uses the Fedwire system. Automated clearing house, namely, ACH, also trades through the clearing houses operated by the Federal Reserve and the New York Clearing House. Wire and ACH are two major settlement methods used as compliant deposit & withdrawal channels, and ACH is used more often.
ACH is mainly adopted by institutional users like Wallets because of the low cost, but it also takes more time. For example, we mentioned above in the Coinbase section that ACH transfer takes about 3–5 working days but has multiple functions, thus price-sensitive users may choose ACH.
The Single Euro Payments Area (SEPA) is a payment integration initiative of the European Union for simplification of bank transfers denominated in Euro. As of 2019, there were 34 members in SEPA. It is similar to ACH yet takes less time. In the Coinbase section, we also mentioned that SEPA transfer takes about 2–3 working days, but can only transfer Euro. The British FPS (Faster Payment) is similar to SEPA, but it can only transfer British pound in the UK.
Chapter V Comparison