Open banking and APIs Can Work Wonders for Crypto Startups

Before the pandemic, the crypto startup scene had a nemesis: lacking demand. In 2021, this changed radically—the number of people leveraging cryptocurrencies reached almost 300 million, and venture capitalists invested a record $25.2 billion in blockchain companies, an eight-fold increase from the previous year, according to a new CB Insights report.

With this development, the needs of crypto startups have shifted from actually being viable to being competitive. There is now a new challenge that makes newcomers increasingly miss out on business—and the secret lies in the last mile, which refers to converting money from fiat to cryptocurrencies or vice versa. 

Financial institutions have not made walking the last mile easy for crypto companies. Banks have been predominantly unwilling to process crypto exchanges; therefore, they do not provide crypto companies with an option to interact with bank accounts.

Young crypto startups can only obtain information through a web page or a mobile app, meaning they have to do everything manually and limit the number of operations they can conduct. As a result, they fail to offer the most valued feature of crypto exchanges—speed.

Open banking and its application programming interfaces (APIs) can be young crypto startups’ greatest companions on the road to triumph. In a nutshell, open banking shares data securely between banks and third parties, in this case with crypto companies. Its APIs help different applications communicate and exchange data with each other.

Let’s take Binance, one of the world’s biggest crypto exchange platforms, as an example. More than $448M is traded on the platform every day, thanks to APIs that allow users to interface with cryptocurrency exchanges, execute trades, and pull and receive data in real-time.

Now’s the time to dive deeper into early-stage crypto startup issues and how open banking and APIs can take them to the next level of operational efficiency.

"Know thyself" was important in ancient Greece. Now, what matters more is Know Your Customer (KYC), which means carrying out identity and background checks before letting customers start using a platform.

KYC is one of the most significant regulatory challenges that crypto companies have faced, especially in recent years. In the US, the Treasury Department’s Office of Foreign Assets Control (OFAC) considers non-compliance a serious risk to national security as it invites money laundering, which harms economies and strengthens criminal activity.

Brian Armstrong, the CEO of a leading US-based crypto shark Coinbase said, "We view compliance as key to digital currency's success." Stronger compliance, via more robust KYC procedures, could help crypto shed its perceived association with money laundering and other malicious enterprises. It is exactly what's needed to get the crypto industry off the ground once and for all.

This is the reason why Binance implemented a new requirement for users to be ‘Verified’ to enhance its KYC and anti-money laundering (AML) efforts, and further user protection. The new approach can give the platform the ability to strengthen its position in the countries where crypto is strictly regulated.

Additionally, the regulatory body of Canada, the Financial Transactions and Reporting Analysis Center (FINTRAC), has obligated crypto exchanges to meet KYC compliance requirements in the same way as traditional financial institutions. The crypto companies that do not meet compliance requirements might face serious consequences that do not come cheap. Financial institutions worldwide have paid an estimated $26 billion in fines and penalties in the last decade for AML/KYC non-compliance.

Young crypto startups may not enjoy a tech infrastructure of Binance's scale, but they can still establish robust KYC structures—with the help of open banking. By collaborating with banks and obtaining information from tax authorities in different countries, open banking collects consumer data. Thanks to its large network of connections, it can validate critical information such as the recipient’s name, address, and bank account number in real-time

An alliance with open banking platforms opens up a door to consumer data and automizes the KYC process, which leads to one of the most desired outcomes for young crypto startups—being more time and money efficient.

Although wire transfers—moving funds between two different banks or financial institutions—are one of the most common methods for larger transactions, they do not represent an optimal solution for crypto companies. 

Since most wire transfers can take as long as two business days to process, crypto startups cannot update their users’ wallets the moment they send money. In a world where people decide whether to watch a YouTube video depending on how long it is, crypto startups have no other choice except to offer the fastest service possible.

Furthermore, customers are required to fill in personal details such as name, address, contact, and account number during wire transfers. Naturally, a new user is bound to feel discouraged from using the platform if the payment does not go through due to an error, such as missing a number. And a lack of live chat support is the nail in the coffin. This is the perfect storm for customer turnover—a factor of existential importance for startups in the ever-competitive crypto space.

The capabilities of open banking go beyond verifying consumers’ identities—it possesses the power to authorize a crypto payment or withdrawal of funds without the need to send bank statements. So, once crypto startups connect open banking APIs, they can automatically detect where the money comes from, when it comes to the bank account, and when they need to send the money back to their customers.

Thanks to being able to offer fast and seamless currency exchanges, early-stage startups can unlock a better consumer experience as well.

Crypto has moved far beyond being a money-making machine for passionate traders. Step by step, it's getting entrenched into our financial systems and becoming a common way of sending and receiving money across the globe.

Therefore, crypto startups can score big if they expand their operations to other territories, especially crypto-friendly countries such as Switzerland, Malta, and Bermuda. The crux of the matter is that entering new markets would not be possible without knowing about the country's regulatory landscape.

A crypto company based in Mexico, for example, wanting to start operations in Colombia in a flash, would be greatly disappointed. Here’s why: Latin America is a huge and heterogeneous continent with 21 countries. Since they all have their own bank systems, laws, and regulations, companies cannot conduct businesses in the same way. A shortcut will save crypto companies from burning the midnight oil—partnering with open banking platforms. 

Working with banks permits open banking to learn the ropes of regulatory environments in various countries and know how to comply with any financial regulations. Through APIs and open banking platforms, crypto startups are able to surpass every country's nuances, which means moving to a country can become an easy transition. To emphasize its significance, a crypto company, Buenbit, expanded its operations from Argentina to Peru, then Mexico, in a matter of weeks. 

The bottom line is that young crypto startups can tackle critical issues by partnering with open banking platforms and connecting their APIs. This way, they can start a new chapter of better investor relations, being competitive, and becoming in a prime position in the crypto market.

Opinion piece by: Rodrigo Tumaian, CEO of Prometeo, and Ivan Wortman, Head of Partnerships at Prometeo.