Enabling Transparency in Crypto Payments
Trying to understand crypto technology often leads you to experience an unsettling state most often described as cognitive dissonance. This feeling you have is driven by the fact that crypto payment systems are simultaneously the most transparent and most opaque in existence.
“The ability to openly query transactions gives blockchain its transparency.”
Crypto payments generally involve transferring payments from one wallet to another wallet and it is a relatively easy task to track that data.
If the payment is made on a public blockchain, like Bitcoin or Ethereum for example, anyone with a browser can view the transactions.
If the wallet address is known, it’s possible to go to a blockchain explorer, such as etherscan.io, and see which addresses the owner of the wallet transferred the money to or received the money from.
However, it’s not possible to tell who owns those wallets as wallet addresses are pseudonymous.
The secrecy around the ownership of the endpoints gives blockchain its opaqueness.
There is no public directory of crypto wallets. The ownership of the wallets is about as opaque as things can get.
The ability to openly query transactions is what gives the world of blockchain its transparency, the secrecy around the ownership of the endpoints, however, is what gives it its opaqueness.
It gets even more tricky if you try to track conversion across multiple cryptos with the involvement of a centralized crypto exchange, i.e., converting from Bitcoin to Ethereum to USDC, a USD pegged stable coin, through a centralized crypto exchange is very difficult to track.
In one of our recent crypto projects, we were enabling transparency in a solution that accepted crypto payments from donors on one end of the process and transferred those payments to multiple individuals at the other end. The last mile involved cashing out in local currencies in different parts of the world. This project involved multiple crypto and non-crypto vendors working together and one of the key requirements was to reduce the volatility associated with holding large amounts of crypto. The solution design included the following:
1.
Front end to accept payments and with the backend performing KYT (know your transaction) checks on the incoming payments
2.
Ability to convert crypto to target stable coin (e.g., USDC, USDT)
3.
Ability to assign payments and make payments to different wallets
4.
Ability for the wallet users to cash out the target stablecoin in different jurisdictions
5.
Ability for the initial payers to track the payment status across the entire process, through a dashboard
High-level solution process
The dashboard solution required us to think through various scenarios. The solution we decided on involved setting up a single wallet used for holding the target stable coin which is converted from different received cryptos or fiat. To keep it transparent for donors we’re using a First In, First Out mechanism to track when and how each donation was disbursed. Since the dashboard was designed to be publicly available, we had to encrypt and mask the recipient’s wallet addresses as that was considered PII, personally identifiable information, in some countries.
Illustration of First In, First Out mapping logic
The next major challenge in this solution was to get the cash out at the other end. The recipients had to be able to get local fiat currencies by exchanging the stable coin into any local fiat currency. The key challenge here was to ensure there was enough liquidity for the local partners to accept the target stable coin and exchange it with the local fiat currency with a mechanism for clearing such transactions. Accepting stable coins and other crypto payments indeed continues to be a major challenge for banks, involving other partners like one of the major card providers would significantly reduce the barriers to crypto payments.
One last word on initiating such projects: involving legal and compliance early on is crucial, as crypto payments regulations are tied to various local jurisdictions and need an early alignment when considering the feasibility of the overall solution.
With such a solution we were able to support the daily allocation and cash out of donations to recipients with complete transparency and low cost.
