Foresight Ventures: Your First Stop to Web3 — Crypto-Fiat On Ramps and Off Ramps

Steve@Foresight Ventures

Introduction

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

a. US

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

2. Business model

a. Liquidity supplier and distributor

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

3. Customer experience

a. KYC

b. Fiat-to-crypto on ramp

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

d. Crypto-to-fiat off ramp

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

1. Centralized exchanges (CEX)

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.

Example: Binance Pay provides multiple payment solutions for merchants.

2. Standalone ramps

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.
Example: MoonPay provides an intuitive interface for user checkout.

3. Ramp aggregators

  • 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.
Example: TransitSwap includes a ramp aggregator that quotes from multiple third-party providers including MoonPay.
Example: MetaMask’s fiat buy service is a ramp aggregator integrated in its wallet and takes users directly to third-party providers including Transak, MoonPay, and Coinbase Pay.

4. Crypto ATM

  • 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

  • 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.

Example: With FTX Card, users make cash purchases using crypto balance on their FTX account.

6. Crypto credit card

Example: Gemini Credit Card rewards users crypto cashbacks but is otherwise a regular credit card.

7. OTC (principal desk and P2P)

  • 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.
Example: Kraken’s principal desk OTC ramp.

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.
Example: Binance P2P facilitates escrowed user to user transactions with customizable payment methods.

Summary

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

Website: https://www.foresightventures.com/

Twitter: https://twitter.com/ForesightVen

Medium: https://foresightventures.medium.com

Substack: https://foresightventures.substack.com

Discord: https://discord.com/invite/maEG3hRdE3

Linktree: https://linktr.ee/foresightventures

Image source: Ramp

--

--

Foresight Ventures is a blockchain technology-focused investment firm, focusing on identifying disruptive innovation opportunities that will change the industry

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Foresight Ventures

Foresight Ventures is a blockchain technology-focused investment firm, focusing on identifying disruptive innovation opportunities that will change the industry