Building Corridors to Power Stablecoin Flows

Transcript

Um Well This is uh just I want to say As you can tell I don't speak very well French. Um Hi, I'm Cactus Rosse from B2C2 and uh we uh B2C2 has spent a uh a fair amount of time over the past roughly 18 months building out uh a bunch of stablecoin infrastructure. Um and when I was uh when I was asked whether there would be something interesting to talk about here uh I thought it might be most helpful to the audience to go through the actual building of a corridor and some of the complexities.

Uh there's a lot of permutations. I'll try to keep this reasonably brief and and to the point, but I just wanted to mention that there's a fair amount of um you know, kind of writing on the internet and various other things about uh how fast stablecoins are going to be and how easy and you sort of just snap your fingers and you move money all over the world instantly uh for no money, you know, free and instant. And while uh hopefully that'll be the future at some future date, that's certainly not the case right now. We are huge fans of the entire stablecoin uh kind of let's call it the paradigm and the movement towards stablecoins within particularly within payments and in other use cases as well, but we wanted to just share some of our actual

learnings and some of our actual difficulties building out a specific corridor. So uh you know, this is kind of this slide is I won't really read the slides, but I just to mention the fact that obviously the world thinks that stablecoins and and we agree that stablecoins are going to become a really dominant paradigm for the movement of value both within networks. An example of that might be Stripe with what they've done recently with Bridge and moving money around their own merchant network. And then obviously uh both within regions and then cross-border uh hopefully from point A to point B anywhere in the globe much faster and much cheaper than what is currently available. Um now the issue in my in my experience is

that these corridors need to be built out with really specific thought. The the actual kind of stablecoin movement is obviously quite easy. Just move something around on chain, no problem, send it to a wallet. But it's the things around it that we want to mention uh where the complexity is. This is really the full stack of a fully built corridor. So you've got everything from the bank where the where the person wanting to send money generally has to go to a bank. Why is that? Pri- Generally for KYC reasons. You've got an FX conversion from the local currency, in this example BRL to US dollar. You've got the deposit of dollars in some sort of an account that we would have to have control over. The conversion of those dollars to

stablecoin is obviously very easy. On-chain transfer obviously very easy, but then the complexity comes up on the back end as well. Um in this example, which is a real world example of us, we have clients in Brazil who want to send money to Japan. And in this example then also in Japan there's a fair amount of complexity. You've got off-ramping, you've got another FX uh leg there and then finally the ability for someone to pull the money out of the bank. Putting the money in the bank to start this process and pulling the money out of the bank to end this process almost always involve at a minimum KYC and compliance uh I'm and in addition to that there can be other considerations such as sanction checks and we'll get

into some of those in a minute. So couple of things here that are is rarely mentioned. Usually when we build these corridors out we go from a local partner in Brazil uh we have multiple local banking relationships such as um uh well, maybe I shouldn't mention them necessarily, but there's a number of banks uh that we work with down there. And we get good FX there. Why do I mention this? For anyone in the audience or anyone listening to this, you should also consider working in addition to your local partners on on both ends of the corridor. Consider working with a money center bank.

The hard part of working with a money center bank, in our case specifically it's JP Morgan, is getting on-boarded. Took us 18 months to get on-boarded to JP Morgan. It's a pretty high threshold both from a compliance perspective as well as you know, suitability in terms of um whether you have the necessary scale to be sort of worth it to an organization that large. But uh while I will walk through what we do with local partners in both regions, I want to point out that a lot of what I'm saying won't necessarily be neces- won't be necessary if you have a money center bank relationship. Other examples, we have banking at DBS, at Standard Chartered, Bank of New York. So there are multiple examples of these large kind of global uh banking

entities. For this specific corridor, one of the things we can do is we could go through what we're going to talk about today, but the other thing we can actually do is if our Brazilian client wants to deposit money in our account in Brazil, it can it can very quickly be registered as yen uh in Japan using a JP Morgan methodology rather than doing uh all the other things I'm talking about. So I sort of just want to point that out as a it's not available to all companies and it doesn't work always obviously if you're in parts of the world that are heavily underbanked, moving away from Brazil, using examples uh for example um arbitrarily the Democratic Republic of Congo, you're going to have a much bigger problem. Uh they happen to be

under sanctions as well, but the reason why KYC AML on this slide is highlighted is specifically because that's one of the things that's so often glossed over in a lot of the literature on LinkedIn or or what you might see these you know, this it's quite fashionable to release a a really fat report about how stablecoins are going to change the world, which hopefully they will, but uh the KYC is pretty heavy on on both sides, just FYI, particularly if there's a dollar leg, which with um with the state of the affairs with stablecoins currently uh usually, not always, but usually involves a dollar leg.

This slide is only to point out that there's another interesting dynamic. There are a lot of really well-built um you know, trustworthy, first-class stablecoins out there. Um we are currently still seeing the majority of our demand currently in uh USDT Tether, USDC Circle. We are a member of the Global Dollar Network and we do also uh encourage our clients to look at USDG um which is issued from Paxos. There are obviously quite a number of newer stablecoins that I am a believer in including the Western Union stablecoin, um the Fidelity stablecoin.

Uh obviously PayPal has uh a quite a useful asset out there as well, but I wanted to point out that um well, we're at ECC so I should point out the vast majority of our activity is on Ethereum, that's for sure. Uh we do get occasional requests for Solana or or more recently Canton for the privacy features, but uh heavily dominant is Ethereum and coin-wise currently heavily dominant USDT Tether, USDC Circle, but with a lot of attractive additional options that I think over the course of the next 24 months will start to become more common.

And then finally, uh just a little a little bit on risk management, you know, that's not again not an area that that people talk about all that often, but to have a robust uh a corridor built out that you know, in addition to KYC and some of the other table stakes we've briefly gone over, uh what your risk management protocols are, what your um sort of vulnerability to either bad actors such as hacking, but more commonly just operational errors. Uh those are those are things that will also be need to be thought of. At our firm and and at a a number of larger firms there is a whole set of checks and balances, authorizations depending on the size of the transaction and various other methodologies including multi-signer um

frameworks to ensure that well, not to ensure, but to to absolutely minimize the possibility of an operational error or a bad actor. And so here's just a little bit around the compliance leg. The compliance leg is interesting for a couple of reasons. For one, it's obviously pretty slow. And unlike the front office where um those of us in the business, you know, we want to do sexy things and move big amounts of money and show how fast we can do things. Uh our partners in compliance rarely share the same motivation with all due respect to anyone in this audience who is uh is in compliance. Um they are much more interested in protecting the firm, protecting the client, protecting reputation and most importantly not

getting into a an uncomfortable situation with a regulator or an auditor. So um I just I just wanted to point out that these considerations when you're building your when you're building your corridor, when you're thinking about, okay, I I have a lot of clients in geography A and they are there's a heavy interest in moving money from geography A arbitrarily to geography B, wherever that may be. These kinds of considerations, what what bank am I going to use? Who are my local partners going to be? And what are their uh do they have adherence to some of the rules that I'm going to need to um adhere to myself?

Are they going to be good partners for compliances? Um It is actually an important part of the conversation. Now this part, converting stablecoins to local currency, the obviously the the stablecoin to dollar conversion is not an issue whatsoever. We don't need to talk about that, but I did want to mention a little bit around FX. Um In our experience, the regardless of the geography, what I'm about to say is true in Brazil. It's uh less true in Japan because that's quite a developed FX market, but um in many many geographies that we've looked at in Latin America, which is my area of focus given um my role is to look look after the Americas, you get wide wide divergence of pricing on the FX. And so, that's another

element of your local banking partners that you'll need to be thoughtful about is pre-negotiating your FX rates. Um we have we actually have an FX partner who offers us terrific FX um on both sides as kind of part and parcel of our of our broad global relationship. But for those of you who are trying to build out something specific, for example, Paraguay to the Philippines, just to pick two arbitrary countries, you're going to want to ensure that upfront you've negotiated uh very very um you know, kind of aggressively your FX rates on both sides to ensure that the corridor that you're trying to build actually creates value for your users.

And then settlement in the recipient country is also not uh it is not a trivial matter. Um for example, the the sort of uh arbitrary example I'm using is Japan. Um most Japanese are very slow on the payouts, like a kind of 24 plus hours. Um there's they're also um my experience has been they're they're not particularly motivated to get involved in this business necessarily. It's kind of like brain damage that they don't really want and they don't want to have to think about you know, the nature of the flows and the fact that there was a stable coin in there somewhere and whatnot. So, finding partners that are going to be good uh motivated partners and who are going to sort of understand that that every step along the this

corridor of of those many steps uh few slides ago needs to be as fast as possible for this thing to create value. Um I should also just point out on a side note that Brazil has a tax. It's a it's a um currency control tax essentially on on uh moving money out of Brazilian real into any any G7 currency such as a uh US dollar. And it's 38 basis points. That doesn't make it that doesn't kill the corridor, but um I want to point out that that is a very important consideration. There are some mechanisms to reduce the impact of that tax uh um which, you know, we can talk about offline, but conceptually, these are other considerations that aren't

necessarily obvious at the beginning when you say to yourself, "Oh, I've got a great bank and I've got some great FX." But again, you have to sort of almost like map out this entire corridor from start to finish and ensure you've built in all the costs and chiseled down as many of them as possible to ensure that what you're offering your clients is going to ultimately um be um be useful. On the subject of clients, I might point out that we work closely with a number of the well-known stablecoin orchestration firms who are, you know, all over LinkedIn or all over the the press for having been, you know, either acquired or having, you know, created exciting partnerships and whatnot.

Um we also work closely with stablecoin native financial services. And so, there are there are um companies that encourage uh stablecoin native um financial services sort of as a back end. Uh companies like Rain, you may have heard of that are focused on cards. There's companies like Kast with a K uh who are who are issuers and maintain accounts really in a stablecoin native way. And a lot of what we do is to help um these types of clients orchestration or um or stablecoin native financial services take advantage of the technology and get and and somehow um navigate some of the complexities we've talked about such as local partners, FX rates, um compliance considerations, and

and in some cases tax or other uh exogenous factors. Um this on this slide it does mention also operational reality. Um I wanted to point out that um for us we're lucky we're owned I don't know if we're lucky about this, but we are in fact owned by a Japanese company and because of that we're lucky to have strong operational capabilities um in Japan in this example being of course sending money from Brazil to Japan. The point though is that uh you're going to want to be thoughtful about what your operational capabilities are at the recipient end of the corridor that you're building.

Because uh without them you're going to end up having, you know, significant problems if there were to be some sort of, for example, uh you know, maybe the next block is slow on the chain you're using and and someone's sort of freaking out about where their money is. God knows what the issue might be, but it's really helpful to have a a robust ops function. I'm not necessarily saying a ton of people, I'm saying a small number of good people and good systems and a good level of automation on both ends. As it says here, the lesson is that the final mile uh is often times where the your corridor breaks down and and in this example we would, you know, one of the example we would have is we had it took us quite some time to find the right banking partner in outside of our

money center bank, which I spoke about previously. Uh it took us quite some time to find the right banking partner in Japan and I think that'll be the case um in a lot of jurisdictions where you might be sending money. On a side note, uh we get a lot of requests for sending money onshore China, which we cannot do. We don't have that corridor built out, but I just thought it would it's just an interesting um kind of proof point for anyone in this room uh that is going to be something in as you go about building corridors, you're going to get that request really quickly. It's really common. And so, uh this is just a list of best practices. I don't necessarily know that I need to read this list of best practices, but what I do need to say is that you can see there's there's quite a

bit there. Um it's as I've as I've said previously, it is important to really sit down and think about every step of your corridor, where you can do better, what are you missing? Uh there's, you know, obviously compliance by uh design there. The next bullet down is about engaging regulators and being transparent about what it is that you're doing and why. What is the nature of the flows? I might also add, by the way, that um we also get pretty consistent like pretty common for us to get uh requests from totally random companies that we've never heard of that are typically LLCs in the United States.

Uh typically, you know, a couple of the people that are the principals of the company have like an ex-military uh military contractor background and then uh they want to move some money from typically somewhere in Africa to somewhere in Asia uh and want to work with us to do the stablecoin leg. And you wouldn't believe how intense the uh the compliance issues there are and uh the uh the the KYB um and uh obviously a whole bunch of AML and then we've we've bounced into sanctions issues in the past as well.

So, as you start to build this stuff out and put it put a shingle out in the marketplace, you will get a lot of um let's just call it surprising calls, uh some of which might be legitimate and a lot of which will probably be better uh left alone. Last thing on this slide is automation. That's just one other thing I want to mention. One of the things we did is we said to ourselves, "Payments companies specifically are going to have a large number of small transactions." Unlike trading firms and large institutions that obviously do, you know, multi-million dollar transactions day in and day out, and that's very common for us. What's less uh what was less common and what's more common these days is working with payments companies and doing hundreds and in some case

thousands of little transactions all the way down to single single uh digit dollars and up to, let's say, half a million. And that is that is all automated uh at our firm. So, we have a variety of different mechanisms to do a fully automated uh movement and then also one of the things we offer is a platform called Penny and we've built this platform specifically for payment sizes, that is to say, more like retail size transactions where it's fully automated, uh it's instant, it's costless, and it it it it is an atomic swap basically where you send us the stablecoin that you want to sell and you receive the stablecoin that you want to buy. And so, Penny was conceived as as a effectively a central facility for

anyone that wants to accept most stablecoins, but only settle in a couple because they have their preferred treasury asset. So, Penny allows uh our our clients to go out to the marketplace and say, "We accept them all." And then and then just quickly use the platform that's instant, as I said, no counterparty risk, and settle in their in their preferred asset. And uh where do we go from here? I mean, you know, we definitely have in in my region we definitely have uh regulatory tailwinds. Um we've built out a good infrastructure. I think that the move towards using stablecoins to move money around both domestically and internationally is still very early days. Obviously, stablecoin native financial services and financial

products are still also very early days. And uh programmability in terms of putting software on top of these stablecoins also very early days. So, I think uh we have a really bright future and oh my only um I said my caution to the audience is move fast, but definitely um pay attention to some of the kind of annoying compliance and regulatory matters that we brought up because uh getting tripped up in that is going to really kill your momentum. I think that's it. Thank you. Thank you.