While the allure of crypto payments is strong, caution is essential. The potential benefits in terms of speed, lower fees, and blockchain efficiency need to be weighed against the risks associated with cryptocurrency volatility.
In the first part of this review, we examined the potential shift towards crypto payments, weighing the allure of innovation against the volatility that shadows it. Now, in this second part, we compile insights from leading executives and experts within the industry about the viability of integrating cryptocurrency into the array of payment options offered by FX and traditional brokers to their clientele.
Lars Holst, Founder & CEO of GCEX, highlighted the impact of cryptocurrencies as a deposit option in the FX and brokerage sectors.
He stresses the need for brokers to gain a deep understanding of the regulatory landscape, pointing out the necessity of dual licensing. This licensing, which includes registration as a Virtual Asset Service Provider (VASP) or its equivalent, ensures adherence to both traditional financial regulations and those specific to cryptocurrencies.
“Implementing the necessary systems and controls becomes crucial for brokers, we must integrate crypto-related protocols into the existing “normal” investment firm infrastructure and procedures seamlessly – always ensuring a secure and compliant trading environment.”
Lars Holst, Founder & CEO, GCEX
Holst also discussed the critical choice brokers face regarding wallet infrastructure, between self-custody and partnering with a third-party custodian. While self-custody offers more control, it demands robust security measures. GCEX, for example, opts for third-party custody with regulated partners. This approach, according to Holst, is crucial for safeguarding client assets and building trust in the use of crypto as a deposit.
“On the other hand, a third-party custodian – which is the model GCEX uses with regulated custody partners – provides institutional and professional traders with additional security and the peace of mind to operate in the crypto market. Safeguarding client assets is imperative in order to build trust and deliver transparency in the emergence of crypto as deposit. Third-party and regulated custody solutions ensure higher standards of security and compliance.”
He further notes that very few traditional prime brokers currently accept crypto as collateral, leaving firms to decide whether to absorb the associated funding costs or pass them onto clients. Holst believes that the adoption of crypto payments provides a competitive edge for brokers. Only a few firms currently navigate the complexities of dual licensing, infrastructure, security, and funding effectively. Offering crypto solutions, Holst argues, positions brokers favorably by combining innovation with regulatory compliance, thus fostering trust among traders and investors in this evolving space.
“The adoption of crypto payments 100% constitutes a competitive advantage for brokers. This is a growing market and only a few brokerage firms get it right in terms of navigating the complexities of dual licensing, infrastructure, security measures and funding costs. Being able to offer crypto solutions undoubtedly provides a competitive advantage to brokers, enabling them to deliver innovation and regulatory compliance and ultimately building trust in traders and investors in this transformative space.”
Tom Higgins, CEO of Gold-i, provided a comprehensive perspective on the implications of adopting cryptocurrencies in the brokerage sector.
Speaking of regulatory implications, Higgins points out that cryptocurrencies, not being traditional currencies, require the development of specific regulations. The current regulatory framework is still in its early stages and needs to become more robust to effectively support cryptocurrency transactions in the financial sector.
Tom Higgins, CEO, Gold-i
A crucial challenge highlighted by Higgins is the anonymous nature of cryptocurrency transactions on the blockchain, which complicates the validation of the source of funds for brokers. This issue poses a conflict with the current security measures used by brokers.
“When crypto currencies move on the blockchain, it is anonymous, so the broker has no way of validating the source of funds. This will not fit in with current security measures that brokers use, which will be a problem. Brokers will need a robust process to validate transaction ids on the blockchain with their clients, or they cannot accept the payments.”
Higgins raises the question of where brokers will hold their clients’ cryptocurrencies. He notes that using a regulated custodian involves fees, and it must be decided who will bear these costs.
Interestingly, Higgins believes that while cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) offer little value for payments currently, stablecoins and upcoming Central Bank Digital Currencies could be highly beneficial. These could provide brokers with a competitive edge. He advises that the right time for this shift might be in 6-9 months, and brokers should start preparing for it soon. Preparation involves various steps, including on-boarding with exchanges, regulated custodians, working with tech vendors, amending client documentation, ensuring banking compliance, assessing and mitigating new risks, staff training, system testing, marketing the new funding method, and planning for an influx of clients and profits.
Sam Johnson, Global Head of Business Development at iSAM Securities, discussed their approach to integrating cryptocurrency deposits into their offerings.
iSAM Securities has spent months developing a secure and robust system for handling crypto deposits, focusing on maintaining full control and customizability within the firm, rather than relying on external parties. A key aspect of their system is the use of an FCA registered custodian to manage their private keys, which ensures full ownership and control over their wallets. These wallets are equipped with multi-signature features as a default security measure. Additionally, they have partnered with an institutional Crypto Liquidity Provider (LP) to ensure a seamless off/on-ramp solution with deep liquidity, all integrated within their existing robust framework.
“iSAM Securities have crafted what we believe to be one of the most secure, and robust offerings for our clients that had been 18-months in the making, while ensuring that full control and customisability lies with us and not external parties.”
Johnson believes that the demand for cryptocurrency deposits will continue to grow in the market. He highlights the minimal barriers to entry for retail clients looking to fund their accounts with cryptocurrencies. This approach not only simplifies the process for current clients but also expands the potential market reach, especially in emerging markets. The implication is that by adopting such a system, iSAM Securities is well-positioned to cater to a broader client base and capitalize on the increasing interest in cryptocurrency transactions within the financial sector.
“With the use of an FCA registered custodian to manage our private keys, we have full ownership and control of our wallets with multi-sig features enabled by default, which we then coupled with an institutional Crypto LP to complete our off/on-ramp solution with deep liquidity all encapsulated under our existing robust framework.”
Miles Paschini, CEO of FV Bank, discussed the growing importance of stablecoins in the financial landscape, particularly in cross-border payments, remittances, and FX brokerage services.
Paschini notes that an increasing number of businesses are utilizing stablecoins as a medium for exchanging value in cross-border transactions. This trend is indicative of stablecoins’ important role in modern payment and remittance markets.
In the context of FX and brokerage services, Paschini highlights the potential of stablecoins to serve as a means of deposit. Traditionally, FX businesses have relied on banks for deposit and withdrawal processes. By adopting stablecoins, this dependence on banks could be reduced, leading to improved speed and better conversion rates.
Paschini envisions a future where “FX can become a decentralised function when there are enough market participants. Conversion of currencies can be done on a decentralised exchange with trade / swap being facilitated by automated market makers. This can be the future of FX and brokerage services and accepting stablecoins as a deposit mechanism can be the first step”.
Miles Paschini Chief Executive Officer at FV Bank
Paschini also outlines several benefits of using stablecoins, such as the speed and certainty of settlement, as well as lower costs. He shares that FV Bank has enabled USDC as a deposit method and has introduced new compliance tools for screening transactions and counterparties for sanctions and AML risks.
“Stablecoins are becoming an important tool in cross border settlement of same or cross currency transactions. Some of the benefits include speed of settlement, certainty of settlement and lower costs. At FV Bank we enabled USDC as a deposit method over one year ago and in anticipation of enabling this settlement rail, we introduced new compliance tools to enable us to screen transactions and counterparties for Sanctions and AML risks. This has incorporated nicely into our push for a seamless integration of traditional banking and interoperability with digital assets, including stablecoins.”
For stablecoins to become mainstream, Paschini believes that more financial institutions need to implement necessary compliance controls and enable wallet or account functionalities that accept stablecoins.
“While we have seen a great adoption to date, for stablecoins to become mainstream, more financial institutions will need to implement the necessary compliance controls and enable wallets or accounts with acceptance functionality. The key is to make the transaction seamless to the consumer while maintaining back office compliance.”
Michael Thirer, the Legal, Governance and Regulatory Affairs Director at Muinmos, addressed the complexities that cryptocurrency introduces to the financial and regulatory landscape, particularly for brokers.
“Throwing Cryptocurrency into the pot can indeed add some complexity. First, in relation to the current applicable regulatory framework, the volatility of cryptocurrencies can increase risk to all parties, requiring special attention to, for example, the setting of margin levels. Imagine the FTX token was being used as collateral.”
Thirer points out that the inherent volatility of cryptocurrencies adds complexity, especially in terms of risk management. He uses the example of the FTX token, whose abrupt price drop posed a challenge for brokers to liquidate positions swiftly enough to prevent clients from reaching negative equity. This volatility complicates the calculation of risks related to transactions, realization of gains, and the overall assessment of trade risks.
Michael Thirer, Legal, Governance and Regulatory Affairs Director at Muinmos
The use of volatile cryptocurrencies as collateral not only affects risk assessments but also changes the nature of due diligence processes. Thirer highlights the necessity of performing “KYT” or “Know Your Token,” a specialized form of due diligence to assess the source of funds in crypto transactions.
“ It may also impact the institution’s assessment of the risk involved in the trade (CRA), as well as change the type of Due Diligence required in order to assess the source of funds (performing what is known as “KYT”, or “Know Your Token”).”
Thirer also discusses the possibility that brokerages dealing in cryptocurrencies might be subjected to additional regulatory frameworks, such as those for Crypto Assets Service Providers (CASPs). He cites the European Markets in Crypto Assets Regulation (MiCA) as an example, noting that while MiCA explicitly states it does not apply to deposits, other regulatory frameworks might not make such distinctions.
“MiCA itself defines ‘crypto-asset service’ as both “providing custody and administration of crypto-assets on behalf of clients”, “exchange of crypto-assets for funds”, “execution of orders for crypto-assets on behalf of clients”, and more. One might say the services a brokerage performs on the back of a Cryptocurrency deposit very much resemble these definitions, and therefore require its regulation as a CASP as well. We’ll need to wait and see”.
Alex Behar, CIO of Zotapay, a global payment service provider, provided a detailed analysis of the implications of crypto deposits in the FX brokerage industry.
Behar believes that the regulatory framework for accepting digital asset deposits is stringent globally, a trend he expects to continue with the wider adoption of cryptocurrencies. He notes that compliance with anti-money laundering regulations will become increasingly complex, particularly as blockchain transaction histories offer deeper scrutiny of fund flows compared to traditional payments like credit cards or bank transfers.
Behar points out the potential for blockchain to enhance the AML toolkit, as it allows for better visibility into the flow of funds, which is limited in the traditional financial system. He also mentions the emergence of new approaches in Web3, such as Coinbase’s KYC service on their BASE chain, which could improve trust and collaboration in compliance efforts across the ecosystem.
Alex Behar, CIO of Zotapay
“With credit cards or bank transfers, associating the source funds of the payment with other entities they have transacted with could prove to be a very valuable tool in the AML toolbox as the space matures and regulators gain deeper insights. Today, in the traditional financial system, few key entities have visibility into the flow of funds, and that hinders the compliance process. In Web3, several actors are pursuing an approach that has the promise to create more tiered global levels of trust.”
Behar highlights the challenge of safeguarding client funds, especially as brokerages operate their own crypto treasuries with various transaction policies and approval chains. The risk is underscored by the compromises seen in DeFi projects and exchanges, necessitating organization-wide security policies.
While acknowledging that blockchain space can be cheaper than some payment methods, Behar points out that this is not the only cost consideration when managing a crypto treasury.
“One of the biggest risks of adoption is the fact that brokerages need to operate their own Crypto treasuries, along with various transaction policies and chains of approval. Safeguarding client funds is a significant challenge even for sophisticated teams, as numerous compromises of DeFi projects and exchanges have shown over the years. They require organization-wide security policies for nearly every employee.”
Behar suggests that the adoption of crypto payments may offer a competitive advantage for brokers, particularly in markets where crypto adoption is higher. However, he implies that this advantage may be market-specific and not universally applicable.
Behar’s insights indicate that while crypto deposits present opportunities for FX brokers, they also bring challenges in terms of regulatory compliance, security measures, and cost considerations.
Finally, Lissele Pratt, a Forbes 30 Under 30 listee and co-founder of Capitaixe, offered valuable insights into the impact of cryptocurrency adoption among FX brokers, including her clients.
Pratt has observed firsthand the benefits of cryptocurrency adoption among FX brokers. She notes a notable increase in repeat business and loyalty from clients, indicating that embracing cryptocurrency payments enhances market competitiveness.
According to Pratt, navigating the regulatory landscape for cryptocurrencies is challenging, as it is still evolving and somewhat akin to the “Wild West.” Despite this uncertainty, she stresses that proactive security measures are essential.
“It’s about setting their own standards in a field where the global rulebook for cryptocurrencies is still in development. Financially, the advantages of cryptocurrencies are evident. They provide a cost-effective and faster alternative to traditional fiat, offering a streamlined and efficient avenue for transactions.”
Pratt acknowledges the financial advantages of cryptocurrencies, such as cost-effectiveness and faster transaction processing compared to traditional fiat currencies. However, she also cautions about the inherent volatility and risks within the crypto market. Brokers must find a balance between leveraging the benefits of cryptocurrencies and navigating their challenges, with a comprehensive understanding of the financial landscape.
“Cryptocurrencies are emerging as a preferred payment method, extending access to a diverse global customer base for FX brokers. Nonetheless, as the industry embraces this transformative shift, a vigilant approach is necessary to adapt to dynamic customer preferences and potential market fluctuations.”
Pratt extends the conversation to include CBDCs, noting that many central banks are considering introducing their own digital cash. CBDCs offer the benefits of cryptocurrencies, such as speed, without the associated risks.
“Dozens of countries are exploring CBDCs as a means to assert sovereignty and leverage the advantages of digital currencies while mitigating potential risks. This multifaceted context adds layers of complexity and opportunity for FX brokers navigating the ever-evolving terrain of cryptocurrencies and digital currencies.”
Pratt concludes that while the benefits of incorporating cryptocurrencies in the FX brokerage industry are substantial, brokers should approach this transformation with a “discerning eye,” considering both the opportunities and challenges.
“Striking a harmonious balance between innovation, security, and financial prudence will be key to sustained success in this dynamic market.”
The current regulatory landscape for crypto payments is rapidly evolving and remains fragmented. Depending on the nature of these assets and the specific context of transactions, several regulators at both federal and state levels may possess jurisdictional authority. Efforts to establish a more defined and suitable regulatory framework, which includes aspects like licensing and chartering authorities, may necessitate legislative alterations. These changes could potentially impact the dynamics and functioning of crypto payment providers/takers within the digital asset space.
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