In the cryptocurrency sector, most market participants would agree that one of the most challenging pieces of the business model to put in place is the on/off ramping solution for its users.
Even if the product has a sound business model and a great market fit, the ability for its users to fully appreciate and consume the solution is hampered by the ease of getting into and out of the product, be it an exchange, a token or an infrastructure.
With the recent troublings faced by one of the few crypto/fiat cross-over banks (Silvergate), this issue has resurfaced yet again and concerns voiced by market participants about this issue.
At Titanconnect, we believe that there is a reason for this on/off ramping issue to persist, and that is that the market regulators (or the lack of it) have not been able to fully embrace the state of the compliance policies that the participants have put in place in their businesses. Perhaps the ones that have been issued an official license to operate are now up to par in this area, but the bulk of the participants are still a work in progress.
Going back to the first principles, the fact that the cryptocurrency market is prospering (or at least has been) is due to the lack of rules and regulations governing the ability to track the source of funds belonging to the users. Anyone with a half-decent network will be able to find someone who is willing to sell them cryptocurrency in exchange for cash or any other asset of value. The demand for cryptocurrency is way more than the supply of licensed gatekeepers in this sector. The converse is true - those that are already holding on to cryptocurrency will find it hard to exit from this market due to the lack of licensed gatekeepers who can help them to off-ramp. This is because the limited number of licensed gatekeepers are few and far between, and those that have that coveted license (especially if it is from an internationally recognised jurisdiction) will not want to jeopardise that license by processing transactions from entities which are not up to par on their own compliance framework.
As for the rate of regulators approving new licenses, the rate that this is happening if obviously sub-par because the regulators have a moral dilemma to protect the traditional financial institutions who, firstly, have invested way more resources into their KYC/AML frameworks, and also because they are easier to manage and control than the proliferation of new entrants into the crypto sector. Additionally, because cryptocurrencies are operating in a sort of parallel dimension where the tokens in circulation are hard to be tracked and linked to their actual owners, this makes regulators nervous.
The current state of technology in the blockchain space allows for just about anyone with a computer to create their own digital wallet and receive and transfer tokens within the ecosphere. It is almost impossible for a regulated entity to know which wallet belongs to whom unless self-declared by the owner of the wallet, or in industry parlance - to be whitelisted by the counterparty whom they wish to transact with.
Therefore, until the day that these issues can be confidently addressed, the challenge for market participants to on/off ramp will persist.
At Titanconnect, we believe that regulations are a must if one is to thrive in this industry. This is not to hamper the growth of the industry, but rather the opposite - to ensure its sustainability and ability to thrive in the future. Regulations need to be present for the same reason that tradfi requires regulations - for the protection of the users.
In order to do this, we should look at not just a strong regulatory framework, but also a strong partnership with a well-established traditional financial institution. This partnership is a symbiotic one in that one cannot succeed without the other, and together, they will ensure that the customers who go through them to enter or exit the crypto sphere will always have someone to go to if anything goes wrong while they are transacting within the crypto sphere.
One idea for additional security for market participants is to issue tokenized deposits to them to start their crypto journey. This means that for entities to enter the market, they will be required to place an equivalent amount of funds in their fiat bank account, upon which the fintech platform will then issue an equivalent amount of stablecoins (pegged to whatever currency the fiat deposit is in) to be credited into a corresponding digital wallet. These tokens can then begin their journey in the crypto sphere however they like. And when the entity wants to off-ramp, it will go back to the same platform from where it is on-ramped, to off-ramp whatever is left of its tokens. This way, the platform will be able to confidently off-ramp the tokens by burning the stablecoins and transferring its fiat currency equivalent to the beneficiary which presented the stablecoins to be off-ramped. To go one step further, the entity (if they are an enterprise-level user) can even mint their own corporate branded stablecoin which they can use as quasi-cash to be paid out to their vendors and customers. These stablecoins can be exchanged for fiat currency as long as the presenter proves their identity relative to the corporate issuer of the stablecoin.
By incorporating these steps when designing the business model, the fintech company will be able to assure the regulators that no new money supply is created or destroyed by them and that the only reason that they are on/off ramping is to facilitate the actual exchange of value within their digital ecosystem.
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