ICE, the owner of the New York Stock Exchange, made headlines reported a $30 billion takeover proposal to eBay — the massive online marketplace. The news is notable in crypto circles because ICE is the same company behind the Bakkt options and futures platform, which offers financial institutions physically-delivered derivatives instruments for bitcoin.
The company even recently acquired Bridge2 Solutions for consumer/merchant payments and is working directly on a “consumer pay app” that would consolidate loyalty points and other features.
In what is just the next play in the ongoing race to consolidate crypto consumer market power, ICE’s move is indicative of a much larger trend at work.
This is important because consolidating loyalty points, trading, consumer payments, and custody under one roof requires translating KYC/AML standards across platforms. And the KYC/AML environment remains fragmented — not only between states in the US but between countries abroad.
However, the hurdle of adequate KYC/AML support looms heavily. One can’t excel without the other, particularly when it comes to merchants accepting crypto payments.
Addressing the Crypto Payments Problem
Conventional applications that incorporate payment functionality, or are strictly a payments app (e.g., Venmo), are integrated directly into legacy payment rail infrastructure. This includes SWIFT, ACH, and other application-layer banking payment apps, like Zelle or Venmo. Banking apps strictly adhere to KYC/AML standards because the companies and clearinghouses behind the transactions are compliant. Not to mention, they’re about as closely intertwined with the government as possible via FDIC insurance and the US government’s hegemony over SWIFT.
With cryptocurrencies, the dynamic is different.
The onus of KYC adherence mostly falls on merchants. Specifically, mid-level companies and small business owners who don’t want to cross regulatory grey areas by not instituting basic KYC/AML technology. But that was never a problem with the USD or other fiat currencies before. KYC was always baked into payment infrastructure, rendering any threats of regulatory encroachment an afterthought.
With crypto, that dynamic is entirely different. And crypto-specific marketplaces across the blockchain spectrum are even grappling with KYC problems.
For example, LocalBitcoins, the popular P2P bitcoin marketplace, shut down accounts in several regions following its stricter policy of adherence to new EU AML laws concerning cryptocurrencies. LocalBitcoins’ specific target audience is crypto traders. E-commerce merchants and other retailers couldn’t care less about crypto traders. Specifically, it’s only in the merchant’s best interest to accept crypto payments if the underlying crypto interaction is masked entirely.
But due to both tax and KYC reasons, it has been challenging to address. Don’t forget about the volatility of crypto assets either.
Strike, the application from Zap announced by Jack Mallers, cleverly removes some of the friction by taking on the balance sheet risk of transactions. For example, Zap’s Strike users can pay an invoice at a store similar to Apple Pay via their phone using bitcoin’s lightning network (LN) without ever interacting with bitcoin. Instead, Zap holds FDIC insured USD deposits in a bank account while LN transactions are handled by Zap on the back-end — users (merchants and consumers) only see balances transferred to and from their bank accounts.
Critically, this circumvents the major tax hurdle for LN payments where each transaction would constitute a realized capital gains “taxable event.” Instead, payments are considered, via the regulatory perspective (merchant/consumer payments), as an adherent to the conventional banking infrastructure — non-taxable events outside sales tax.
However, this only addresses the tax-related concerns of the government, not KYC/AML adherence. And considering that congressmen have already expressed concerns about illicit crypto activity, the area also needs to be addressed in consumer payments.
In fact, the balancing act of KYC for Libra may have been what spelled its initial (and irascible) regulatory backlash.
Building Standardized KYC for Crypto Payments
While Bakkt does plan to offer a consumer-facing payments app that is KYC/AML compliant, it’s a closed-loop system.
If the internet has taught us anything, it’s that open digital standards typically convey the most value to applications built on top of them in the long-run. And that’s precisely the area companies like Maxonrow are targeting.
Rather than strictly managing KYC for a closed ecosystem of its own users, Maxonrow’s KYC blockchain functions as a “gateway” to accessing decentralized applications. Their recent response to COVID-19, MedsLOCK, integrates with any existing system to ensure data collection & exchange between stakeholders is transparent and trusted. Identities can be securely managed on-chain, adhere to government regulations, and can even vary for a region’s AML laws, like the EU compared to the US.
As a result, the KYC, rather than imbued into a specific payment application itself, operates as a standard that can translate across payment apps. Imagine wielding the same KYC identity standard for multiple payment apps (e.g., Strike, Lolli, etc.) using one technology rather than crafting an app-specific KYC model for each app. This drastically lowers the costs of implementation.
Companies, specifically online merchants and point-of-sale stores willing to accept crypto can subsequently save a bundle on KYC costs. All they need to do is tap a technology like Maxonrow rather than spin up their own KYC implementation like Bakkt
Paired with payment designs like Strike, both tax and KYC hurdles can be overcome for crypto payments. Whoever builds the standard the instills both into a standard framework for app developers will likely become the foundation of crypto consumer payment apps.
It’s unlikely that US regulators would support full-scale crypto consumer payments without some form of standardized KYC adherence. Ultimately, firms like Bakkt, who have stockpiles of resources, can afford to initiate their own KYC processes. Smaller e-commerce shops cannot.
Therefore, it’s unlikely merchants will adopt crypto payments with the risk of regulatory issues until a low-cost standard emerges. The risk of non-compliance is simply too high and current solutions are too costly.
A plug-and-play KYC solution is required, and that’s precisely why the race to consolidate market power in the crypto consumer field hinges directly on KYC innovation.