The Importance of Fiat
Whether we like it or not, fiat is still the access point for crypto. Until we are fully decentralised and decoupled from traditional banking systems, users of crypto will convert native fiat currencies into crypto to then use in the crypto ecosystem. This is evident everywhere; Bitcoin is measured in USD or GBP, rather than a value in itself. Then there has been the emergence of stablecoins over the past few years, which is a testament to this symbiotic relationship; any perceived value in crypto is always pegged against a fiat currency. It is unsurprising, then, that this dependency on fiat also imports some of the shortcomings of traditional banking systems into crypto. Contrary to the popular utopian view of decentralised finance, users of crypto are still limited by issues such as local fiat restrictions. The solution, therefore, is to build a better bridge between fiat and crypto if we want to improve user experience and, ultimately, increase adoption.
The Current Bridge Is Falling Down
The interaction between fiat and crypto can be divided into three distinct steps. Firstly, the user effectively pays for crypto in fiat; this is the on-ramp and fiat needs to be converted into crypto. Then, activity occurs on blockchain ; this could be anything from trading to purchasing and selling NFTs. Finally, the user cashes out to fiat; this is the off-ramp experience and crypto needs to be converted back into fiat so that it can be withdrawn and used by the user.
Banks are integral to this process, and crypto providers need to work closely with them in order to give users the best banking experience. However, the bridge between fiat and crypto again has its flaws. Currency requirements are an issue; even if a crypto provider only lists in GBP, EUR and USD, they will require three different banking integrations. Then there are local restrictions and regulations that can be prohibitive. Platforms need to obtain the correct local licences in order to operate, and these licences are often issued after a manual compliance review, which is slow and outdated. Aside from the associated costs, operating on such long timeframes isn’t helpful when dealing with the 24-hour volatility of crypto.
The Cost of Building Poor Bridges
A bridge between crypto and banks needs to be easily accessible, stable, reliable and, most importantly, visible. The current offering falls short of these standards and has led to the creation of bridges where transactions move slowly from one side to the other and the cost of moving transactions has a high premium, mainly due to perceived KYC/AML risks from a bank’s regulatory perspective. As a result, tier 1 banks have put the equivalent of a ‘do not cross’ sign on the bridge. They can’t quantify the risk according to their models and as such the default is to put a high-risk status on crypto platforms.
The responsibility for creating this bridge, therefore, falls on tier 2-4 banks who, despite their best efforts, are slower to embrace the latest payment methods (FPS, Sepa Instant, ACH Instant etc.) and are already handling significant volumes of fiat flows for crypto platforms. This instability could lead to eventual collapse, and these banks know this. Again, they often charge hefty premiums in order to compensate for the risk. Only by creating a more efficient, and transparent, bridge between crypto and fiat can we begin to eliminate these extra costs.
Breaking the Negative Feedback Loop
It is important to recognise the role that user experience, and more specifically the banking experience, plays in the perception of crypto. The dialogue between crypto providers and banks is still fragmented at best and, as a result, crypto providers have very little input on the restrictions and regulations imposed by traditional finance. The risk of debanking is constant, and when this happens it can be a headline-grabbing event that is disruptive to the industry. When Binance debanked (temporarily) from the UK, the ensuing panic and inaccessibility created huge instability in the market.
In order to break the negative feedback loop that currently exists, there needs to be more transparency and better reporting of fiat-crypto flows, as well as improved education for crypto providers on how banks prefer to operate. In order to mature the crypto ecosystem, the crypto market needs to mature. Fiat to crypto needs to be simplified and that user journey needs to be as positive as possible.
