Foresight Ventures: Your First Stop to Web3 — Crypto-Fiat On Ramps and Off Ramps
Steve@Foresight Ventures
Introduction
The conversion from fiat currency to cryptocurrency is many users’ first action to onboard the world of Web3 — whether on a centralized exchange or at a Bitcoin ATM. The special nature of these transactions earned fiat-to-crypto platforms the name “on ramps” in the context of cryptocurrencies. Intuitively, platforms hosting the reverse crypto-to-fiat transactions are called “off ramps”. Crypto-fiat transactions are heavily regulated, to conduct which nearly all global jurisdictions require a local Money Transmitter License (MTL) and mandate Know Your Customer (KYC) procedures. Because it takes a long time to get MTL approved for different jurisdictions, it became a barrier for market entry and created a segmented market landscape — crypto ramps range from large centralized exchanges serving global markets to small standalone ramps focusing on local markets.
In this article, we will first delineate the key differentiating factors for crypto ramps, including legal requirement, business model, and customer experience. Then, we will map seven types of crypto ramps, including centralized exchange, standalone ramp, ramp aggregator, crypto ATM, crypto debit card, crypto credit card, and OTC. This article’s focus skews towards the US market, as crypto ramps such as crypto debit card and crypto credit card are less readily available outside the US.
Key differentiating factors
1. Legal requirement
Money Transmitter License (MTL) in the US or its equivalence in other jurisdictions (such as VASP in EU and Remittance Service Provider in Australia) is the only license required to operate a crypto ramp. (Note that we will refer to these equivalent licenses as MTL for easy context from now on.) Although detailed regulations for MTLs are different across jurisdictions, MTLs have two things in common: First, they are required for non-banking entities transferring physical or digital value above a certain threshold (e.g. $1,000 in the US) and thus called “money transmitters”. Second, they require an Anti-Money Laundering (AML) program involving customer identity verifications called Know Your Customer (KYC). The following are two examples of MTL regulations:
a. US
In the US, crypto ramps need to first register as a Money Service Business (MSB) with Financial Crimes Enforcement Network (FinCEN) at the federal level and then obtain an MTL from each individual state, a very lengthy process. KYC programs need to go through periodic compliance reviews by FinCEN and MTL must be renewed every two years.
Besides, because there’s no regulatory framework for cryptocurrencies on the federal level, crypto ramps might be subject to SEC and CFTC regulations in the future if the cryptocurrencies these ramps deal with are categorized as “securities” or “commodities”.
Furthermore, if crypto ramps including centralized exchanges bankrupt and liquidate, retail customers are considered their “general creditors” and therefore are not guaranteed the ownership of digital assets in custodied wallets.
b. EU and UK
In EU and UK, which have more established cryptocurrency regulations, crypto ramps need to register for a Virtual Asset Service Provider (VASP) license, which is required for exchange, mining pool, wallet provider, escrow service, and DApp. VASP license is regulated by Financial Action Task Force (FATF) and like MTL, VASP license also requires an AML/KYC program. Fortunately, registering as VASP with one country in EU grants the right to operate in the entire EU. Because Lithuania provides the most favorable virtual asset regulation, many centralized exchanges, such as Binance, register as VASP there.
2. Business model
Crypto ramps buy and sell crypto-fiat liquidities and generate revenue either by earning a spread between buying and selling rates or by charging percentage fees to customers. Therefore, key parties in a crypto ramp’s business model, from upstream to downstream, are supplier (to buy liquidity from), distributor (to sell liquidity to), and end customer.
a. Liquidity supplier and distributor
Supplier and distributor are relative terms — a crypto ramp can supply for one business but distribute for another. In a theoretical example, a centralized exchange like Coinbase buys ETH at 1600 USD/ETH from market maker partners, resells ETH at 1700 USD/ETH to a standalone ramp like Moonpay, and makes 100 USD/ETH in profit. Therefore, Coinbase is market maker partners’ liquidity distributor but Moonpay’s liquidity supplier. Going further downstream, Moonpay can supply liquidity to a ramp aggregator like TransitSwap. In general, liquidity flows from market makers, to centralized exchanges, to standalone ramps, and to aggregators, each of which can directly sell to end customers as well.
Upstream players are generally larger entities with more crypto and fiat types supported, more global presence, and lower rates. Downstream players are generally smaller entities with fewer crypto and fiat types supported that focus on local jurisdictions they are licensed in and charge higher rates for better customer experience.
b. End customers
End customers include merchants demanding crypto-fiat payment solutions and treasury management, as well as retail customers demanding crypto-fiat liquidity.
3. Customer experience
Customer journey on crypto ramps has four steps: KYC, fiat-to-crypto on ramp, crypto-to-crypto, and crypto-to-fiat off ramp.
a. KYC
KYC is required if a customer trades above a small amount, generally equivalent to a few hundred dollars a month. KYC documents include government-issued ID (passport or driver’s license), proof of address, and face recognition. KYC is usually automatically conducted at a third-party KYC provider and approval takes from hours to a few days.
b. Fiat-to-crypto on ramp
1) Payment methods
There are four payment methods available for fiat-to-crypto purchase: wire, ACH, debit/credit card, Google/Apple pay. In general, higher fees are charged for greater convenience to make purchases.
- Bank wire goes through an interbank communication network such as SWIFT and could interchange at several banks before arriving at the on ramp. Each interchanging bank could charge a fee. Domestic and international transfers usually take one or two business days.
- Automated Clearing House (ACH) is another interbank communication network like bank wire but is mostly used for routine payments. ACH is free but takes up to three business days to settle.
- Debit/credit cards can be used to purchase crypto for a high interchange fee shared between the card issuer (usually the bank) and the card network (e.g. Visa).
- Google/Apple pay can be used to purchase crypto for a high fee comparable to debit/credit card, except that the payment service provider (Google/Apple) also takes a cut of the fee.
2) Fiat and crypto types supported
Fiat types supported depend on in which jurisdictions licenses are obtained. Crypto types supported depend on the crypto ramp’s technical resource to set up another chain. As a rule of thumb, larger ramps such as centralized exchange offer more fiat and token types than smaller ramps, given the former’s greater legal and technical resource.
3) On ramp fee structure
In addition to fee charged by payment methods, three more fee types can incur in a fiat-to-crypto purchase:
- Fiat-to-crypto exchange fee: either a percentage fee or a spread implicit in the exchange rate.
- Distributor markup: either a percentage fee or a spread implicit in the exchange rate. For example, standalone ramps may apply markups to the rates they sourced from centralized exchanges. Ramp aggregators may apply markups to the rates they pooled from standalone ramps. Therefore, the more layers of middlemen, the higher the fees.
- Blockchain network fee: charged by miners to transfer crypto from ramp-custodied wallet to customer’s wallet, only incurred when the customer uses a self-custodied wallet by providing its public key.
c. Crypto-to-crypto
After on ramping, customer can perform crypto-to-crypto transactions in a custodied wallet on a centralized exchange, or in a self-custodied wallet on a decentralized exchange. However, we won’t discuss this as we focus on crypto-fiat transactions.
d. Crypto-to-fiat off ramp
1) Withdrawal methods
Off ramp withdrawal methods are much more limited on ramp payment methods. End customer either initiates a bank transfer (wire or ACH) or pays crypto for fiat-denominated services using a crypto debit card.
2) Fiat and crypto types supported
Again, fiat and crypto types supported depend on the ramp’s legal and technical resources.
3) Off ramp fee structure
Like on ramp, off ramp fees have four parts: payment method fee, crypto-to-fiat exchange fee, distributor markup, blockchain network fee.
Crypto ramp types
We will now discuss seven types of crypto ramps (centralized exchange, standalone ramp, aggregator, ATM, crypto debit card, crypto credit card, and OTC) using the framework we just set up (legal requirement, business model, and customer experience). A full comparison is summarized in a spreadsheet at the end of the article.
1. Centralized exchanges (CEX)
Centralized exchanges, such as Coinbase, Binance, and FTX, are the most used crypto ramps. Given their vast legal and technical resources, CEXs typically have Money Transmitter Licenses (MTL) in most global jurisdictions and support the most fiat and crypto types with the lowest fees. Liquidity is supplied by outside market makers or by trading CEXs’ own principal. CEXs then distribute liquidity through their own OTC desks to institutional clients, standalone ramps, ramp aggregators, or directly to end customers such as merchants and retail customers. As the middleman of liquidity, CEX makes profits by charging a percentage fee or spread to its distributors and end customers. Crypto bought or crypto to sell are first deposited on CEX-custodied wallets but can be later transferred to customer’s self-custodied wallets for additional blockchain network fee.
CEXs also provide payment solutions to merchants through services such as Coinbase Commerce, Binance Pay, and FTX Pay. These services help merchants set up customer payment methods through CEX-hosted check out page or provide APIs and SDKs for merchants to customize and integrate payment methods on their own front end. If both the merchant and the customer use wallet custodied by the same CEX, no fee is charged because the payment only transfers crypto from one account to another account on the same CEX wallet. Merchants can also opt to receive fiat only by asking the CEX to automatically convert crypto receipts from customers to fiat. Fiat can then be stored on a CEX custodied fiat account for withdrawal or directly on the merchant’s own fiat account. In the latter case, CEX would need to open a commercial fiat account on the merchant’s behalf.
2. Standalone ramps
Standalone ramps, such as Moonpay, Transak, and Wyre, are essentially mini exchanges but mostly only provide crypto-fiat ramp services. They also need MTL licenses for the jurisdictions they operate in. Given their smaller size and limited legal and technical resources, these standalone ramps usually focus on local geographies and support fewer fiat and crypto types compared to CEXs. Because liquidities are sourced from market makers and often times CEXs and because customers mostly need to bring over self-custodied wallet addresses, standalone ramps often charge higher fees than CEX, due to the additional layer of markup and the blockchain network fee. The downstream of standalone ramps include ramp aggregators and wallets, who apply yet another layer of markup to the exchange rates. For example, MetaMask’s fiat buy feature is an aggregator of standalone ramps including Moonpay and Transak.
Similar to CEX, standalone ramps also provide payment solutions to merchants, through hosted payment pages or API/SDK tool kits for customizable payment front end. Merchants can bring over self-custodied wallet or use ramp-custodied wallet.
While ramps are essentially smaller CEXs with higher fees, they provide a few key advantages that justify their existence:
- For end customers, they provide more intuitive interfaces. Rather than immediately requesting KYC or providing users hundreds of trading pairs after logging in, many standalone ramps provide minimalistic interfaces with a fiat amount at the top and the corresponding crypto amount at the bottom. Although KYC is still triggered if the user trades above a small threshold or attempts to withdraw fiat, standalone ramps work very well for onboarding retail customers through their first purchase.
- Most standalone ramps only work with self-custodied wallets and are good for security-concerned customers.
- Most standalone ramps give distribution partners the option to set up their markups in SDKs and thus allow distributors to control the profit they make. The split of fees is less explicit for CEXs.
3. Ramp aggregators
Ramp aggregators, such as TransitSwap, KyberSwap, and MetaMask’s fiat buy service, make money by listing quotes and earning commissions from standalone ramps and CEXs. While they are just another layer of markup in the liquidity distribution chain, they have four main differences from CEX and standalone ramps:
- Ramp aggregators only play as the middleman because the actual transaction is completed through third party providers.
- Ramp aggregators often display quotes from competing third party providers for customers to choose and this is their key value added.
- No MTL license is required because users go through third-party provider’s KYC.
- Ramp aggregators often offer additional services such as swap, liquidity staking, and NFT marketplace. Ramp aggregators are typically retail-facing only and don’t provide payment solutions to merchants.
4. Crypto ATM
Often despised as the “dumbest” way to buy crypto due to their exorbitant fees (up to 20%), crypto ATMs such as Bitcoin Depot often fulfill many users’ first purchase. MTL is required because crypto ATMs custody liquidity from third-party providers and transfer crypto to users’ self-custodied wallets. One key advantage of crypto ATMs is their anonymity, as users can purchase crypto using cash without KYC up to a small threshold (about $250 equivalence). Beyond that, a simpler KYC involving ID only is needed. However, crypto ATMs have three major downsides:
- First and foremost, ~80% of crypto ATMs offer on ramp only.
- Second, payment methods are very limited, often cash only and occasionally allowing debit and credit cards.
- Third, only blue-chip tokens such as BTC and ETH are supported on these ATMs, given most users are just dabbling into cryptocurrency.
- Fourth, fees are extremely high (between 5% and 20%) to cover the maintenance cost of ATMs, as operators are usually specialized in crypto ATMs without big banks to help spread over costs like traditional ATMs.
These said, fee structure is very similar to other crypto ramps, including exchange fee, ATM’s markup, and card interchange fee.
5. Crypto debit card
Crypto debit cards are only issued by CEXs to users who already have a CEX account. For background information, two parties are needed to create and maintain a debit/credit card:
- First is the card issuer, the party that custodies funds and processes individual payments such as Coinbase and JP Morgan.
- Second is the card network, the party such as Visa that communicates among banks, batches up individual payments, and facilitates interbank transfers.
Crypto debit cards are off ramp only and are used to pay merchants fiat currencies converted from crypto. Behind the scenes, CEX first supplies liquidity by converting user’s crypto in their CEX account to fiat and implicitly charging a percentage fee or spread. The rest works the same as regular debit cards — the fiat payment is batched and routed from CEX’s bank account, via card network such as Visa, to the recipient’s bank. Therefore, crypto debit cards are the same as regular debit cards except that the card issuer (CEX) needs to first off ramp crypto to fiat. Because CEX handles all crypto-to-fiat conversions, no additional MTL is needed for the card. Fees (1%-4%) are usually higher than crypto-to-fiat fee on CEX, because users also need to pay interchange fees charged by the card network.
While crypto debit cards offer convenient utility for automatic crypto-to-fiat conversion in small purchases, they are taxable events and therefore less convenient than regular debit cards. Besides, because they are linked to user’s CEX account, user needs to first deposit crypto in their CEX-custodied wallet.
6. Crypto credit card
Crypto credit cards, issued by CEXs such as Gemini and payment services such as Venmo, function the same as regular credit cards in payments and settlements, which are facilitated by a card network such as Visa. The only difference is that crypto credit cards offer the option to receive cashback in crypto. Because the conversion only happens one way from fiat to crypto, crypto credit cards are considered on ramp only. Fiat-to-crypto liquidity is provided by card issuers who charge implicit markups behind the scenes. Crypto cashbacks are then deposited in user’s wallet custodied by the card issuer.
7. OTC (principal desk and P2P)
Over-the-counter (OTC) ramps offer crypto-fiat trades that happen directly between two parties. OTC ramps have two models:
- Principal desk, such as Kraken OTC
- Peer-to-peer (P2P), such as Binance P2P
Principal desk always has client as one side asking for quotes and the OTC desk itself as the counterparty trading its own principal. KYC’ed client initiates a trade by submitting a quote for crypto-fiat pairs supported by the principal desk, usually with a minimum quote equivalent to $100K or $200K. Trade is facilitated either by an automated quote system or by an online chat room populated by client and principal desk traders. Principal desk makes an offer to the client after receiving their asset. If the client accepts, the principal desk will attempt to make a profit by trading assets from the client (now the desk’s own principal) at prices lower than the offer price at multiple liquidity sources, including other market makers and OTC desks. Therefore, although always touted as zero fee, principal desks make profits by implicitly charging a spread between the offer price and trader’s executed price. Thus, fees are all-inclusive in the offer price. Nearly all major CEXs have their own principal desks that serve institutional and high volume retail clients, but many non-CEX players offer principal desks as well. There are a few key advantages offered by principal desk OTC ramps:
- First, avoidance of slippage. Large volume trades, when executed on exchanges with insufficient liquidity, can cause significant price movements called “slippage” to the trading party’s disadvantage. Principal desk eliminates this problem by offering fixed prices for large volumes and leaving trade executions to professional traders.
- Second, deeper liquidity. Principal desk traders have access to and can trade at the best price at multiple liquidity sources. The client enjoys these benefits at the cost of a spread.
- Third, privacy. The client’s privacy and order information are protected by directly trading against a principal desk counterparty rather than revealing the trade on a public exchange orderbook.
Peer-to-peer (P2P), the second OTC ramp model, are crypto-fiat trades truly happening between two parties without a principal desk on one side, such as transacting crypto for fiat with a friend. To eliminate trust issues, some platforms such as Binance P2P facilitate user to user transactions by providing escrow services for a small fee. The seller deposits assets to the escrow service and posts a quote on the P2P platform with self-defined payment methods. The buyer takes the quote and fulfill the seller’s payment method. The seller then confirms receipt of payment and releases asset held by the escrow. There are a few key advantages offered by P2P OTC ramps with facilitated escrow services:
- First, high variety of payment methods. Once both sides of the trade go through KYC on the facilitator’s platform, they can set any payment method that’s mutually agreed on, including methods specific to local geographies and even in-person cash transactions.
- Second, trustlessness. P2P facilitators often publish user scores such as percent of orders completed as a gauge for user trustworthiness. On the flip side, there’s still risk that the counterparty might delay or cancel an order.
- Third, privacy. Banks in many countries such as India restrict users from transacting crypto in fear of potential future regulations. Transacting crypto via P2P services avoids these restrictions by not revealing the purpose and destination of bank transfers.
Summary
In this article, we first listed the key differentiating factors for crypto ramps, including legal requirement, business model, and customer experience. Then, we mapped seven types of crypto ramps, including centralized exchange, standalone ramp, ramp aggregator, crypto ATM, crypto debit card, crypto credit card, and OTC. A detailed comparison is in the spreadsheet below.
In terms of legal requirement, the only license needed is equivalence of Money Transmitter License (MTL), which is required for each jurisdiction of operation. It’s not a banking license and custodied assets are not protected by government insurance in the case of bankruptcy.
In terms of business model, crypto ramps profit by charging a percentage fee or a spread between the rate paid to upstream liquidity supplier and the rate paid by downstream liquidity distributor (or end customer).
In terms of customer experience, KYC is conducted for trading volume above a certain threshold. On ramp and off ramp fees include payment method fee, exchange fee, distributor markup, and blockchain network fee. Purchased digital assets are directly deposited in custodied wallets or in self-custodied wallets upon provision of public key.
In terms of different types of crypto ramps, upstream (CEX) players have more fiat and crypto types supported due to their greater legal and technical resources. They charge lower fees and focus more on sourcing and re-distributing liquidity in bulk. In contrast, downstream (standalone ramps, ramp aggregators, ATM) payers have less fiat and crypto types supported due to their limited legal and technical resources. They charge higher fees and focus more on customer experience and ease of access. Larger players such as CEX and standalone ramps also offer payment solutions for merchants. Crypto debit card and crypto credit card are considered utility cases to holding custodied digital assets on CEX. OTC ramps either offer quotes for trades between high-volume clients and principal desks, or facilitate truly peer-to-peer transactions with escrow services.
About Foresight Ventures
Foresight Ventures is dedicated to backing the disruptive innovation of blockchain for the next few decades. We manage multiple funds: a VC fund, an actively-managed secondary fund, a multi-strategy FOF, and a private market secondary fund, with AUM exceeding $400 million. Foresight Ventures adheres to the belief of “Unique, Independent, Aggressive, Long-Term mindset” and provides extensive support for portfolio companies within a growing ecosystem. Our team is composed of veterans from top financial and technology companies like Sequoia Capital, CICC, Google, Bitmain and many others.
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