Silvergate and Silicon Valley Bank

It’s been a crazy week. I won’t opine on what happened with Silvergate and Silicon Valley Bank in this email. Will discuss this further in coming days.

This is a quick note to reassure you that we at Layer2 have had zero loss of client or corporate funds as a result of these two events. In fact, we engineered our  platform from the ground up to be multi-partner, to mitigate these types of risks. 

  1. Silvergate –
    1. We did NOT have any corporate funds held at Silvergate. However, Silvergate was the settlement bank for one  of our liquidity/exchange partners.
    2. We, along with our exchange partner, proactively halted trading on the first sign of trouble, immediately settled open trades and wired out ALL in transit client funds from Silvergate.
  2. Silicon Valley Bank –
    1. We are fortunate that we did NOT have any corporate or client funds held at Silicon Valley Bank, either directly or via partners.
    2. Many of our friends, partners, clients however have been severely impacted and we will do what we can to assist them in any way we can.
    3. Once this crisis passes, there is a broader discussion to be had around how to spread assets between various deposit accounts, and deposit/treasury accounts. 

What are we doing to help our clients mitigate these types of risks?

  1. Multi-partner – Layer2’s  Banking/Payment as a Service platform was engineered from the ground up to be multi-partner, all accessible via a Single API, which means:
    • multi-custodial – 2 qualified crypto custodians  (1 OCC bank, 1 Trust)
    • multi-exchange – 5+ crypto, fx exchanges/ liquidity partners
    • multi-bank – 4 fiat banks, trusts for fiat deposit, treasury, payment products
  2. Safe, qualified custody – While we are a Money Transmitter in some jurisdictions, we strongly believe that Money Transmitters should use qualified custodians.
    • Qualified custody – All client digital assets are always kept safely with multiple qualified custodial trusts.
    • Full transparency, control – Clients have full transparency, and control of their assets. Funds are never used to lend out to counterparties, unless you choose to lend it to a licensed lending facility.
    • No co-mingling – We (Layer2 + our partners)  will never co-mingle corporate funds with clients funds. 
  3. Fiat Treasury Accounts –  We are launching treasury accounts in the US very shortly. Assets are backed by US Treasury Bills (fully transparent) and kept off balance sheet, safely at a trust. More to come on this new feature.

If you have any questions, or concerns, please reach out to us via your dedicated slack channels or

Resilience And Opportunity through a Multi-partner model

As a financial institution or financial technology company you must find a balance between mitigating risk and exploring new opportunities. Thankfully, by adopting a multi-partner model you achieve both.

A multi-partner model is where a company works with multiple partners (e.g. custodians / exchanges), by leveraging a combination of products across the various partners. This is in contrast to choosing only one partner and being limited to the products they support.

Financial institutions and fintechs should approach custodying and trading digital assets like their cloud infrastructure. If you asked your technology team to host all of your technology infrastructure with one cloud provider, they would explain at length why that is a bad idea. It’s best practice for companies to use multiple cloud providers (e.g. AWS, Azure, GCP) instead only relying on one.

The same is true for digital assets. A multi-custodian model spreads assets (and risk) across multiple custodians and banks, while a multi-exchange model uses multiple exchanges and liquidity providers to broaden trading options.

Multi-custody decreases risk

In a multi-custody model, an institution uses multiple crypto custodians and or banks to hold assets (fiat + digital assets). You might hold 50% of assets on Coinbase and 50% on Gemini. Or a third each on Coinbase, Gemini, and Anchorage.

The exact split will be down to customer preference and market incentives (such as insurance limits). This model helps companies and customers in three ways.

1. Risk Management

When you use a single custodian, you are completely reliant on that custodian. This is a fundamental issue with digital assets, all the way down to self-custody—if everything is in one cold wallet and you lose the private key or secret phrase to that wallet, you’re out of luck.

The same goes for using custodian services. If all your customers’ assets are with a single custodian, any problem with that custodian propagates down to you and your customers. In this rapidly changing crypto environment, we’ve seen this at least twice in recent months:

  1. Crypto banking firm Juno had custodian Wyre as its single custodial option. When Wyre started experiencing liquidity issues in late 2022, this led to Juno having to stop deposits and tell current customers to withdraw their funds.
  2. Crypto company FTX was acting as a custodian as well as an exchange. When FTX went bankrupt anyone with their assets custodied at FTX lost access to their funds. These people are now embroiled in a legal battle to recover their assets.

With multi-custody, these issues are mitigated. If one custody partner goes down, assets are still available via other custodians. If assets are locked in a legal tussle, other assets can still be called upon from other custody partners. Even with temporary technical failures, your customers can always access at least a portion of their assets.

2. Compliance with Regulations

Though the concept of country or continental borders doesn’t really work with blockchains, digital assets are still subject to different regulations in different countries. Two recent examples.

  1. The wider tech analogy here is with GDPR. With GDPR, EU regulators want to restrict the storing and processing of EU citizens’ data outside of the EU. This requires global companies to have servers, data centers, and teams within the EU specifically for EU customers’ data. They have a multi-cloud approach imposed on them.
  2. Likely, a similar issue will come to crypto where US or EU regulators want their citizens’ assets custodied in their domain. EU regulators will want EU customers’ assets custodied within Europe, and US regulators will want US customers’ assets in the US. If you are working with customers around the world, you’ll need custody partners in different jurisdictions to support these customers.

Complying with emerging regulation is going to mean that fintechs looking to operate in multiple jurisdictions will have to work with multiple partners.

3. Customer Protection

Using multiple partners to custody fiat assets (banks), means you can utilize the FDIC insurance of all banks to insure more of your customers’ money. The limit for FDIC insurance is $250k per depositor, per bank, for each type of asset. So a multi-bank (i.e. multi-custody) approach is used for fiat as well. You can spread your money across multiple banks, taking advantage of the insurance per bank. So if you invest $750k in one bank, only $250k is insured; if you split that $750k equally over three banks, all $750k is insured.

Though crypto insurance is nascent, you can take advantage of insurance across custodians with a multi-custody approach rather than being subject to a single insurance policy with just one custodian.

Multi-liquidity drives revenue and reduces cost

A multi-liquidity approach uses multiple exchanges and liquidity providers to expand trading options and services for end users. Multi liquidity does help mitigate risk—e.g. outages at one exchange will not stop your operations—but the main benefit of a multi-liquidity model is that customers have access to a more diverse selection of trading options, at the most competitive prices.

1. Reduce costs by ensuring you get the best prices

If you use only one exchange provider to execute trades, you are at the mercy of the prices they set and the fees they charge. By using many exchanges you can compare the prices across your partners and route trades in the most cost effective manner.

Exchange A may charge fees of 25 BPS (basis points/0.25%) for BTC-USD trades, and 15 BPS (0.15%) for USDC-USD trades. Whereas Exchange B may charge only 15 BPS for BTC-USD trades and 20 BPS on USDC-USD trades.

In this example, it makes sense for a company to route BTC-USD trades to Exchange B, and USDC-USD trades to Exchange A. A company can pass the cost savings onto customers for free or turn it into a revenue generating feature.

2. Offer a wider range of trading pairs

Different exchanges offer different trading pairs. If you are locked into one exchange, you are locked into only those trading pairs.

It also means you can’t offer more interesting and riskier trading pairs to those customers who want a higher return and will shoulder a higher risk. For example, if your exchange doesn’t support Solana, your customers can’t buy Solana. The same for niche or newer assets on the market—you cannot offer these assets to your customers until your exchange partner supports it.

3. Offer a wider range of trading products

Working with more exchange providers can give you access to different products.

  • Limit orders – Exchange A may offer the ability to create limit orders as well as market order.
  • Derivatives – Exchange B may have derivatives markets where customers can long and short assets.
  • Leveraged Trading – Exchange C may allow customers trade with leverage, with different exchanges likely offering leverage limits.

By integrating with multiple providers, companies can provide all of these revenue generating products to their customers, whereas this would be impossible relying on only one.

4. Increased efficiency in executing trades

With a single exchange, you are locked into any problems with that exchange:

  • High traffic: Cryptocurrency exchanges can experience high levels of traffic, especially during times of high market volatility. This can cause delays in processing trades and updating the order book.
  • Technical issues: Technical issues such as system outages, software bugs, or network congestion can cause slowdowns on a cryptocurrency exchange.
  • Poor infrastructure: Some exchanges may have poor infrastructure, such as slow servers or inadequate bandwidth, which can result in slow trading times.

If you are using multiple exchanges, you can a) split your trading volume to speed up the process from your side but also b) mitigate these problems by moving trades to better-performing platforms on demand.

This also helps during market volatility. In 2022, trading platform sFOX were able to reassure customers during a peak in volatility because they were using multiple liquidity providers. From a customer email at that time:

sFOX has taken precautionary measures to mitigate any client risk. Our trading and settlement operations continue to operate as normal, with no impact or disruptions on your activities or funds.
In addition, SFOX offers 50+ liquidity providers and during these times we are able to route customer orders to other venues.

Multiple partners mean more value for customers and more trust for you

At Layer2 Financial, we provide our clients the benefits of multi-custody, multi-exchange through one easy to use API.

By adopting these approaches you ensure a reliable and efficient fintech stack. Using multiple custodians to improve resilience, adhere to regulations, while using multiple exchange partners to drive revenue while limiting costs.

About Layer2

Layer2 Financial is a Crypto as a Service infrastructure that makes it easy for fintechs, banks, and neobanks to launch fully compliant crypto products, in a matter of days. Layer2 provides seamless access to compliant custody, trading, payments, fiat ramps, and yield; all through one user-friendly API. Click here to learn more.

The Next Wave of Crypto Users Will Not Know They Are Using Crypto

“My guess is that in 10-20 years, we’ll see a substantial portion of GDP happening in the crypto economy.”

Brian Armstrong, Coinbase CEO (Source: Bloomberg)

How do we get one billion people using crypto and make it a “substantial portion of GDP”?

The answer lies in onboarding the world to crypto without them ever knowing. By integrating crypto products into current channels, and abstracting away complexity, people can realize the benefits of crypto without realizing they are using it.

This is similar to how Apple Card works. You don’t really have an Apple Card—there’s no such thing as an Apple bank account—you have a Goldman Sachs account. People can realize the benefits of banking with Goldman Sachs without knowing it.

Here are five ways more and more people are using crypto without realizing it, and how we’re already on the path to that one billion.

1. You won’t realize your payment uses crypto rails

As more and more fintechs, begin integrating crypto into their product offering, they will realize that crypto can be a good method of transferring value.

Currently, people must wait for 1-3 days to send a Fedwire or ACH transaction. It is easy to see a scenario where instead of using these traditional payment rails, fintech may choose to use blockchains to transfer money. The introduction of stablecoins ensures that the money will retain its value in transit, and new scaling solutions like L2s or subnets ensure costs are kept low.

However, to the end user initiating the payment, it will look like they are sending a payment like they always do. Unbeknownst to them, their payment was sent to the payee using a blockchain. Or maybe a combination of blockchain and traditional payment rails.

On both ends, the payor and payee will not know crypto is used; all they’ll see is their regular currency. But the process is streamlined by using crypto payments. These payments can be instant and cheap, meaning that people remitting money back home will see more of their money reach their families and reach them much quicker.

More to come on this in the future.

2. You won’t realize your stocks are managed on a blockchain

The other opportunity for crypto investments is asset tokenization.

Tokenization is the process of representing digital or real-world assets, as a token that lives on a blockchain. Tokenization is used to increase the transferability of assets; increasing speed, reducing cost and unlocking liquidity.

These tokenized assets can be anything. They can be tokenized versions of traditional financial investments. For instance, private equity group KKR tokenized their Health Care Strategic Growth Fund on Avalanche. A primary benefit of this is that it lowers investment minimums. Whereas before, you would need millions of dollars to invest in such a fund, tokenization pulls that minimum to $100,000.

Tokenization is growing incredibly fast. Finoa predicts the tokenized market volume could be as high as $24 trillion by 2027. Boston Consulting Group puts the opportunity at $16.1 trillion by 2030. Asset markets like IntainMARKETS, are being created to manage and trade tokenized assets, such as securities, at up to 100bps fewer transaction costs.

Big banks are also getting involved:

With these technologies, more people can invest and take advantage of growth only previously available to the highest-level investors.


Then there are the more interesting tokenized assets: houses, cars, art, watches. You can buy a token in all of them and take advantage of their value growth. Of course, you can’t hang the Picasso on your wall but you will own a part of it and can take advantage of its upside.

This is not investment advice.

3. You won’t realize your loyalty rewards are NFTs

Reward points are, for the most part, pointless. You might get a free basic coffee once in a while, but the schemes are a marketing ploy.

Starbucks Odyssey is a bit different. Instead of points, Starbucks uses ‘Stamps’ to reward customers’ loyalty. People can earn stamps by buying coffee or by ‘playing interactive games or taking on fun challenges to deepen their knowledge of coffee’. The more Stamps you collect, the more cool things you can do; go to Starbucks events, buy merchandise, get access to collaborations, and even take a trip to a coffee farm.

The unique angle is that these ‘Stamps’ are NFTs on the Polygon blockchain. Like all NFTs, Stamps can be bought, sold, and transferred with others in the Polygon ecosystem. If one member is one Stamp shy of that Costa Rican coffee farm trip, they don’t have to jump through Starbucks’ ‘challenges of coffee’ hoops, instead, they can just buy their missing Stamp on an NFT marketplace.

NFTs can be used as gift cards or vouchers. The transferability of NFTs means that if you receive an NFT gift card for a brand you don’t like, you can sell it. Again, they can be sold on an NFT marketplace without the user needing to understand the technical underpinnings. You won’t need to go to OpenSea to sell your Starbucks Stamps—you can do that from your app. Many users won’t even have to know they own NFTs—they just have Stamps.

Likewise, ERC-20 tokens can become a new version of reward points or store credit. Tradable with others on decentralized exchanges. What value will these reward points command? The market will decide that but if you can buy $100 worth of product for 100 tokens you can infer that these points definitely have a tangible value. They can be issued by the company giving the reward, so the value stays within their ecosystem but can be exchanged more easily by users.

4. You won’t realize your avatar was minted

The NFT subreddit is one of the worst places on the internet. Full of scams and hate for NFTs. So Reddit being the launch platform for one of the most successful NFT projects to date is interesting.

That’s what’s happened with Reddit’s Collectible Avatars. Every Reddit user has a regular avatar, a version of Snoo, the Reddit alien mascot. Collectible Avatars are NFT-versions of Snoo available to Reddit users either through airdrops, having high ‘Karma’ on the platform, or by buying them in the Collectible Avatars Shop.

(Meme Regime #464389 on polygon)

As of January 2023, there are over 6 million Collectible Avatar holders, according to Dune:

The main reason for the growth is the ease of adoption.

Reddit users did not know they were getting an NFT. Reddit users did not know a wallet was set up on their behalf. Reddit users did not know that all of the complexities of crypto like gas, passphrase management, were abstracted away from them by Reddit.

For the millions of users on Reddit, they were simply getting a cool new digital avatar to show off to friends, unknowingly becoming first-time NFT owners overnight.

The reason why Starbucks and Reddit succeeded is they focused on creating great experiences first, crypto tokens second. Both brands successfully onboarded millions of new crypto users without them ever knowing.

5. You won’t realize your savings account APR is from digital assets

If you have a run-of-the-mill savings account, your yield is at the mercy of the interest rates set by central banks. The best savings rate currently is about 4%.

Thanks to Defi (decentralized finance), there are many new ways to generate yield. In some places, you can double the yield that banks provide.

You can earn yield from digital assets in a number of ways:

  1. Yield from lending protocols such as Aave, where you lend digital assets (stable and non-stable) to borrowers. The yield is determined by the demand for the lent assets.
  2. Yield from validating blockchains certain erc20 tokens (Ethereum, Avalanche) can be ‘staked’ to earn rewards in return for validating the blockchain.
  3. Yield from providing liquidity to protocols like Uniswap. LPs (liquidity providers) deposit assets in pools to facilitate trading. In return, LPs receive trade fees based on the amount of liquidity they have deposited. Uniswap pays LPs 0.3% on each trade and has paid out over $40 million to LPs in the last 30 days.

By July 2022, these yield options had almost $50 billion combined in total value locked (TVL):


In the future, it is likely that a portion (or all) of the yield provided from a ‘savings account’ will have been generated using digital assets. To the end user, however, it just looks like a high APR.

More people involved in crypto means more people benefiting from crypto

People don’t care about whether something is crypto or not. They care about good experiences. If the experience is cheaper, faster, more engaging, a person is more likely to use it.

If we can get 1 billion people involved with crypto, then 1 billion people’s lives will be better. Either they’ll be able to do something cheaper, like transfer money or invest, or they get more value from what they are already doing, like investing, drinking coffee, or arguing in r/politics.

Either way, users won’t have to actively seek out the better crypto solution. As financial institutions and companies come to understand the benefits of digital assets and crypto for themselves, they are wrapping these into their traditional offerings. Stop focusing on crypto and start focusing on creating great products.

About Layer2 Financial

Layer2 Financial is a Crypto as a Service infrastructure that makes it easy for fintechs, banks, and neobanks to launch fully compliant crypto products, in a matter of days. Layer2 provides seamless access to compliant custody, trading, payments, fiat ramps, and yield; all through one user-friendly API. Click here to learn more.

Protecting Crypto Users in a Post-FTX World

It has been a rough 12 months for the crypto community. The FTX saga has been front-page news worldwide, with $8 billion of customers’ money lost. Genesis filing for bankruptcy with a billion owed to creditors. Logan Paul’s failed NFT project, Cryptozoo, is peppered with felons and con men.

So why do we continue to build in this space? Fundamentally, we believe that digital assets are the future of finance. We also believe that more attention needs to be paid to the protection of crypto users from bad actors.

Where there’s money, there’s fraud

Bad actors, bad altcoins, Ponzi and pyramid schemes, and outright fraud plague the crypto industry.

The Onecoin Ponzi scheme defrauded investors out of almost $6 billion over five years. The Trade Coin Club took $295 million from 100,000 investors. This month, Mark Cuban was deposed over his involvement in Voyager, which is being called a Ponzi. This list is added to every week.

And then, of course, there’s FTX. $8 billion gone. Sam Bankman-Fried faces wire, commodities, and securities fraud charges though he maintains a version of innocence.

These are only the cases where money is lost. There are also more profound dangers associated with crypto right now:

  • Money laundering. In November 2022, 21 people were arrested in a $300M crypto money laundering scheme. Many saw the 2021 $25bn boom in NFTs as driven partly by money laundering.
  • Terror financing. As many as 20% of all terror attacks could be financed by crypto. Terrorist organizations need “anonymous, secure, and ready streams of funding” to which cryptocurrency is ideally suited.
  • Human trafficking. A 2021 GAO report found that 15 out of 21 commercial sex marketplaces accepted cryptocurrencies.

(Source: Coinbase)

There is a lot of corruption within the crypto community. Traditional finance suffers all the same problems on a much larger scale.

💡 Ponzi schemes and fraud weren’t born with Satoshi Nakamoto.

BMO Financial group was caught up in a Ponzi scheme and found guilty in November 2022. The Canadian bank will “record a [CAD]$1.12-billion provision” for its part in a $3.65 billion Ponzi scheme. South of the border, the US department of defense failed its audit for the fifth time. The pentagon can’t currently “account for 39 percent of its $3.5 trillion in assets.”

The COO of Wirecard is on Europol’s most wanted list, fleeing after the German payment processor collapsed amid massive fraud, with €1.9 billion “missing.”

Wirecard COO Jan Marsalek’s wanted poster (source: Wikipedia)

There are always these issues in finance, decentralized or centralized, alternative or traditional. This isn’t about downplaying the problem. It’s about realizing the actual problem—bad actors—and putting weight behind those of us in the industry that want it to grow and prosper and become genuinely valuable for the next billion crypto users.

The core of crypto is stronger than the core of traditional finance

Digital assets are a better option for modern finance than the fiat financial system. Three reasons for this:

  1. It’s transparent. Anyone can see the code and read the papers behind large crypto projects.
  2. It’s trustless. Put trust in a public ledger and smart contracts. There’s no need to put trust in unneccessary middlemen.
  3. It’s fast and cheap. Crypto payments can happen instantly and without the fees charged by fiat intermediaries.

Compare this with the fiat system. Where your money is right now is entirely opaque. You must trust your bank and other financial institutions to do as they say. And you have to pay fees for the pleasure.

Case Study: Ukraine Donations

No transaction shows the difference between the Old and the New better than cross-border payments.

“Crypto really helped during the first few days [of the war] because we were able to cover some immediate needs.” Alex Bornyakov, Ukrainian deputy minister for digital transformation (Source: The Economist)

Ukraine raised $100M in crypto in the first month of the war. The bulk of this money came from individuals wanting to help. Consider what this would have looked like without crypto:

*Note – currency fx: In the above example, assume that currency fx fees are the same for both traditional and crypto solutions.

**Note – swift fees: Banks charge ~$50 per Swift transfer. To get around having to pay $50 each time, charities will wait for many donations to come through before grouping donations and sending them in one Swift transfer.

Charities helping the Ukrainian crisis appeal do amazing work. Unfortunately they are hampered by slow processing times and payment processing fees. Taking Miles4Migrants as an example, their donation tool Donorbox (including Stripe fees) charges 3.7% + 0.30c on every donation made by card.

Contrast this to crypto. In this scenario, donors could donate large sums of crypto to a Ukrainian government managed wallet. Transactions are peer to peer and settle in seconds. There are no payment processing fees so what you send, the beneficiary receives. You only have to look after the gas

Versions of these easy, quick, secure, transparent payments play out thousands of times a day across the globe. Not paying for war, but for coffee, or rent, or just to help family members out in another country. This is huge—you can pay anyone, anywhere, for anything, instantly, with crypto

How protection will, and is, working for crypto users

The history of the fiat financial system is the history of institutions and regulators learning and building walls (sometimes literally) around the system and people’s money to keep it safe and build trust. As the National Law Review says of crypto companies:

“Their employees have not been going to industry security meetings and conferences since the days of Jesse James, sharing information on how to prevent thieves.”

Banks have. They have literally centuries of experience. We’ve learned a lot in those years and put in a lot of controls around anti-money laundering (AML), Know Your Customer (KYC), fraud, etc., that have helped us fight terrorism, trafficking, and other global crime.

Some crypto companies in the Centralized Finance (CeFi) space are working on solving these problems, such as Layer2 Financial, Anchorage, and Fortress, improving the space using a mix of regulatory oversight, AML/Fraud tools, and compliance tools.


The simplest win would be better auditing. Quoting John Ray, the CEO of FTX while they sort through the mess:

Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.

Even first-year accountants would have wept when they saw how FTX was tracking assets and liabilities over a mess of spreadsheets and QuickBooks. But FTX had an auditor. Presumably, so does Genesis, even though it listed its $1.1 billion promissory note from its parent company as a current asset.

One of the issues is that many auditors are not sure how to audit crypto firms. An unlikely pair, ‘Big Short’ investor Michael Burry and Binance CEO CZ, have both said this. It’s clear that both sides need to learn. Crypto firms have to learn more about auditing; auditing firms have to learn about more crypto. Movement from both sides is required for movement forwards.


Progress is also being made on serious controls such as AML. Layer2 Financial partners with companies such as Alloy, Chainalysis, and Coinfirm to manage risk and compliance. This includes incorporating the AML ‘travel’ rule into our transactions, passing information about fund transmittors and receivers to other financial institutions to help spot patterns in the movement of large amounts of money.

These partners don’t just help with AML, they help with all types of transaction monitoring. For instance, alerting customers to hacks or issues on the blockchain immediately. This is one of the areas where the transparency of crypto activity is a boon to customers. All on-chain activity is transparent, so you can immediately see any problems. Contrast that with the fragmented, hidden world of tradfi.

A New Type of Regulation:

Finally, not all compliance controls being enacted in the crypto space come from traditional finance. The industry itself is inventing ways to self-regulate and protect decentralized finance.

Smart contracts are the core of DeFi apps, providing a trustless model where everything is transparent—logic, code, transactions, and owners. If you know how to read the contracts you can spot the bad actors and steer clear. Unfortunately, the vast majority of people will not be able to read blockchains or decipher smart contracts. This makes users vulnerable, as it forces them to put trust back with the builders, not the public code.

Smart contract auditors, like Paladin and Certik, have stepped into this gap between the builder and consumer. They audit smart contracts to give the seal of approval that a smart contract is safe to use. Consumers can then have peace of mind when using a smart contract without needing to know exactly how the smart contract is coded.

Other interesting solutions are:

  • Defi KYC. Where project owners are anonymous, companies like Obsidian and Assure Defi can perform KYC on the project / smart contract owner. In the event where the project owner is a bad actor, their verified identity is sent to the authorities.
  • Multi-signature wallets. Multisignature wallets require multiple people to sign a transaction before the transaction is executed. This means no one individual can control all the funds in a wallet for nefarious purposes.
  • Defi insurance. Through projects like Hedera and Nexus Mutual you can now insure yourself against things like exchange failures and smart contract exploits.

A crypto core with institutional controls

FTX was a disaster. It’s set crypto back and lent credence to naysayers. The strongest response to this is to learn from the mistakes of FTX, Genesis, BlockFi and all the other platforms now struggling.

The good actors in the space are moving in the right direction. The auditing, the insurance, the AML, the KYC controls—all are great opportunities for crypto to become stronger.

Financial Institutions, like banks, that have been trusted with money for generations need to participate in this growth. It’s not just about using their institutional knowledge to better control crypto, its about them also learning about this new model of finance and finding the right ways to negate the bad actors while letting everyone else prosper.

About Layer2 Financial

Layer2 Financial is a Crypto as a Service infrastructure that makes it easy for fintechs, banks, and neobanks to launch fully compliant crypto products, in a matter of days. Layer2 provides seamless access to compliant custody, trading, payments, fiat ramps, and yield; all through one user-friendly API. Click here to learn more.

Demystifying Crypto For The Mass Market

The icon for the default notes app on an iPhone is a little picture of a legal pad. The legal pad was invented in 1888, about 120 years before the launch of the iPhone. Why did, does, the most twenty-first-century invention of them all, use this nineteenth-century invention as an icon? To make it relatable and obvious to users as to what function it serves.

This is ‘skeuomorphism’, where you replicate old-school ways of doing things to help people understand the new-school way of doing things. The not-yet-terminally-online audience of the early noughties knew what legal pads were and what you used them for — note-taking. When they saw the icon on their new smartphone, they knew that this was where they’d write their notes.

Sometimes new technologies need to look like something already used by the mass market for adoption to increase.

“Crypto needs its own version of a legal pad”

Increasing adoption by decreasing complexity

Mass adoption happens in the late majority, but we won’t get there with crypto as it is now. Crypto is just too complex and too unsafe for the mass market. RIPEMD160(SHA256({KEY})) and “not your keys, not your crypto” are never going to be day-to-day concepts for hundreds of millions of people.

The Bitcoin/crypto adoption curve(Source: Osprey Funds. Are we really there?)

Take this story from Vitalik Buterin, the founder of Ethereum.

“We ordered tea and snacks, and we asked if we could pay in ETH. The coffee shop owner obliged, and showed me the QR code for his Binance deposit address, to which I sent about $20 of ETH from my Status wallet on my phone.

Digital payments should be easy. But he goes on:

“The one issue with my coffee transaction is that it did not really make pragmatic sense. The fee was high, about a third of the value of the transaction. The transaction took several minutes to confirm: I believe that at the time, Status did not yet support sending proper EIP-1559 transactions that more reliably confirm quickly.”

Compare this with paying with a debit or credit card. You just have to swipe your watch now and the payment and confirmation are instant. Fees are certainly less than gas fees on Ethereum right now.

Current crypto solutions are oriented towards traders and early adopters, like Buterin. They revel in their technical complexity. That won’t work for a mass market of millions.

So crypto needs a “legal pad,” a skeuomorphic version that millions can immediately understand and cuts through the complexity inherent in the system.

What is it?

“It’s the bank account. Crypto needs to be just another entry in your account list.”

Most people have a bank account. You have a checking account and a savings account. You might have a separate investment account as well with the same bank or a different institution. But basically, they are all the same — you put money in, you take money out.

Simplified End User Experience

If crypto looked and acted like a regular bank account, it would remove the complexity of crypto for end users. No longer worry about ‘blockchains’, ‘wallets’, ‘private keys’ and gas fees to manage.

“These components of crypto will still exist, but they will be abstracted away for the end user.”

All the end user will see is an account like all their others, transfers happening at the press of a button, and investments being easy to track. Crypto becomes an option alongside fiat, instead of something completely separate. It is the old-school way of doing things, but it’s the way everyone understands.

Safety, Security and Compliance

Embedding crypto within existing Financial Institutions (FIs), and treating crypto accounts as the same as bank accounts, increases the security and safety for end customers. Banks and fintechs know how to do compliance. They have the infrastructure and processes in place to comply with the increasing regulatory requirements.

Banks have been safe custodians of fiat money and assets for hundreds of years. They have invested billions of dollars into security technology and operations over the last couple of decades. This makes them well suited to be the safe custodians of crypto assets as well.

However, for this to happen, existing FIs need to adopt crypto. This is a problem. Why?

“Because crypto isn’t just complex for end users, it’s also complex for the billion-dollar financial institutions trying to implement it.”

Removing complexity for Financial Institutions

There is still a lot of fragmentation and complexity in the crypto ecosystem that needs to be solved for to enable mass adoption by FIs. Just a few of the things FIs have to abstract away from their end users:

Custody to create crypto wallets, settlement

Exchange to trade different cryptocurrencies or convert fiat currency to crypto

Crypto networks to get notified on blockchain events, and manage gas fees

Compliance to perform KYC/KYB, transaction monitoring, and sanction checks

Lending and Staking integrate partners to generate and distribute crypto yield

Ledger to maintain the core book of record for accounts and transactions

Workflow to orchestrate complex transactions

Reconciliation to ensure that all transactions are correct, and accounts have the appropriate balances

A disparate and complex crypto infrastructure ecosystem

Any one of these is a huge headache for a dev team. You can end up losing money, paying exorbitant fees, or sending money to a regime on a watchlist.

Additionally, none of these infrastructure components provide any competitive differentiation to the FIs. They should be focused on building differentiated end user experiences and unique products that work in harmony with the rest of their offering.

Abstracting Crypto Complexity

What is needed is a Crypto as a Service infrastructure similar to a fiat core banking platform. The Platform will handle all of the complexity of integrating with various regulated crypto & fiat partners. The platform will help clients perform compliance activities, maintain the core book of record, manage all the blockchain operations such as gas & wallet management, orchestrate workflows to create easy to use banking and payments products.

Crypto as a Service Platform

“A Crypto as a Service infrastructure approach focuses on reducing complexity, allowing Financial Institutions to focus on building great products and customer experiences.”

The platform will provide one straightforward API that the FIs will use to:

– Create and manage customers, including KYC and compliance

– Open deposit, payment accounts for multiple cryptocurrencies

– Safely custody crypto with regulated banks and trusts

– Transfer funds between accounts

– Exchange funds between different currencies

– Deposit funds from and withdraw funds to external accounts

– Accept payments from customers

– Earn yield

By abstracting away the complexity, Financial Institutions can focus on creating great experiences for their customers. Customers don’t have to worry about finding a trustworthy place to manage their crypto. They can manage their crypto in an account right next to their checking account in their day to day bank.

Crypto is just like another type of bank account after all.

About Layer2 Financial

Layer2 Financial is a Crypto as a Service infrastructure that makes it easy for fintechs, banks, and neobanks to launch fully compliant crypto products, in a matter of days. Layer2 provides seamless access to compliant custody, trading, payments, fiat ramps, and yield; all through one user-friendly API. Click here to learn more.

Layer2 Financial Launch

We are excited to announce the official launch of Layer2 Financial, a Crypto as a Service infrastructure with integrated compliance that allows you to launch crypto products within days. Our platform has already been trusted by leading fintechs, banks such as Anchorage Bank, AngelList and Capital.

Why use Layer2?

  • Launch multiple crypto products in a matter of days, with seamless access to compliant custody, trading, payments, fiat ramps, and yield products through a user-friendly API.
  • Simplify crypto compliance with our licensing, sponsor bank partnerships, integrated onboarding, AML, and fraud capabilities.
  • Create better products with our ecosystem approach, featuring leading, qualified custodians and regulated partners for competitive pricing, a wide range of assets, and minimized risk.
  • Focus on building financial products, while leaving the complexities of blockchain operations such as gas management, wallet management and sweeping to us.

Contact Us to learn more and make sure to follow us on LinkedIn and Twitter to stay up to date on our latest products and enhancements.