Bankless 93 - Crypto Payments and the DeFi Mullet | Visa's Cuy Sheffield and Anchorage's Diogo Mónica
Primer: The DeFi Mullet thesis posits that FinTech apps would enter the crypto space and gradually replace the legacy banking payment layer with crypto. How is this thesis panning out? In this episode of the Bankless Podcast, hosts Ryan Sean Adams and David Hoffman speaks with Cuy Sheffield from Visa and Diogo Mónica from Anchorage to get their thoughts on the DeFi Mullet thesis.
Background
Cuy Sheffield
Head of crypto at Visa
Diogo Mónica
Co-Founder and President of Anchorage Digital
DeFi Mullet Thesis
Last year, David and Ryan noticed that many FinTech firms were starting to enter the crypto space and talk about crypto
Their DeFi Mullet thesis posits that the FinTech apps are front-facing while their backend comprises of DeFi. The FinTech apps would come into the crypto space, polish up the user acquisition, and slowly replace the legacy banking payment layer with crypto
Cuy
Is a believer in the DeFi Mullet thesis
Years ago, crypto companies were not seen as part of the FinTech scene
Exchanges like Coinbase and FTX were growing rapidly. They were looking to expand into payments
Set up their crypto product team in 2018 as they recognized that crypto exchanges and wallets had the potential to become major players in the FinTech and payments ecosystem
Started working with crypto wallets to help with fiat on-ramps and off-ramps
Diogo
Is a believer in the DeFi Mullet thesis
FinTechs win in 3 ways when they integrate crypto:
Increases engagement and strengthens their network effect
Increases revenue for the firm
For publicly traded firms, they are recognized in the market for being innovative
On the other side of the coin, people believed that there will be regulatory risk when crypto is added to the platforms of FinTech firms. This is proven not to be the case over and over again
Does Visa View Crypto Entering Payments As An Opportunity Or As A Threat?
Cuy
Visa views it as a tremendous opportunity
What crypto companies are worried about is direct merchant acceptance of transactions over public blockchain networks
For example, if a merchant accepts USDC, which network does it accept the USDC on (e.g. is it on Ethereum, Solana, Stellar, Algorand, or Arbitrum, etc.?)
Visa still provides value as it requires no change on the merchant's part
Expecting to see more crypto-linked debit and credit card products over the next several years
Why Does Adding Crypto Increase Engagement And Customer Retention?
Diogo
Crypto is something that is marketable and what people want to talk about
The flashier and more interesting the feature, the higher the engagement they receive
FinTechs are in competition with one another. Their apps need to integrate as many features as possible such that they can stand on its own, providing users with no need for their competitor's apps
Cuy
For a long time, people in banking and FinTech looked at crypto as a super volatile asset class
At some point, there was a switch and product managers realized that crypto facilitates users to open their app often in order to check on crypto prices
Each time users open their app, platforms can upsell another product and build a loyal customer base
"Some might say another word for engagement is addiction. Maybe some people listening can can relate in the number of times they check their Blockfolio and crypto prices during a given day." - Ryan Sean Adams
Banks and FinTechs can see the money flows from their consumers to crypto exchanges such as Coinbase and FTX
Crypto-Backed Rewards On Card Programs
Diogo
Credit card rewards that are crypto-based drives engagement and makes it sticky for users. Users will perceive that they have obtained crypto for free and would not be affected by the volatility if the price goes down. Hence, there is more upside than downside
Seeing a lot of demand for crypto-backed rewards
Cuy
Sees crypto-backed rewards on credit cards becoming a major trend
Compared to air miles that expire and depreciate in value, crypto-back rewards appreciate in value
Crypto companies have a different business model than traditional FinTech firms and neo-banks. Because of how profitable the former are, they are able to offer more lucrative rewards than most other programs would
In the future, there's potential for users to vote on which categories should have rewards for the next month
The Payment Space
Cuy
The existing payments ecosystem exists in multiple layers
VisaNet is a high throughput authorization system that works at 70 million merchants across the world. It allows for the exchange of messages between a Merchant's bank and a customer's bank
Visa uses different settlement networks across the world to coordinate settlement from one bank to another bank
Blockchains as a settlement layer operate 24/7, unlike many existing settlement layers
Different countries have payment rails with different features:
The US does not have a real-time payment system
Brazil has real-time payment networks
Just as different countries are trying to connect their payment infrastructure to facilitate cross-border payments, the DeFi Mullet is still fragmented with multiple chains
Thinks that both will co-exist and solve different problems for different client segments
Diogo
Crypto is not primarily a retail phenomenon. Institutions benefit from the rise of stablecoins and the growth of different settlement networks
Large FinTech firms are coming to Anchorage because it improves efficiencies in their businesses
Backend Of Anchorage
Diogo
Their role is to provide a regulated integration between blockchains and fiat on-ramps from the traditional world
They started out as a regulated custodian
Today, they have a federal charter where they provide the infrastructure, the APIs, and the prime services for any institution to do custody, execution, buy and sell, staking, etc.
They only work with institutions
Cuy and himself work really closely together to build B2B products
How Do Their Companies Help To Bridge The Gap With Consumer Payments?
Cuy
Visa enables the issuing bank of the cardholder to settle with Visa. They manage the conversion of one currency to another currency
They are working with crypto native companies like Crypto.com and their card product
They have integrated Anchorage in to Visa's Treasury system as a crypto settlement bank
"And so the same way that Visa manages conversions, and works with banks to convert Dollars to Euros, we think we should have the capability to help convert a digital dollar in the form of USDC into a traditional Dollar that we can deliver to a bank. And so we work with Anchorage, to be able to do that." - Cuy Sheffield
Has an Ethereum address for clients who want to pay them in USDC
Visa ensures that everything happens seamlessly at the backend — the right form of currency is accepted, the right form of currency is sent to the Merchant's bank
In the fiscal year ending Sep 30, Visa processed $3 billion of payment volume coming from crypto-linked Visa cards
Diogo
To consumers, what matters is convenience. It does not matter what form the currency takes
On-chain transactions are not a good proxy for settlement between consumers and merchants
The number of cards that have a relationship with Visa and the volume of cards backed by crypto on the backend is more representative of the volume of payments being done with crypto
Cuy's Journey
Joined TrialPay, a startup, as his first job out of college
TrialPay was acquired by Visa. Was learning about Visa and entering crypto at the same time
His colleagues at Visa didn't know anything about crypto. His crypto friends did not know anything about Visa
"And so you know, I was just the the annoying crypto person inside the company just talking about it every single day." - Cuy Sheffield
It became clear to him that the future is going to be an intersection of the two
Visa is a partner-driven company. When their partners started to move into crypto, they followed suit
Started a newsletter called Visa Crypto Weekly in the beginning of 2018. Grew from 10 readers to 500 readers
Does The Immutability Of Blockchain Transactions Cause Problems For Visa?
Cuy
In the context of working with Anchorage, it's not a major issue because other large settlement rails like Fedwire are not easily reversible as well
Card products are still useful. It allows consumers to reverse transactions in some contexts where it makes sense to have such a feature (e.g. cancelling a subscription)
One has to consider the trade-offs for both consumers and merchants. There is no clear product that is better on every single metric
Still a long way to go before crypto native payments become as consumer friendly as card payments
Diogo
In the traditional world, there are many use cases where financial institutions require the 2 days in the T+2 settlement format to give themselves time to react in case something goes wrong
This is part of their built-in risk model
Why Did Visa Buy A CryptoPunk?
Cuy
Visa views NFTs as a brand new phase of commerce, where it's a digital storefront
Visa wants to help accelerate the adoption of NFTs by making it easier for merchants and brands to sell NFTs and for consumers to buy them
They are building a crypto native culture at Visa where they encourage experimenting and trying out crypto (e.g. setting up a wallet, buying a CryptoPunk, etc.)
Told Diogo that Visa wanted to buy a CryptoPunk. Anchorage stepped up to it and helped them secure one
Had identified a seller who had a collection of Punks. Hence, they were limited to only Punks within that collection
Did not want to enter the crypto space by doing a Visa NFT drop. Wanted to pay homage to CryptoPunks and build authentic relationships that are forming around NFTs
Diogo
Institutions approach transactions very differently from retail investors. They have to consider things from a risk perspective and the process would take some time
After Anchorage has announced that Visa has purchased a CryptoPunk, every single client of theirs reached out to them to make Punk purchases
Anchorage actually owns a significant percentage of all the Punks on the market on behalf of their clients
What Strategy Will The US Pursue With Regards To CBDC?
Cuy
China is a very unique country and market for payments. Hence, it is hard to draw direct parallels from them to other markets
Discussions on designing CBDCs are very academic and abstract. One of Visa's challenges is to identify what problem does CBDCs solve for consumers as well as what they look like as a product
Visa is engaging with every major central bank across the world, doing research and helping them to think through the issues
For CBDCs to be successful, they have to have many of the same properties that stablecoins have
Diogo
Thinks that what comes out of a CBDC is going to be positive for crypto
It's not a full cryptocurrency but will still be available on smart contracts
What Are The Wins For Crypto Natives In Having Institutions In The Space?
Cuy
Encourages people to read up on Dee Hock and the origins and history of Visa
In the 60s/70s, Dee Hock predicted a lot of the things that we are now seeing in crypto
For crypto to grow and become mainstream, it needs to be convenient for consumers to access it. Visa wants to be one of the best on-ramps into crypto
Diogo
People's focus should not be on centralization or decentralization, but on specialization
Institutions have legal requirements to use third-party custodians and Anchorage is the only qualified custodian in the United States because of their OCC Chartered Bank
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