Public Key Podcast

Everything You Need To Know About Cross-Border Crypto Payments: Podcast Ep. 139

December 3, 2024 | by Chainalysis Team

Episode 139 of the Public Key podcast is here! The world of international payments has been innovating over the last few years and many think it is because of the increased usage of cryptocurrency and stablecoins. In this episode, we speak to Arnold Lee (Co-founder & CEO, Sphere Labs), who identifies the major challenges of cross-border transactions and how stablecoins and Sphere are transforming global payments with blockchain technology, while working with complex banking landscapes to optimize transaction efficiency.

You can listen or subscribe now on Spotify, Apple, or Audible. Keep reading for a full preview of episode 139.

 

Public Key Episode 139: Breaking the Bank: How Sphere is Disrupting Cross-Border Payments with Crypto

The world of international payments has been innovating over the last few years and many think it’s because of the increased usage of cryptocurrency and stablecoins.

In this episode, Ian Andrews (host) speaks to Arnold Lee (Co-founder & CEO, Sphere Labs), who brings an intriguing backstory, having ventured from IoT to the world of fintech, and illustrates the complex issues surrounding cross-border payments.

He talks about Sphere’s journey from its inception following the FTX debacle to its significant impact in regions like the Caribbean, LATAM, and Asia Pacific, using innovative solutions that tackle the major pain points faced by fintechs and crypto payment service providers in the complex banking landscapes.

Arnold also introduces Spherenet, a closed-loop ledger facilitating fintech connections and explains a new concept of auction mechanism and how it completely changes how cross-border payments will be done in the future.

Quote of the episode

“We have trouble finding a consistent on and off ramp provider. We have trouble, you know, interacting with blockchains as they exist today and over time we realized that there were some stickier, like deep rooted issues”  – Arnold Lee (Co-founder & CEO, Sphere Labs)

Minute-by-minute episode breakdown

2 | Arnold’s unexpected journey from IoT and tinkering on-chain to crypto payments

5 | Solving cross-border payments with blockchain and stablecoins at Sphere

9 | The biggest challenges with cross border payments involving crypto

15 | How to compete in a saturated crypto and innovative payment ecosystem

19 | Introduction of Spherenet and providing crypto payment systems to LATAM, USA and Asia Pacific

22 | Optimizing trust and data sharing in private blockchain networks

26 | Spherenet’s auction mechanism and how it completely changes how cross-border payments are made

31 | The path towards onboarding decentralization in 2025 and beyond

Related resources

Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.

Speakers on today’s episode

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Transcript

Ian:

Hello and welcome to another episode of Public Key. This is your host, Ian Andrews. Today I’m joined by an amazing guest, Arnold Lee, who is co-founder and CEO of Sphere. Arnold, welcome to the show.

Arnold:

Thanks so much for having me on. I’m excited.

Ian:

I’m excited to learn about Sphere because it’s a topic that you’re operating in a space that is really topical right now, which is international payments, using cryptocurrency, using stablecoins. Tell us how you ended up building a company in this space. Let’s maybe start the conversation there.

Arnold:

Yeah, it’s a very unexpected rabbit hole because I come from the world of IoT. And so we were working with sensors, everything from concrete, curing, to solar compactors. My best friend from college, I’ve known him for like 10 years, the meme I like to use back when he had a full head of hair and bright eye, he always was interested in finance. I worked in TradFi asset managers, eventually did some payments at startups. We had been building on chain a lot of random stuff for a few years at that point. We kept running into this problem of payments and started off with maybe a less ambitious version of cross-border payments, just a checkout page, make it so that people could pay us for the products that we wanted to try out.

Coinbase Commerce didn’t support Solana at the time. Stripe didn’t support Solana at the time. We are coming from a Web2 background, so fast, cheap, works amazing. And so Solana was our home base. And yeah, that ended up becoming a hackathon win for this tool that we had built starting off as a step for crypto and just kept going into the rabbit hole over time. So I suppose that’s how we ended up in payments.

Ian:

And was that your first entree into crypto? Is that where you first encountered it? It was your friends like, “Hey, help me figure out this payments problem.”

Arnold:

Yeah, so my backstory with crypto is a little strange. I found it when I was quite young in middle school. My much smarter younger brother and I were trying to figure out ways where we could pay for video games. We had just gotten one of the first iPhones. And so on the bus ride to and from middle school, 45 minutes there, 45 minutes back, we’d fill out these online surveys, advertisers, maybe like a variation of Mechanical Turk. It’s like, how many times do you drive your Nissan a week? How many times do you exercise?

Ian:

So you’re saying that all of the data collected in those paid surveys is probably unreliable?

Arnold:

No. It’s a long time ago, so I don’t remember [inaudible 00:02:16], but no.

Ian:

You’ve got some middle schoolers faking the data to earn the fee they pay for participating in the study. That’s amazing.

Arnold:

It was called freeonlinesurveys.com or something. It was very on point. You get a little bit of Bitcoin or you could get money via PayPal. And you would get a little bit more Bitcoin maybe just because it was new and internet money less worth it, I suppose, than dollars in PayPal. So we just did that for a while. For a few months we would just fill out these surveys, get a little Bitcoin. I still remember the Bitcoin wallet you could just download. Very simple. It was like send Bitcoin, receive, here’s your wallet address.

We were eventually able to buy a month of World of Warcraft. It was amazing. We were very young. Our parents didn’t speak English super well. I remember thinking at the time, “How do you open up bank account? Do they just steal your money?” This is coming off of like ’07, ’08. So it was pretty magical. It felt like maybe YouTube in 2004 or early days of Facebook or IRC Chats, just very grassroots. For some reason, people thought that this coin had value and it was way more convenient for us to be able to earn money that way versus trying to find jobs as 13 year olds.

Ian:

Do you remember what a month of Warcraft cost back then priced in Bitcoin?

Arnold:

Yeah, so World Warcraft was $15 a month. You could get a two-month card, 60 days, so 30 bucks. I don’t know how much that was in Bitcoin. I try not to think about it.

Ian:

I feel like the story is heading down that famous one about the guy who ordered two pizzas with Bitcoin in 2010, and that’s now millions of dollars that he spent on pizza.

Arnold:

Yeah. Somewhere out there on a ThinkPad, there’s probably a little Bitcoin left, but we cleaned out the house for that subscription card. So the past is construct, right? And so…

Ian:

That’s amazing. Now at that point in time, you’re still in middle school obviously, but thinking forward. Has the crypto seem like an obvious destination for a career or building a company? Because it sounds like after you graduated from university, you were actually maybe more in the green tech world.

Arnold:

Yeah, not at all. I didn’t think Bitcoin was going to make it. Didn’t even know what crypto was. To me, it felt like internet game money, like RuneScape Gold or something.

Ian:

Yeah.

Arnold:

There were ways people could use Bitcoin for the years thereafter, just like peer-to-peer buy sell stuff. Ethereum rolls around like 2015, ’14 maybe. But for us in college, ’15, ’16. It wasn’t until 2017 where it felt like there was really intense interest from all sorts of big companies, but never really considered a career in crypto. And I wanted to be a math professor for a while. Somewhere out there, 16-year-old Arnold is very disappointed, but it’s been quite the loop to loop, I suppose, of a career journey. Much easier to connect the dots looking backwards for things that captured my interest. But even for Luigi, he definitely never really expected to work in crypto. We both were just like, “Oh, this is a cool technology.” Never expected so much capital or so much talent composing an ecosystem or an industry.

Ian:

Yeah. Anytime I meet a true believer who’ve been in crypto for a decade, I’m amazed that they had that much conviction in anything in the early days, more of a skeptic by nature. So I really didn’t pay much attention to crypto until I joined Chainalysis in 2021. It wasn’t even on my radar. I never had the moment of like, “Oh yeah, I’ve coupled together a few Bitcoin here when they were worth a few hundred dollars and missed my window of opportunity.”

So I want to talk about Sphere. There’s a few pieces to the business it seems like. So there’s SpherePay, which is available today, Sphere Labs. How does all this fit together? Maybe draw us a little bit of a picture of the structure of the business and where you all see it going.

Arnold:

Yeah, so Sphere Labs is the entity we incorporated a week after FTX.

Ian:

Wow, good timing.

Arnold:

Yeah. Our history is one of the great timing. It eventually would stumble from the spike for crypto, raises funds. This is around the regional bank crisis. Solana, you could count the number of apps that were around and everyone was worried about survival. And so it was tough to sell, like a checkout page was not on the top of anyone’s priority list. Turns out that people don’t really want to pay with crypto when the number is really down.

We looked around and we’re like, “What should we do?” We just raised money. Our families are thrilled that we’re no longer unemployed. Hired some of the smartest people that we knew and just kept getting weird coincidences where people who are way more successful than us from the Web2 world wanted things that we thought were easy, being able to generate wallets, thinking about different chains and gas, on chain compliance. How do I know that I won’t get in trouble for this? We had a known about Chainalysis actually back then, but especially on and off ramp. We thought it was a solid problem because you could buy stuff on Coinbase, crack and pick your favorite central exchange.

And yet the conversations that we had, these counterparties were so excited, respective customers, and they kept coming from the same parts of the world, namely the Caribbean and LatAm. Over time, Asia Pacific. We decided to build for them because it was a struggle to get anyone else to talk to us frankly. And that becomes SpherePay, which is what we’re mostly known for today. There’s ways to pay with crypto of course, but I’d say the bulk of the business is in facilitating on and off ramp for the purpose of cross-border payments and some more difficult corridors. We get pretty granular with the bank messaging to help support corridors where a number of active correspondent relationships is low, and hence it’s harder to just move money at all, even if you go through Swift in these places.

Sphere Labs is the development studio behind SpherePay, but we, I’m sure, we’ll go into in this, we’ve realized that there are some amazing ways that you can borrow from some ideas in traditional FinTech, apply some of the developments in cryptography and distributed systems to create a closed loop that makes it even easier to do this job of on and off ramping. And that’s why we make that distinction between SpherePay, Sphere Labs and what we’re working on now, which is SphereNet.

Ian:

Got it. So when you first encountered what became your customer’s for SpherePay, what was the problem as they described it to you that you ultimately ended up solving?

Arnold:

Yeah, there are all these different chains. “What’s the difference between Optimism and Polygon and Solana? Why do I have to pay gas when on central exchanges I don’t have to pay gas to move money between wallets? How do I create sub accounts for my customers?” And then simplest yet trickiest one is, “How do I move meaningful amounts of money in and out of blockchain without getting in trouble with my bank, without my account getting shut down, funds frozen?”

In some cases, these payments which are supposed to be instant, can take longer than Swift, because the source of funding is unclear or you’re just a company outside of the states trying to interact with dollar accounts but might not speak English very well or all of your corporate documentation is not in English. And so the escalation becomes a lot trickier.

You would think it’s straightforward to sign up for an account at an exchange or maybe use a service provider to move $500,000, $5 million in a shorter timeframe, but it turns out that it is quite tricky because that process of manual escalation on what are traditionally considered higher risk funds movement means that you’ll probably run into problems. And we learned that the hard way. At the time they were just telling us, “We have trouble finding a consistent on an off ramp provider. We have trouble interacting with blockchains as they exist today.” And over time we realized that there were some stickier deep-rooted issues as I just described.

Ian:

And were these folks individuals, like high net worth individuals who were investing in crypto or were they crypto businesses or were they just people that were looking to move money of any type internationally from within their country into the US? What was the profile of the folks that you initially encountered as customers?

Arnold:

That was one of the things that made us the most bullish actually, which is that they weren’t Web3 companies at all. They were solidly Web2 FinTechs doing things like payment orchestration, invoices, payroll. And because it was such a struggle to utilize traditional rails, they were looking into newer technology like stablecoins.

Were not crypto natives. Juan recently actually came out to TOKEN2049 to hang out, and that blew my mind because I never expected to see him at a crypto conference with me. But the way that I like to describe it is not on CT, we’d never be at East Denver, just normal entrepreneurs trying to build 10X products and blockchain technology is really interesting to them for that reason. Maybe there’s a common thread of FinTech, maybe there’s a common thread of regionally where they come from, but beyond that, very much different from the people we were used to interfacing with on chain.

Ian:

And talk to me about the solution that you came up with because this one of on ramp, off-ramp and banking relationships. It’s a common thread that I see in almost everybody I talk to who does anything in the world of crypto, is that is the biggest pain point. So I’d love to understand what you and the team hit on that produced a solution.

Arnold:

Yeah, I think we just really focused on a couple of use cases or a couple of customer profiles and then realized that there are structural reasons why it’s hard to move money, let alone money involved with stablecoins in and out of local banks. There aren’t a ton. All of their correspondent accounts are at these GSIBs or large banks in the United States. They’re in a situation where the bank messaging is set to a default, which actually doesn’t provide a lot of information about the transfer. And it starts to make sense that someone sitting in a wire room receives a notification maybe from a dashboard to process this payment and it’s a little suspicious because it’s of abnormal size. The fields that you would want to see filled in by default are not. So it’s very unclear. What’s the point of the payment? Where does the money originally come from? Is there an associated path, a destination where the corresponding invoice can corroborate a legitimate cross-border payment?

How did we learn that? I suppose found out the hard way. We were trying to support these FinTechs. I realized that funds were getting stuck sometimes for weeks, even months. And in talking to the local sponsor bank and getting lucky with recruiting some folks who had worked at wire rooms for decades, we realized that there was a missing leg where you can really get into the granular fields, say an MT 103 or an ISO 22 Fedwire, and that the software that the local sponsors were using were not filling out the fields that would actually make a difference when a wire operator in the United States sitting at that large bank receives the payment.

It was lucky because you can’t really do this easily at scale. It’s a lot of manual coordination figuring out what is the best peer-to-peer connectivity. If you have four corresponding accounts as local sponsor bank, which one’s the fastest? Which ones do you have the best relationship with? Is your bank core built on top of ones maybe? But yeah, in escalating frozen or stuck funds or just slow funds movement, that’s how we start to dig in as engineers, I suppose, coming into the banking world because there’s a bug in your code, you got to go line by line.

Ian:

Yeah. And as you’re tracing that through the code to find that bug, was the solution that your banking partners had to actually upgrade their software or was fear actually able to replace what they were using to send those wire details? Where did the upgrade happen to make the information that was necessary to pass through the GCV wire room effectively? How did you make that adjustment? That feels hard.

Arnold:

Yeah, so we were unable to convince any bank to upgrade their software, but we were able to instruct the local sponsor to indicate to their correspondent, “Hey, I actually have an opinion about, I don’t know, Field 1510 and the Fedwire, and I want you to explicitly define the intermediary for me, which is an instruction that a wire room operator in the states can handle.” It’s just typically abstracted away by a wrapper software like VFX or something.

And so it wasn’t foreign information per se, it was just something that they don’t default towards doing because there’s a variety of reasons like liability. You don’t want to be too opinionated when customers are sending you wires. But if you get that manual setup done for a given local sponsor and their correspondent and potentially the receiving bank, they know what these fields are supposed to do and you’re kind of just giving them the consent that, “Hey, this is the explicit correspondent route that I’d like to take.” So yeah, it wasn’t much of a software change and more of, “Hey, we just like to be very opinionated about how these funds move” and making sure that the local sponsors, especially in countries with weak Swift relationships, were brought up to speed and communicating with their correspondent.

Ian:

Yeah. Give me a sense of how big that business is for you today. How many countries are you operating in? How many people are using it or maybe how much asset value is now passing through your system?

Arnold:

Yeah, it does about seven, eight figures of daily payments volume.

Ian:

Amazing.

Arnold:

And it’s in at least 14 different jurisdictions just within, call it the Americas, LatAm, US, Canada. And there are a couple in Asia that we counterparty against Southeast Asia, Hong, Kong, Singapore, as well as recipients in US, Europe, Switzerland. So a lot of different countries. And the beauty I suppose is that because we’re dealing with correspondent accounts, we can isolate funds movement down to countries as opposed to having to start over per country. Hopefully that is good high level contest.

Ian:

Yeah, it is amazing what you’ve built. The question that I’ve been wondering about is it feels like a very crowded space, this area of international money movement. I look at big companies like Ripple. That seems to be the entire focus of their business. And then you’ve got amazing FinTechs like Stripe who recently have made some pretty big announcements around stablecoin payments being available as a feature in their platform. How do you think about your place in the market and competitive differentiation when you’ve got the giants are also going after for this problem space it seems like and a ton of other startups want to get into the space?

Arnold:

Yeah, it’s a fantastic question. What’s interesting is that there’s almost like an inherent paradox where the larger you grow, the less it makes sense to do bespoke setups, the less it makes sense to target certain markets. And you now have the resources to really compete for the biggest markets in the world, US, Europe, and LatAm. The big three are Mexico, Brazil, Argentina. If you can leverage those resources to take meaningful share, it’s so much more plus EV for you to do that. And hence there’s what I describe as a structural deadweight loss where certain markets, countries with lower GDP, use cases that involve a lot of headaches because maybe there’s a lot of nesting. Maybe in Brazil met friends who just didn’t have IDs. So how do you KYC them?

As companies get bigger, it becomes harder to justify underwriting some of these different types of use cases. It also starts to make less sense to really spend time in saturating a given individual market until there’s a threat of competition from, say, another startup who’s trying to take up that share. And so we’ve started to see regional concentration because laws evolve, customer preferences evolve.

The bottom line is that until agents get good enough, you need people who are really up to speed with local language communicating with partner banks, communicating with regulatory agencies within that jurisdiction. And if your entity is located somewhere physically as it has to be currently and you need people located physically in some country, you’re naturally going to start to develop some edge within that jurisdiction.

So going back to your question, where do we see ourselves in that stack, I think we’ve invested a lot in this corridor of very specifically Asia, LatAm, and the United States. But the tricky part of it is that, as you grow, you need to make more money, which always invites a younger startup who needs to make less money to come in and take your market share. So there seems to be this inherent cycle.

I think where we’ve really developed our DNA as a team beyond jurisdiction is in interacting with these blockchains, with these ledgers and noticing that there are some great filters in utilizing these ledgers in terms of monetizing as a business. Stablecoin spreads, as an example, are compressing the zero across the board. And if you shift, maybe as it was the case in traditional FinTech for a given currency towards lending out money, credit lines, pre-funding in order to speed up the latency on payments, you are in some sense doing high-risk lending. You are underwriting the given signals of a jurisdiction, which leads to even more jurisdictional concentration because you’re going to understand one country because you have limited time and limited manpower better than other places.

Part of the endeavor of SphereNet is to give payment companies more paths towards monetization beyond just conversion fees in order for them to be able to more conveniently access this path of, say, the underwriting credit or leveraging unique components to blockchains, such as the fact that transactions are compiled into a block and there’s value to be captured in the ordering of those transactions within a block, something that is typically monopolized by really smart people writing really insane bots, on chains today, because the end state is really that cycle. You do it really well as a local startup. You grow, you make money, someone comes to challenge your market share and their bar for making money is lower. So how do you make it so that way even if you’re a very large startup, you can continue to monetize? If you’re a younger startup, you could have a fair path of distribution.

I think that a blockchain setting is really amazing for these things that are harder to do within the silos of, say, a bunch of different Postgres databases corresponding to FinTechs in different countries. I’ll TLDR that with, we see ourselves historically as being a US, LatAm, Asia maybe payments provider, really just digging in deep into the B2B use case for certain types of clients, but we are now transitioning towards this alternative form of a ledger where hopefully this leads to better monetization for everyone by unlocking some of that structural deadweight loss I talked about.

Ian:

Amazing. It seems like a perfect transition point to maybe unpack what SphereNet is for the audience listening. Maybe we can go there next.

Arnold:

Yeah, absolutely. It’s a closed loop shared account ledger for FinTechs. FinTechs currently don’t have a way to directly debit and credit each other. They could use a blockchain, but most don’t because there are these risk vectors on open loop chains. And the idea is for it to be really easy as a FinTech to avoid what I like to call the fork in the road. You did well in country A, how do you get to country B? You either take path number one, which is to raise a ton of money and then develop a local operation there, licenses, manpower, bank relationships. This might work for a company in the developed world, but even then it’s really hard. We’re an American company, it’s millions of dollars to get licensed. There is no Silicon Valley in Nicaragua, so how do they scale?

Or path number two, which is, you find a good counterparty in a different country. But the nature of finding a counterparty now is really hard because they’re not going to give you their Postgres, so you don’t know what their true latency is, what their true rates are, what is their funds flow, what is their legal structure. They might disclose some of this to you during mutual onboarding, but it makes path number two as you literally go on Google and schedule a bunch of calls and kind of do vibe checks and do mutual onboarding and spend months trying to figure out the perfect partner in a new country. Blockchains are really good at coordinating potential adversaries. FinTechs are used to shared account ledgers that are closed loop.

And so the idea is to make path two way easier so that way a really awesome FinTech in a country that might have historically been considered high risk or a FinTech in America who’s more in the Web2 space has money transmission licenses but doesn’t know where to start in Web3 to give them more objective data so that way they can make a more qualified risk analysis when deciding whether or not to face off against another regulated FinTech who wants to be able to do money transmission where they’re licensed. So yeah, that’s that.

Ian:

When you say closed loop, is that a synonym for a private blockchain, meaning you’ve only got trusted parties operating on the chain?

Arnold:

Yeah, it is that. It’s like a private and permissioned Solana cluster for us.

Ian:

Okay. And when you described that counterparties have more data on chain so that they can make a better analysis versus the Zoom call vibe check, a status quo, what is that data? What would a user of SphereNet actually be putting on chain besides, “Here’s a bunch of assets that I currently control the private keys for”?

Arnold:

Yeah, what’s amazing is it would be really useful to know everything from how many transactions has someone done in the last year or last month, what is their average time to completion. If I know that of your last 99% transactions, you did the fiat component of a stablecoin to fiat cross-border payment, if you did those in under a minute, you must have some pretty good rails. Or if you provide attestations that are kept hidden so that way you’re still willing to do it in a reference a SARS ID, then I know that you have a semblance of a compliance program because you’re actively filing these.

There’s a lot of information that is really hard to post on chain today because chains are public and the account structure is not opinionated on this use case. But if you layer in forms of encryption of multi-party computation of zero knowledge proofs and you hyper-optimize the account structure of a chain to this use case of FinTechs trying to find each other and selectively reveal information about each other when going through a risk assessment of a counterparty, there is a ton of time that you can save that you would normally have to dig through someone’s website, go to their disclosures, read through their terms of service, talk to them, try to get an understanding of their funds flow. And the truth is, you’ll never really know if it works until you try to send them a ton of flow maybe three months later. Here you can get a less trusted version of that. You can know that the max transfer size that they’ve done is 30 million, that their average ticket is 500K, that there’s a latency for their higher transfers that is worse than their lower transfers or not.

And nested right KYC, how do you pass the KYC of customers that they’re moving funds on behalf of? It’s all siloed today. I might have one identity vendor, you might have another. You have to bespoke share it with each other or sign a reliance agreement. There is so much trust in this process right now of finding good partners. And you have to do this in all the countries or all the regions where you want to scale. And if a blockchain is very opinionated about that type of information, makes it super convenient to selectively display, to selectively reveal, then it becomes much easier to speed up how quickly you can trust a counterparty because you now have this guarantee that it’s not just their word. It’s the word of everyone else that they interact with. It’s the word of the things that they’re attesting to and are on the hook for with their licenses if they ever lie.

Ian:

I’m trying to piece together how all of that information ends up on chain because they’re not necessarily collecting KYC on chain. This is something that they’re doing in a real world process. How does that data end up represented in a way that then other potential counterparties can validate?

Arnold:

Yeah, that’s a great question. So if you and I were the only users, it would make no sense for me to hit an endpoint and hash a response that I get from Sumsub or from Persona to post a zero knowledge proof of it. But if there are a hundred people and I decide to post this information on chain, it’s not just within our bilateral relationship where that information is now useful. Now, the other 98 people can see, “Oh wow, Arnold is posting this information properly. I can request a transaction to see some of this information and this makes me feel a lot more comfortable about onboarding him as a counterparty because he went and made these attestations that he didn’t have to.”

Ian:

Interesting. Okay. So if I just walk that process to make sure I understand it, so an individual is attempting to onboard with a participant in SphereNet. They submit some sort of proof of identity like a passport, maybe some other documents. The entity then takes that, passes it through their KYC provider to validate the documents are real and that the individual is who they say they are. So they’re using something like Sumsub. Sumsub comes back and says, “Yep, looks good. Ian is Ian.” And then that entity is able to post that Ian is Ian response to the chain, which is then obscured in some way because you’re really just posting a hash of the acknowledgement, like the positive acknowledgement you get from your KYC provider, which then everybody else in the ecosystem who’s chosen to participate in the chain has the ability to read and validate in some way. And then they know that that entity that validated Ian, they can say, “Oh yeah, you’ve also validated these other thousand people.” Like you’re actually practicing effective KYC.

Arnold:

Exactly.

Ian:

Very cool. Okay. And then on the fiat to, say, stablecoin or the on-ramp, off-ramp validation, you talked a lot about speed of transfer being a key metric when you’re looking at counterparties in a given country and understanding variations between small and large payments, how does that data get on chain? Because again, it feels like maybe some portion of it could be on chain, you’re moving stablecoins around, but the other half of it, which is what you’re actually trying to validate is the conversion happens in the real world.

Arnold:

Yep. That’s a great question and it’s relevant to what we were talking about a little bit before. Currently, very few cross-border payments are truly atomic. If you send me money internationally, most likely I have money sitting in my country that I’m going to send in anticipation of your money hitting. And then I’ll do that internal balancing thereafter. So you can think of this as high risk lending as I hope your money comes to me because I’m immediately sending the corresponding amount out. But that time value is essentially risk and that’s where I can make money because there is a fundamental unit that is valuable here, which is, I’m taking inventory risk on your behalf.

SpherNet, we anticipate, works the same way. FinTechs are already used to holding float, having credit lines with various counterparties and sending out money immediately. If you look at companies like Wise, Airwallex, Ripple I assume does the same thing, Revolut, they essentially have local nodes in all of the countries where they operate. They send out money immediately, their counterparty risk is quite low because they’re facing off against themselves. And then they are doing internal reconciliation between all these different bank accounts.

The idea here is to take that obligation, which is traditionally on one provider to make it competitive. If there are a hundred FinTechs in a different country and you auction off the right to provide this flow, then the most competitive FinTech will win and will be able to service that flow. And if no one wants to compete for that flow, it’s money on the table that someone who is licensed there can come and take and they get to make money off of it.

To us, it’s a form of how blockchains can make this process that currently is the backbone of cross-border payments today a lot more efficient because you are delegating the responsibility for fulfillment to a local expert. And within each local financial rail, there is a notion of a receipt, a reference ID that you can create a zero knowledge proof of and post on chain because I suppose you could think of this as a fundamental long on local rails getting really good. RTPs are going to proliferate even more, but it’s really difficult to imagine a global RTP because you have sovereign interests competing against each other. Capital flight is a risk. And while you can make local systems essentially instantaneous because there’s a central bank as the ultimate underwriter, FinTechs currently don’t have a way to balance these different RTP systems against each other without paying a central vendor.

Idea here is to give them no central vendor. This is entirely credibly neutral. You know that you don’t have to pay money. That is the bottom line for some company or some other company. You get the most efficient market outcome when you want to serve as flow or you want to send flow somewhere else.

Ian:

This auction mechanism is fascinating to me. It seems like you need a fairly significant number of market participants to make it work. Do you have that today? Describe the current status of SphereNet. Where is it in its development cycle?

Arnold:

Yeah, so we have the permission cluster done. Right now we’re figuring out which version of cryptography should we go for. V4, which is very intense, has hardware acceleration, adaptations of, it’s not generic FHE, but it’s a partial good enough FHE, which opens up product use cases versus V0. What are we going to ship in the next six to 12 months? There are 19 different FinTechs who are signed up, the money services businesses, VASPs, broker dealers. And the beauty is you’re totally right. For a global version, for one that is a 10,000X on what exists today, you need FinTechs everywhere. But to solve cold start, you just need one licensed entity to be willing to service the flow.

Ian:

Got it.

Arnold:

And the most important corridor is the dollar corridor. So you need one licensed entity in the US willing to help solve cold start because opening up US rails, there are a ton of people who are interested in that and just have difficulty maybe speaking English or doing the sourcing the discovery themselves.

Ian:

Yeah, give me a sense of what it costs. So once I decide I want to send transaction and leverage this auction mechanism, what should I expect in terms of fee structure? Because I’m assuming I’m paying each leg of the transfer. There’s some value there even if it’s competitive because you’ve got maybe multiple parties bidding in order to win the transaction. And maybe contrast that to the status quo, like what would happen if this didn’t exist and you were using just traditional system today.

Arnold:

Yeah, the beauty is that it’s pretty efficient because in the traditional system, you are implicitly getting the best quote plus whatever take rate that the provider has on top. They might aggregate liquidity providers, other FinTechs in different jurisdictions. You’re essentially paying for the cost of them integrating, maintaining those integrations, doing the sourcing and discovery, and then also whatever they can charge for extra revenue on top.

The beauty of using SphereNet instead is that because we defer local obligations to localized entities, what goes into the input price from an economic’s POV of completing this payment is no longer on a single company so that company doesn’t have to pay for a local entity that now also has to be compliant with its general compliance policies, local manpower, so that way that entity has to communicate with all the other entities cost of capital. It’s no longer just one company who has to pay for the initial pool within a new country or pay to interface with a liquidity provider in a new country and instead is dividing that work up.

So stablecoin spreads are pretty low today. We will be an early participant through our US entity and we’ll provide a early competitive base rate to help prove out the concepts. But because you just need to be a regulated entity hitting rest endpoints to use the network, if someone wanted to create a very competitive product, then they would just have to plug in and they could undercut whoever is currently providing that rate and have alternative paths to monetization that are much harder when you just have bespoke peer-to-peer channels between FinTechs and it’s not kept in one place.

Ian:

Yeah, amazing. I’m curious, what does it look like if I want to onboard? So I’ve got a local MSB license in a country and I’m listening to the podcast and I say, “Wow, this sounds amazing. What Arnold’s built is exactly what I’ve been dreaming of forever,” what do I do next?

Arnold:

So there’s a path towards onboarding decentralization. Initially, a foundation entity will help facilitate a lot of the onboarding. And if this sounds exciting to you, the prospect of not needing to do discovery, foreign entity set up, maintenance of integrations, and alternatives and the traditional world are maybe expensive because they need to make money too, please feel free to reach out. We have Twitter, email, LinkedIn, WhatsApp, Telegram. We’d love to involve you as an early partner on helping us both design V0 versus V4 and thinking about which corridors to focus on first. Because a key component is making it as easy as possible to onboard by embedding as much commercially reasonable compliance logic that you can more programmatically. So it would just be reaching out, getting in touch, and then letting us know what would make the integration process for you as easy as possible.

Ian:

Amazing. My customer closing question is always, what should we look forward to in the future? What’s coming up next?

Arnold:

Well, we will release more information about SphereNet. And the existing business, SpherePay, will just continue to grow. We’re very avid chain customers, actually.

Ian:

Thank you for that.

Arnold:

Our bill this year was more than expected because we’re fairly rigorous about running chain on essentially everything. So they’ll just be more product updates both on SpherePay and SphereNet, as well as thinking about some of the news that’s happened over the last year. I really love chains reports, everything from the global crypto adoption, index, thinking about financial crime. And we’re planning on doing some similar things just for more, I guess, lower level events on blockchains, like thinking about block building, block proposing, who are your counterparties. If you really get down to the first principles of using a blockchain, it’s just a matter of time because it is physically what is happening before more people become aware of these topics and so we’d love to contribute to that discussion.

Ian:

Fantastic. Arnold, this has been such an exciting conversation. I love what you’re building and can’t wait to see more of it come to life. Thank you for joining us.

Arnold:

Thanks so much for hosting and excited to see what everyone thinks about this next step for us.

Ian:

Absolutely.

 

 

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