The digital currency ecosystem is a new frontier, grown from a strong desire to bring the groundswell of digital revolution to finance, and even more specifically to money. The dot-com boom was a panacea for technical innovation, but the introduction of cryptocurrencies such as Bitcoin and Ethereum will turn the entire financial industry on its head as money fully becomes software.
Beyond cryptocurrencies in their pure form we are seeing brand new concepts emerge like the expansive realm of NFT’s, or non-fungible tokens, which are driving a collision course between art, money, gaming and access. In other parts of the crypto-sphere (we’re almost tempted to call it the multiverse) we’re seeing digital mechanisms replace and innovate on traditional finance systems, creating the burgeoning Decentralized Finance or Web3 space, where crypto lending, leveraging, borrowing, and everything in between is occurring.
If all this sounds daunting, don’t worry. In the following guide we’ll break down the cryptocurrency space, discuss different ways to integrate crypto into your products and offerings, dive into some of the requirements to operate in the space, and describe the more nuanced concepts that are worth understanding (at least at a high level). We’ll also break down what it would cost to build a team if you wanted to take on all the complexity yourself.
You may be asking the strategic question of if your organization should embrace crypto. Beyond all the hype, and the scams, and the volatility, is it actually worth the time and effort to plan, build and release something to your customers? We think the answer is a resounding ‘Yes!’, but you don’t have to take our word for it. You just need to look at the market growth and onslaught of weekly press releases about traditional organizations introducing new crypto-based products and services. If you’re not getting into crypto, you may be missing the boat (the same way organizations who didn’t embrace the Internet, or Mobile were).
The crypto market is big, and growing. As a market, the aggregate set of cryptocurrencies has been fluctuating between $1-3 Trillion, with some estimates indicating it will be worth over $5 Trillion by 2028. Approximately 20,000 different cryptocurrencies are listed on the popular CoinMarketCap web site, showing there is no shortage of innovation and opportunity in the space. In fact, momentum is only growing as the traditional Layer 1 blockchains like Bitcoin and Ethereum become congested and their transaction costs become prohibitive, which has prompted the creation of additional Layer 1 blockchains or Layer 2 scaling solutions to continue driving innovation.
So let’s be clear. While there is a lot of hype, crypto and DeFi are not going away, and it’s critical your business and strategy teams understand and consider what role crypto plays in the future your company.
If you don’t have your head wrapped around the basic concepts of crypto, be sure to check out our full Crypto Primer guide, which will give you enough information about blockchain technology, cryptocurrencies and decentralized finance to be dangerous.
For now, let’s just briefly cover a few key terms:
Paving the way for transactions that are cheaper, faster and more secure, the question is not “if” Crypto-as-a-Service will disrupt the financial sector, but “when”. With 88% of Millennials expressing interest in investing in crypto, demand suggests this shift will happen sooner rather than later. By the end of 2023, it is expected that between another 100 and 200 million new crypto wallets will have entered the space.
Engaging in the cryptocurrency ecosystem can come in a number of forms, with a few different models in terms of how you can start your crypto journey.
Direct models capture scenarios where end users desire to interact directly with the cryptocurrency space, carrying out activities such as trading coins, staking those coins to receive network rewards, or participating in more advanced decentralized finance mechanisms. Let’s discuss a few of these options.
Trading (Buy, Hold, Sell, Swap)
Cryptocurrencies can be bought, sold, or swapped similar to how traditional currencies are exchanged on FX markets. Millions of people are now interested in getting direct exposure to crypto, and want to purchase coins directly. Trading offers the ability to swap traditional fiat currencies for their equivalent value in a cryptocurrency such as Ethereum.
Trading doesn’t have to be the full-on experience you might be familiar with from advanced or high-frequency trading solutions. Instead, a basic form of trading can be introduced to users that allow them to simply trade between fiat currencies and the top crypto coins in circulation. The experience can be painless and easy to understand for beginners, even if they have never traded a cryptocurrency or stock in their lives.
Staking is the process of locking owned coins or tokens into a network to support network operations like approving transactions. Taking certain coins and tokens, and locking them into validators, users are able to earn a staking reward for participating in network consensus. These rewards create a significantly higher APY that would be typical on fiat currency savings accounts, often as high as 5% and beyond.
Decentralized Finance (DeFi)
Beyond buying, selling or staking coins and tokens, there is a growing catalog of dApps, or Decentralized Applications, that allow users to explore innovative financial instruments that have been designed just for cryptocurrencies. Decentralized Finance (“DeFi”) is the broad term given to a subset of dApps focused on creating and providing financial tooling to Web3 users. The tooling includes a wide variety of applications from non-custodial liquidity markets to decentralized over-collateralized multi-asset backed stablecoins.
These services can be made available to more sophisticated end users who are more familiar with buying and holding cryptocurrencies, and are interested in exploring more advanced experiences and opportunities.
Lending and Borrowing
While this is a general DeFi capability, lending and borrowing activities are large enough to call out separately. This function is available to users as a result of DeFi, but also the result of bridging Web2 and Web3, and enables users to lend and borrow assets for yield. There are many dApps that offer borrowing and lending services, along with corporations that offer a more traditional lending setup. Ultimately, these solutions are used to generate a yield on assets the users own, or to gain extended leverage for investment activity.
While some organizations and users desire to interact directly with cryptocurrency, others may like to benefit from an indirect offering that let’s users just put a toe in the water. That’s where rewards can really shine as an initial channel to offer exposure to cryptocurrency.
Loyalty & Reward Programs
Loyalty and reward programs are all about offering products and services that entice users, so why not entice them by earning popular cryptocurrencies such as Bitcoin or Ethereum? With the popularity surrounding the space, adding cryptocurrency is a great addition to any loyalty program. Here’s just a few ideas for crypto rewards:
Crypto Gift Cards
With the popularity of Crypto, it makes for a great birthday gift or stocking stuffer regardless if the person is already heavily invested or just starting to dip their toes. Most people now recognize popular coins like Bitcoin or Ethereum, and adding a crypto gift card to someone’s present can increase the uniqueness factor.
In a more professional setting, crypto can also play a growing role in employee rewards. Rather than passing out a $50 Amazon gift card for recognition, there’s increasing demand for rewards in crypto. Receiving the equivalent of $50 worth of Bitcoin has a totally different feel to it, and forward leaning organizations are jumping in. Whether the card is physical or digital, gift cards loaded with cryptocurrency will become more commonplace.
Cryptocurrencies squarely land in the space of finance, and as such there is a growing body of regulations and compliance slowly (and sometimes quickly) being introduced. There are those in the cryptocurrency industry that would rather see no regulation in the space, and lean into the anonymous and decentralized nature of blockchain technology. But for cryptocurrency to have the impact we want to see, it must be regulated. This is a good thing for both businesses, and the protection of consumers.
In North America, there are a number of regulatory bodies involved in oversight of the cryptocurrency market, and several compliance related activities that must accompany regulation, including financial registrations, AML / ATF policies, KYC requirements, and significant reporting requirements like the travel rule. Let’s dive into these areas:
Anti money laundering procedures are designed to explicitly identify suspicious activity surrounding money movements that may indicate some level of criminality. Money laundering is the process of making money from criminal activity that seems like it comes from a legitimate source, and innovative criminals are always looking for fresh ways to launder their earnings.
While criminal activity is growing in cryptocurrency, it’s at an order of magnitude less than the overall growth of the market, representing less than 1% of overall activity. Even so, the same checks and balances that exist in traditional finance must also be deployed in crypto.
Know Your Customer (KYC)
Part of AML prevention comes from the practice of KYC, or know your customer. This is a process that entails gathering required information to properly identify account holders, and flagging certain types of users that could be at risk, such as Politically Exposed Persons (PEP) and Heads of International Organizations (HIO).
Know Your Transaction (KYT)
Getting a bit more granular, KYT, or know your transaction, looks at individual cryptocurrency transactions. It provides analytical context to the source and movement of funds, as they are transferred between wallets during a transaction.
You can think of wallets as a specific and unique address, just like an email or home address. These addresses can be flagged for malicious behavior, and there is a new breed of companies popping up that help to monitor and flag these suspicious addresses, or suspicious behavior around the cryptocurrency transfer.
Know Your Virtual Asset Service Provider (KYVASP)
Yet another newer layer of AML for cryptocurrency is the concept of Virtual Asset Service Providers (sometimes referred to as dApps). These are largely distributed services that exist in the decentralized finance (DeFi) space, which holders of cryptocurrency can interact with for access to advanced financial mechanisms.
Not every service provider is as safe as the next, so gaining an understanding of these services before use is key. An analytical review of a dApp, including the likely source of funds deposited/withdrawn, allows for a reasoned decision on whether or not to interact with the provider..
The Travel Rule was initially developed by the FATF and enforced by G7 countries for fiat currency movement. These guidelines and recommendations have now been released for cryptocurrency, and organizations operating in the space must adhere to these rules. It specifies certain details that must be included with cryptocurrency transactions so that provenance and identities around cryptocurrency movement can be fully understood.
Due to some of the cryptocurrency history in Canada, specifically surrounding now defunct exchange Quadriga CX, Canada has taken a fairly stern line on how they regulate cryptocurrency. There are a number of regulator frameworks that are typically required to work with crypto in Canada.
At the Federal level in Canada, you have several oversight bodies responsible for creation and enforcement of regulation. Most notably would be FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) whose purpose is for the surveillance of money transactions that resemble money laundering or terrorist financing.
The Canadian Securities Administration (CSA) has offered some interim guidance that does allow organizations to operate, which they refer to as the Restricted Dealer Framework. If you are trading and custodying crypto, then you must register as a Restricted Dealer. Once registered you’re limited in the types of solutions you can provide to those approved specifically by the regulators.
Lastly, it may be required to register with IIROC (Investment Industry Regulatory Organization of Canada), which is a non-profit, national self-regulatory organization. IIROC oversees all registered investment dealers and trading activity on equities and debt markets in Canada. Oversight duties include monitoring members for compliance and enforcing securities regulations through quasi-judicial proceedings. This is both very costly to register, as well as maintain appropriate monitoring.
Provincial regulators exist in each province, handling both the oversight of regulation and enforcement of securities activity, for example the Ontario Securities Commission (OSC) and the Alberta Securities Commision (ASC). While cryptocurrency itself has not been deemed a security, it can become a security depending on how it’s handled.
For example, operating as any type of exchange, where you are trading dollars for crypto, puts your organization squarely in the sights of FINTRAC, where you must register as a Money Service Business, and specifically a Virtual Currency Dealer. A Money Services Business is used to describe a business that transmits or converts money, and operating as one drives a number of anti-money laundering activities that your business must adhere to.
If a single organization offers both trading (swapping dollars for cryptocurrency) and custody (storing that cryptocurrency in a wallet on behalf of a user) then they are deemed as creating a security. This stems from the fact that the cryptocurrency is not being ‘immediately’ delivered to a user, and instead the user receives a sort of IOU to retrieve their cryptocurrency later. Once you tip into this regulated area, you’re in the domain of the provincial regulators. It should be noted that it’s the location of your end-user that dictates the applicable laws and regulations, and exact specifics may change.
Working with crypto in the United States is typically a little easier than in Canada, though there are a number of regulatory bodies that are involved in the space. The location of your business and end user will determine the specific bodies that are required to be dealt with.
At the state level, it’s required that you are a Money Services Business, with the specific Money Transmitter designation which allows you to handle cryptocurrency. It should be noted that New York requires additional licensing in the form of a BitLicense, that is handled independently to MSB or Money Transmitter licenses.
At the federal level there are several bodies involved in regulation, each with specific duties in the creation and enforcement of legislation regarding virtual currencies. With multiple governmental entities involved, complexity of monitoring and reporting for compliance can be cumbersome and overwhelming at times.
For instance when processing transactions, it is important to verify individuals and/or wallets are not blacklisted in compliance with The Office of Foreign Assets Control (OFAC) requirements, which is in addition to FINCEN’s requirements to report AML, ATF, and other financial related crimes.
When considering cryptocurrency taxes, the Department of the Treasury (USDT - not the stablecoin) is responsible for enforcing the federal finance and tax laws, along with their role of supervising national banks and printing paper currency and coins. The USDT is most likely to be intimately involved in a US CBDC or regulation of the USD pegged stablecoin market as regulation matures.
In certain circumstances, if you are deemed as creating securities related products because of the structure of your cryptocurrency offering, you may be required to become a Regulated Dealer or Broker-Dealer.
Getting started in building with crypto can seem overwhelming, which is why we built Cybrid to reduce both the technical and regulatory burden for businesses who want to introduce a crypto product. We distill the complexity and costs of end-to-end crypto into simple, cost-effective APIs and SDKs to enable your business idea to go from paper to product with minimal uplift and expense.
If you’re just starting to take a look at building something in the crypto space, you may find the level of effort to get started surprising. Let’s walk through a few areas you should consider.
Getting a crypto product from idea to production can be a large uplift. You’ll need the people, skill sets, and technology required to cover front and back end within a ‘normal’ development environment, overlaid with the skill sets, knowledge and complexity required for nodes, gas fees, networks, protocols, blocks, wallets, keys, coins & tokens, security - and that’s without discussing liquidity partners and infrastructure to move capital between fiat and virtual currencies.
Let’s walk through the major areas to consider and plan for.
The first step in building a crypto product is to ensure you’ve got the right engineers. Demand for high quality engineering talent that can understand this space has been incredibly high, and so are the associated salaries for this talent. Depending on the level of complexity of the solution you’re planning to build, you need to expect 4-8 engineers, at premium engineering salaries.
Additionally, supporting these engineers will require the right product and design folks which can add the ongoing cash outlay.
Legal Advice and Opinions
Many of the areas in crypto are brand new, and not sufficiently documented or regulated, making it a murky and gray area to operate in. You’ll want to make sure you’re engaging knowledgeable lawyers in the crypto space, in order to advise you on the best way to structure your crypto business. Additionally, you may want to go as far as getting an official legal opinion (though this may be tough in some scenarios) in order to feel comfortable that the way you are operating your business is on the right side of the regulations and law.
This type of legal advice is not cheap, so expect to easily spend 6 figures to get the right advice, structure your business operations, and get the appropriate customer agreements completed.
Finding Liquidity Providers
In order to be able to swap from fiat currency, such as USD, to cryptocurrency, such as BTC, you’ll need one or more liquidity providers. These providers are able to source a large volume and variety of crypto currencies and are often market makers on a number of exchanges.
Liquidity providers can easily swap your fiat currencies for whatever desired crypto currencies your customers want. You’ll need to ensure that settlement for both the fiat and crypto sides of liquidity are sorted out.
Determining a Custody Solution
One you’ve landed on liquidity providers, you’ll need to decide where purchased cryptocurrency is being delivered to. There’s a number of different custody options available, including hot (connected wallets) and cold (disconnected wallets), as well as a middle-ground option, often referred to as warm wallets, which may have some mix of hot and cold, and have numerous additional securities and policies in order to execute transactions.
A key question you’ll need to answer is whether your organization will custody the crypto on behalf of your customers, or if you will simply send the crypto direct to customer wallets. While the former full custody solution may provide a better customer experience, there may be additional regulatory requirements, such as additional registrations. The latter is certainly easier to handle, but comes with additional AML efforts to ensure wallet destinations are not criminally flagged, not to mention all of the risk associated with storing crypto will now land on the end customer.
Lastly, in some instances you may be required to use a Qualified Custodian, which means selecting the right custody provider, or becoming a qualified custodian yourself.
Ledgering and Accounting
After solving for liquidity and storage of crypto assets, you’ll need to make sure that you are properly accounting for every transaction, both in and out of your platform, and for fiat as well as cryptocurrencies.
This is not just important for internal accounting purposes, but also for generating end-of-year tax documentation for your customers. In most cases, gains made on cryptocurrency are calculated as capital gains from a tax perspective, and it’s important to provide customers with clear tax information so they're ready for tax season.
Trade and Swap
While liquidity providers enable you to provide a fiat onramp / offramp, they often don’t provide the capability to swap directly between crypto currencies that are already being held. There are a couple of options to enable this swapping, ranging from directly holding crypto yourself, to integrating with centralized or decentralized exchanges.
Holding a balance of your own crypto exposes you to potential volatility, so working with an exchange is the better option. Evaluate your user acquisition and retention strategy when determining which type of exchange to work with. If you decide to select a centralized exchange, be aware that they may be competing for your customer, as many exchanges are happy to pay referral fees to get a user in their ecosystem, potentially selling many other services including different accounts and cards.
If protecting the customer relationship is important, then working with a decentralized exchange might be the best option as you can keep assets directly on-chain, and decentralized exchanges are not interested in your users.
Staking and DeFi
As the crypto IQ of your users improves, they may become interested in more advanced capabilities such as staking or other decentralized finance opportunities.
Staking provides a mechanism whereby users can lock their crypto assets into the underlying blockchain in order to participate in the operation of the network. As part of this participation, they will receive rewards in the form of new cryptocurrency coins. It’s a logical next step when holding on to coins, as it lets you increase the size of your holding with little to no additional risk.
DeFi is probably large enough for its own section, but the main thing to remember is that there are decentralized bank products emerging that provide everything from lending and borrowing to high yield opportunities. The return rates of some of the DeFi protocols are quite attractive, and in some circumstances can outshine the best rates available at existing banking institutions. Take extra care when looking at DeFi options as this is the most forward leaning side of crypto, and there have been some problems with protocols and coins that have resulted in significant losses.
Disaster Recovery and Insurance
If you’ve decided to custody the cryptocurrency on behalf of your end users, you need to make sure that you have an appropriate disaster recovery plan in place. Without a disaster recovery plan, it’s possible that a catastrophic failure could occur and the private keys that provide access to wallets could be destroyed. If the private keys are lost, there is no way to access funds in those wallets again, so it’s imperative that there is a recovery plan in place.
Closely related to your DR plan, is what you plan to do for insurance. Certain infrastructure providers will provide some level of insurance, but usually it’s a fairly low and limited amount. Optionally, there are insurance providers that offer additional levels of insurance that you could either include in the cost of your platform, or pass downstream to your end customers. Expect a cost of at least 1.25-1.5% of total assets protected.
Completing Regulatory Registration
Based on your technical solution, the legal advice you received, and how you’ll be operating your business, you need to file the appropriate registrations. Depending on the geography your business is operating in, and the types of cryptocurrency products you plan on releasing, you’ll need a number of different registrations, from money services business to more specialized licenses like restricted dealer in Canada, or broker-dealer in the US.
Expect registrations to take anywhere from a month (for simple MSB) to 6-12 months (for securities dealer). Along with this timeline, expect to spend beyond 6 figures to ensure you’re submitting properly, with all of the right information and paperwork.
Setting up Compliance
Once you’ve completed financial registrations, you’ll be bound by a set of compliance rules including KYC/B (know-your-customer / business), AML (anti money laundering), ATF (anti-terrorist financing) and others. You’ll need a Chief Compliance Officer or equivalent to head up compliance operations, and to put all of the appropriate documentation together covering how you will operate your policies and procedures for KYC, AML/ATF, reporting, and record keeping.
As part of ongoing compliance, you’ll need to identify and pay for partner services that provide the correct identity checks for KYC onboarding, as well as PEP/HIO (Politically Exposed Persons / Heads of International Organizations) screening.
Putting these procedures together, hiring and paying the compliance staff, and integrating with the right compliance partners will run well over 6 figures annually.
The Crypto Product Canvas
Summarizing these various steps, below is an easy to reference the Crypto Product Canvas.
As you can see, releasing a crypto-based product can become complicated and costly very quickly. There are many technical partnerships needed, and significant monthly minimums that will add up.
When you consider the engineering team, legal costs, and vendor expenses, you need to plan for a total initial spend of between $2M and $3M USD, and an ongoing monthly operational cost between $100k and $150k.
In addition to these costs, expect at least 6-9 months of building to get an initial product ready, and 9-12 months to ensure the legal, regulatory and compliance requirements have all been met.
Due to the cost, this is a high barrier of entry, especially if you aren’t certain that crypto will make a significant impact in your business.
Launching a crypto product can not only entice new customers, and engage existing ones, but it can also drive a solid revenue stream. We like to call this Crypto Led Growth.
Generating revenue is usually completed with a spread or transaction fee on cryptocurrency trades. Spreads vary, but you can use 1% as a reference point to calculate potential revenue amount. For example, if you have 10,000 users, on average trading $250 per month, you could expect to generate $25,000 in revenue monthly with a 1% spread. Alternatively you could use a fixed transaction fee, however this model isn’t used very often in the crypto space.
If you don’t want to spend several million dollars, and upwards of a year building a crypto solution, there’s another option.
Cybrid provides a turnkey platform for fintechs and neo banks to easily embed crypto and wallet functionality within their applications. Our platform handles the technical complexity of crypto integrations, while covering all regulatory and compliance aspects of rolling out a solution.
Your development teams can choose exactly how they want to integrate, leveraging either our robust cloud API’s or accelerating faster with our themable SDK and UI components. Our platform is so easy to build with, you can be up and running in a matter of weeks with a crypto solution.
The Cybrid solution is priced liked a typical SaaS platform, with a nominal annual platform fee, and a variably monthly active user fee. Cybrid never takes part of your spread, as we believe that you should benefit most from the active cryptocurrency users on your platform.
Cybrid provides solutions for a wide variety of use cases within a simple pricing structure. Easily forecast and budget accordingly without sacrificing attention on what matters, which is growing your business!