VeradiVerdict - Consumer Benefits For Spending Crypto At Retailers Like BBB & Whole Foods - Issue #39
Hi, I am Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing into blockchain companies and cryptocurrencies. I focus on early investments and want to share my thoughts and what’s going on in the industry in this weekly newsletter.
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One of the biggest announcements during NY Blockchain Week was the announcement of Flexa partnering with Gemini to launch their SPEDN app with the ability for consumers to gain benefits and spend at many top retailers. A common question was regarding how it works under the hood so I thought I’d break it down:
• The current problem with using cryptocurrency for mainstream retail payments are that it creates a huge amount of work on the retailer’s side. It either requires them to develop the tech infrastructure to support blockchain things like wallets, addresses, keys, etc. or partner with exchanges to convert cryptocurrency and fiat, breaking the “closed-loop” systems that power 90% of all transactions today.
• Past cryptocurrency payment solutions essentially used a prepaid debit card from a bank, where users load crypto into the card and it is exchanged to fiat on-demand during transactions. One of the problems with this is that it’s too similar to the system of banking and debit cards––highly prone to fraud and privacy issues, and also excludes a subset of the population that just isn’t able to get a bank account because of institutional barriers. Another problem is cost. There are significant fixed variable fees for these cards. Why bolt crypto onto an expensive legacy payment system?
• Flexa proposes a closed-loop solution using stored-value accounts and flexcodes to make cryptocurrency retail payments. At transaction time, it essentially creates a stored-value account identified with a flexcode that preserves security and privacy and secures a transaction like a letter of credit; transactions are actually funded later, once the crypto has been converted to fiat.
• Flexa’s solution is end-to-end, meaning it takes crypto from a user and manages the entire process until it delivers fiat into a retailer’s bank account. There’s pretty much no extra work on either side of the transaction, other than integrating with Flexa’s system.
• Flexa recently announced SPEDN, which is the consumer side of the payment network. It is essentially a secured wallet that allows consumers to pay retailers that accept Flexa payments with a variety of cryptocurrencies. Over 30k locations today accept Flexa payments, including some major vendors in the US like Bed, Bath & Beyond and Whole Foods.
• Ultimately, Flexa presents a very promising self-contained solution for making cryptocurrency retail payments. It’s the first step forward in revitalizing an outdated financial system too reliant on external institutions by moving towards using decentralized, secured payment mechanisms that are easy for consumers and sellers alike.
Envisioning a Cryptocurrency Future
Most of the cryptocurrency we see today focuses on either (1) the technical side of blockchain or (2) the trading-related applications of cryptocurrency. It’s all about improving scalability, speed, and security, or helping blockchain enthusiasts make money off of cryptocurrency as an asset––not necessarily a vehicle for asset exchange. Unfortunately, not a lot of these new companies are geared towards mainstream, non-cryptocurrency-inclined users.
The whole idea of cryptocurrency has the ability to completely revitalize the way we think about money, transactions, and wealth. Let’s consider one popular future for cryptocurrency––retail and consumer spending. Imagine you could walk into a store, pay for items using Bitcoin, all controlled through an app on your phone, and manage all of your wealth and assets in a decentralized, privacy-focused, and highly-secured manner instead of relying on third-party banks and an outdated system.
What’s stopping us from getting there?
The biggest issue stems from the fact that the entire retail system is designed around the bank way of handling assets, not the cryptocurrency way. Namely, retailers don’t want to accept payments in cryptocurrency because:
1. If they accept in pure cryptocurrency, they have to pay their suppliers and all of their external operators in cryptocurrency; these parties don’t want to accept cryptocurrency as a payment, and will only take fiat because that’s the way they’ve done it for several decades. They also have to establish infrastructure to manage private keys, wallet addresses, and all the other blockchain-related tech behind cryptocurrency. Most retailers don’t have the tech infrastructure to support this.
2. They can choose to accept customer payment in cryptocurrency and then convert it to fiat before depositing it in their own accounts. This forces the retailer to rely on third-party exchanges that do the conversions for them, which introduces a whole new agent into the transaction equation. This is what’s called an “open-loop” payment, because it requires the parties to rely on operators that are outside of the traditional transaction loop. 90% of transactions today are “closed-loop”, which means that it’s entirely managed between a retailer, the retailer’s bank, and the consumer. Closed-loop payments are faster and cheaper for retailers because it’s all internally managed. Transitioning to an open-loop system to accept cryptocurrency presents a huge management problem for retailers.
In sum, there’s essentially no easy way for retailers to accept cryptocurrency payments natively that doesn’t force them to either build out cryptocurrency infrastructure themselves or create partnerships with external exchanges. This is why most retailers are wary of accepting cryptocurrency payments.
And for the most part, people haven’t been willing to spend cryptocurrencies (to make it worthwhile for merchants to make these changes) because most blockchain assets have been speculative in nature. However, many new projects that utilize the secure and fraud-resistant core features of cryptocurrencies (like stable coins) are gaining traction. Given the extremely low cost in processing cryptocurrency payments relative to traditional payment instruments, it’s only a matter of time before we see a shift towards mainstream usage,
What are some ways of getting around this?
So far, the two most popular mechanisms have been:
1. Having a bank issue a prepaid debit card where card-holders can load cryptocurrency into the card, and the account converts cryptocurrency to fiat on-demand during transactions. The problem with this is that it centralizes the cryptocurrency system, meaning that it’s bank-managed (which defeats the purpose of having a decentralized currency in the first place). Additionally, it comes with all the hassle of opening a debit card in the first place, like the Know Your Customer and credit checks––this is too much friction for most mainstream consumers to get a cryptocurrency card, and also excludes a huge part of the population that have particularly hard times opening these accounts.
It’s also expensive (fees) and takes a digital medium and forces it into analog architecture.
2. Making bank payments directly during transactions by partnering with merchants’ banks to convert cryptocurrency to fiat on-demand when the payment is loaded into a retailer’s account. This is a super promising solution––but one that hasn’t seen a lot of innovation, because it requires retailers to work with their individual banks to set up a system to convert crypto to fiat. Again, another institutional hassle on the retailer-side of things.
So, how do we get around it?
At the 2019 Coindesk Blockchain week, Flexa announced their new network that enables retailers to natively accept cryptocurrency payments from users as fiat assets in their bank accounts, with essentially no institutional overhead. Flexa’s solution essentially translates cryptocurrency payments from the consumer’s end directly into fiat in the retailer’s bank account in a process that’s seamless to both the consumer and the retailer; there’s basically little-to-no extra work that either party has to do to support the conversion aside from allowing the Flexa platform to integrate with their mobile device or financial accounts.
How exactly does it work?
Flexa presents a closed-loop solution to the problem. Closed-loop payments inherently use “stored-value” accounts which are kind of like bank accounts, with no identity or specific owner attached to it. Flexa creates a stored-value account to hold a user’s cryptocurrency assets and manage them. This allows it to:
1. Integrate natively within a retailer’s closed-loop transaction system, meaning there’s almost no institutional overhead for the retailer
2. Stay decentralized and private, meaning that the fundamental qualities of cryptocurrency are maintained, and it’s not dependent on a bank
3. Operate as a money-services business, because all it’s doing is managing finances and exchanging cryptocurrency, as opposed to managing cryptocurrency commodities or goods.
At a transaction, Flexa generates a barcode called flexcode which relays the consumer’s stored-value account information to the retailer and their bank.
*Note the codes only exist at the point of transaction, the customers don’t have access to any funds, and accounts settle similar to a letter of credit.
Each flexcode is only used once, which maintains specificity in each transaction. This is important because with one-use flexcodes, Flexa can preserve security in their transactions and prohibit fraud, because codes are not reused. One-use codes are the fundamental basis for some of the most powerful and secure cryptographic tools on the market today.
Flexa’s stored-value accounts and flexcodes are also both temporary, which means they are created at the initiation of transaction and expire immediately after. This allows for the cryptocurrency-to-fiat exchange to happen at the most-current rate (in real-time), and on the consumer side, there’s no need to load assets into the system before or convert assets before.
Transactions are also secured, but not settled, immediately. This means that the stored-value account is secured by the cryptocurrency amount being paid, which essentially creates a letter of credit guaranteeing payment in the future. Most credit and debit networks today operate with a similar infrastructure, where transactions are secured by the transaction amount and actually funded later. This allows for the cryptocurrency to be converted to fiat through the retailer’s native banking system. Flexa connects their transactions to the base-layer of the bank’s processing infrastructure, which means it’s an end-to-end pipeline for channeling crypto from users to fiat in banks.
SPEDN is Flexa’s big announcement from Blockchain Week. It’s basically a mobile app that users can download on their phone that allows them to make Flexa payments to the retailers that Flexa partners with. Flexa partnered with Gemini (a mobile crypto portfolio management tool, run by the Winklevii) to ensure that every SPEDN wallet is completely backed by the New York Department of Financial Services, meaning that users can be confident their assets are safe, and fully insured. Essentially, SPEDN allows users to make retail payments using Bitcoin, Ether, Bitcoin Cash, and the Gemini dollar (a regulated, dollar-pegged stablecoin). Flexa payments help simplify the retail-side of the transaction equation; SPEDN helps simplify the consumer-side of things.
Why is this so important?
There’s a lot of technical magic that goes into Flexa’s system but the bottom line is that Flexa creates a solution that allows users to pay cryptocurrency instantly with an app on their phone, and retailers to accept payments in fiat without having to establish specific individual partnerships with banks/exchanges or create a cryptocurrency financial infrastructure by themselves.
Flexa maintains cryptocurrency decentralization, preserves security and privacy, and natively integrates with retailer’s closed loop systems. It’s a self-contained solution to a problem that’s been perpetuated by having too many moving parts––which means now, it’s easier than ever for cryptocurrency purchases of retail goods to be a reality. Cryptocurrency can finally revitalize the outdated financial system of credit and debit cards, which has been prone to fraud, poor consumer benefits, and generally slow development and high costs. Retail payments done through cryptocurrency are cheaper, more-secured, and optimize financial rewards for consumers and producers alike.
Another important implication of the Flexa system is that it allows allows for borderless retail payments using cryptocurrency. Flexa’s stored-value accounts and flexcodes means that cryptocurrency is only exchanged to fiat (a government-controlled asset) at a point-of-sale, which allows the transaction itself to be borderless. Additionally, since transactions are only secured with Flexa, and funded later, payments can be made in local fiat currency once initiated with a consumer’s cryptocurrency.
Where is the Flexa system available today?
There’s more than 30,000 locations in the US that accept Flexa payments. Some notable ones include Whole Foods, Bed, Bath & Beyond, GameStop, Nordstrom, and Office Depot. The system has gained an insane amount of traction recently, and its partnership space is only projected to expand further.
It’s time for cryptocurrency to access the mainstream consumer––the one who doesn’t think of cryptocurrency as a mechanism for trading or decentralized applications, but rather a way to replace the financial tools they’ve been using their entire life. Cryptocurrency payments for generic goods have been limited by a ton of institutional overhead, limited technical infrastructure, and overreliance on an outdated financial system.
Flexa presents a unique way around that. With their closed-loop solution using stored-value accounts and flexcodes, Flexa has created a way for cryptocurrency transactions to natively integrate with a retailer’s bank account and convert to fiat currency at the point of transaction. On the consumer side, Flexa’s new SPEDN app also makes it incredible easy for consumers to manage their crypto wallets and make payments wherever they go. Altogether, it’s a seamless, self-contained, and end-to-end solution that allows consumers to pay in crypto and retailers to receive payment in fiat, without having to do much work on either end.
Flexa’s blown up recently, with more than 30,000 retail locations accepting Flexa payments, including some of the largest vendors in the United States. Its entire system presents a new development in the way we think about transactions; there’s no need to rely on banks and debit/credit cards anymore, which in the past have been plagued with high costs, too much institutional overhead, and fraud and security issues. Flexa allows the decentralized system of cryptocurrency to take foot in a space where it has the potential to revitalize the way that consumers pay for their day-to-day goods.
The reality of consumers using cryptocurrency as their exclusive payment mechanism might seem like a far-off reality, but Flexa and SPEDN are the first steps to getting there.
Now that Blockchain Week is officially a wrap, we wanted to thank everyone who joined us at the Consensus conference and our launch events here in NYC. We’re very grateful to the growing Flexa…
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