On/Off-Ramping: Fiat-Crypto-Fiat Solutions

Permitting your clients to buy crypto with card payment

From the experience of our legal consultants working actively with hundreds of crypto companies, it is clear that allowing customers to purchase virtual assets with debit card or credit card payment is a catalyst of the customer base. With the vast majority of the Western and Asian citizens equipped with bank cards, and a daily increasing amount of individuals in developing countries getting access to payment means, card payment for online services is a must on virtually every market.

Crypto companies willing to offer card on-ramping services have two ways to go about it: implement it themselves or outsource the card payment processing.

Developing the technical solution to receive card payments requires in fine a bank account to connect with. The development of a homebrew payment system is regulated in various jurisdictions, to protect customers from malevolent practices such as card data theft. This solution is usually preferred by large FinTech companies and projects encompassing banking services with an Electronic Money Institution embedded in their legal structure.

The simpler, generally preferred method, is to outsource card payment processing to a dedicated third party service provider. As the proper legal structure allows a crypto project to subsequently access to banking services, it also opens the door to contracting with payment services providers. LegalBison usually offer a 2-in-1 solution, including a corporate account and a payment gateway agreement to allow crypto companies to provide on-ramping services with card payments to their customers.

Allowing your clients to buy crypto with bank wire

The simplest way to allow on-ramping in countries whose population are mostly banked is to offer bank wire on-ramping. On the operational level, it usually differs from a card purchase nonetheless. Fairly often, crypto companies will prefer to offer their clients to load up their accounts in fiat currency, to then exchange it directly on the platform, when offering bank wire as an on-ramping solution. This is simpler given the required time for a bank transfer to complete and for the limited amount of information it can carry, in contrast with immediate card payments.

On the technical level, this is also the simplest solution. Unlike card payments, there is no middleman between the end user and the project’s bank account. Making use of an API, it is then possible to automate bank wire reception to your KYC software and to your platform’s database, hence streamlining the user experience.

Alternative on-ramping methods

According to the World Bank’s Global Findex Database, about one in four human beings don’t own a bank account. Yet, these people still need to transact on a daily basis. Whether it’s using cash or remittance services such as Western Union, or other innovative financial services, there are alternatives to bank-based transfer methods.

Selling Bitcoin and cryptocurrency in physical shops, against cash, was made popular very early in the existence of virtual assets. It continues to be a striving business model, oftentimes in the form of Bitcoin ATMs. On these machines, a user can purchase BTC on a new or existing wallet. As for snack vending machines, these ATMs can be equipped with the hardware to accept bank notes and coins.

As various ways to sell cryptocurrency to clients can be conceived, they all revolve among the same key points on the legal perspective.

Off-Ramping on payment cards

Payment done directly onto a payment card is novel way to transfer money. This technology is mainly used by e-commerce companies and has grown popular in certain areas of the world. It is made possible thanks to technical innovation by card issuers and by remittance companies.

The implementation of such an option in a virtual asset services platform will then depend on a third party: the payment gateway. Usually, this payment service provider furnishes all the technical tools such as APIs and scripts to seamlessly insert on-card payments for customers.

Off-ramping through bank wire

The main off-ramping method in Western countries is for users to sell their cryptocurrencies on an exchange for a credit line in a fiat currency. Then, proceed to request a bank wire from the same exchange interface in the given fiat currency, onto their bank account.

This solution encompasses the implementation of credit lines onto the exchange platform. The user having sold its cryptocurrencies is now in credit of a given amount of fiat currency. The user can then proceed to request a wire to his account. The request can be appended into a database of transactions “to-do” or directly sent out to the exchange’s banking infrastructures to deliver a faster payment.

Other off-ramping methods

One may conceive other ways to transfer fiat currencies to clients in exchange for the cryptocurrency they detain. Cash payment comes to mind, as in a transaction between two individuals meeting face to face. The usage of other value transfer methods such as PayPal can also fall under the scope of crypto licensing, in addition to the terms and conditions of such services.

The exchange of clients’ virtual assets for coupons, vouchers and alike is not considered off-ramping. The provision of such virtual asset service falls under the scope of other regulations, depending on the exact extent of your activity. We advise getting in touch with our consultants and request a legal assessment for certainty.

Customer due diligence for on-ramping and off-ramping transactions

In a global effort to combat, the Financial Action Task Force (FATF) has emitted guidelines to help financial regulators worldwide to ensure the soundness of the financial system. Every actor of the financial and FinTech sectors are required to play their part, by conducting customer due diligence (or enhanced due diligence for high risk customers).

When a business relationship is initiated, a provider of financial services shall acknowledge the identity and a few specific details about the physical or legal entity it serves. This is often known as the Know-Your-Customer (KYC) or Know-Your-Business (KYB) process. It often requires collecting identity documents, proof of residence, source of funds for large funds, etc.

The enforcement of KYC due diligence is imposed by financial regulators and issuers of crypto licenses, which are themselves required to open a bank account. This makes KYC/KYB a strategic necessity for all crypto businesses willing to offer on-ramping and off-ramping services to their clients. LegalBison can assist with the acknowledgement and enforcement of these rules, including the introduction to KYC software-as-a-service providers.

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Complying with anti-money laundering and combatting terrorism financing (AML-CFT)

Along with the conduct of due diligence, financial services providers (including FinTech and VASPs) are liable to monitor transactions happening within their virtual premises. This way, suspicious and abnormal transactions can be reported to the police for investigation, thereby helping in combating money laundering and the financing of terrorism.

In a similar fashion as KYC, LegalBison can assist with the preparation of the policies and procedures pertaining to the AML-CFT regulations. Compliance with AML-CFT is a general prerequisite of crypto licensing, itself allowing for the provision of banking services and payment gateways to crypto companies for their businesses.

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Implementing a card payment gateway

Add an option to purchase cryptocurrency directly with a card transaction by partnering with a licensed payment service provider. As for any financial institutions, such third parties expect virtual asset services providers to operate under a crypto license, making it a sine qua non condition for offering card on-ramping and off-ramping to your customers.

The technical implementation is usually streamlined by the providers themselves, offering an API and the technical support to easily implement card transactions into your crypto platform.

It is important to note that, even in the case that you would operate without a bank account and through a payment service provider for incoming card payments, third-parties still expect crypto platforms to hold a crypto license.

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Bookkeeping of on-ramping and off-ramping transactions

As the provision of on-and-off ramping services to your clients is conditioned to the obtainment of a crypto license, the regulatory aspects pertaining to accounting apply. For the matter of simplicity, this is why crypto platforms with a high volume of fiat transactions from and to their clients are using two different accounts: a corporate bank account and a payment gateway account (so-called merchant account).

Keeping a ledger of these transactions and implementing them into your books in an efficient manner is then simultaneously a requirement by the law of the crypto regulator, and a strategic operation of your business to avoid excess costs and incorrect calculations.

LegalBison can assist you with hiring highly competent accountants or relying on our proven network of seasons accounting firms.

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Managing liquidity and ensuring solvency of your operations

Another requirements of most crypto licenses and financial regulators in general, is to guarantee the solvency of the credit lines and/or funds in custody of the clients. Different regulators have different views on the level of auditing they expect you to accomplish, on a more or less regular basis, to demonstrate that you are in a position to pay off all of your clients’ deposits if the need arose.

Naturally, a virtual asset service provider shall also has its liquidity provision in line and be able to deliver the cryptocurrency purchased by its clients, as per its terms and conditions.

LegalBison can assist your crypto business with boss the acquisition of a crypto license in order to get access to banking services (for which, we are also able to provide assistance in opening accounts) and for the proper redaction of terms and conditions and other legal documents for your company.

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Building a legal entity from scratch with on-ramping and off-ramping services

The usual process of setting up a proper legal structure for a crypto business willing to provide on and off ramping services can be broken down into three steps:

1. Incorporation of a legal entity;
2. Obtainment of a crypto license for compliance with the regulations, that financial institutions are subject to;
3. Opening of a corporate account, payment gateway account, and proper technical implementation/automation (if relevant).

All these steps are connected to each other, as the company registration leads to the licensing process. The license itself is a requisite for opening accounts in financial institutions and FinTechs.

Adding ramps to a licensed crypto company

As your legal entity is set and you are already operating under license, the process gets significantly simpler and shorter.

Based on your legal structure and with the possible reinforcement of legal documents, LegalBison will present your company file to a set of trusted financial institutions, to assist in opening a corporate account and/or a payment gateway account. The introduction will then make it possible for your business to provide on-ramping and off-ramping services.

Is it possible to offer on-ramping and off-ramping with an unregulated crypto company?

Experience shows that without a proper authorization, third parties will be reluctant —if not forbidden— to work with a crypto company operating with no license or equivalent permit. Financial institutions are all tied to strict regulations and working with an unregulated actor would put them at risk, thereby putting a hard stop to this practice.

LegalBison can assist such unregulated crypto companies to consider different solutions that would unlock the path the necessary financial services. We encourage you to detail your case into a contact request, that will be forwarded to a legal expert, that will get back to you on your particular case.