Methods and Best Practices for On-Ramp and Off-Ramp in the Crypto Landscape

2. Decentralized stablecoins

Unlike centralized stablecoins, decentralized stablecoins mint synthetic stablecoins when users deposit other crypto assets into a smart contract, rather than wiring fiat into a bank account of a deposit-taking institution.

These smart contracts aim to programmatically maintain a fixed exchange rate to a reference fiat currency, mimicking the decision-making processes and operations used by central banks or currency boards for their exchange rate policies. 

For example, Curve, the second largest decentralized exchange on Ethereum, has released a whitepaper detailing an example of one such implementation of a price stabilization mechanism.

It’s technically not possible to directly deposit fiat currencies from bank accounts into smart contracts. Decentralized stablecoins exist in a middle ground between centralized stablecoins and centralized exchanges (CEXes). It’s still possible to off-ramp certain decentralized stablecoins in a roundabout manner that appears almost instantaneous.

Pros

- Global accessibility, not limited to USD stablecoins: Offers a range of non-USD stablecoins to conduct transactions in specific local currencies. For instance, Jarvis Network is a synthetic stablecoin protocol that operates on an over-collateralized basis and focuses on issuing non-USD stablecoins while creating liquid markets for them. Jarvis Network offers a range of non-USD stablecoins, including major currencies like jGBP, jCNY, and jEUR, as well as smaller and less represented currencies such as jSEK, jPHP, and jNZD.

- Beneficial for businesses operating in diverse markets: Non-USD stablecoins can enable Web3 companies to have deeper penetration into specific local markets. Through its partnership with Mt Pelerin Group, an authorized financial intermediary in Switzerland, Jarvis Network allows users to off-ramp decentralized stablecoins from any wallet on both Layer 1 and Layer 2 blockchain networks. It offers stablecoin off-ramps in 14 fiat currencies directly from bank accounts in 172 countries.

Cons

- Reliance on algorithmic mechanisms for stability and exchange rate: There’s a risk that a decentralized stablecoin will have a price meltdown.

3. Centralized exchanges

Centralized exchanges (CEXes) offer versatile on-ramps and off-ramps by accepting fiat bank deposits via bank wires or credit cards. Unlike stablecoins, CEXes facilitate the exchange of various cryptocurrencies and stablecoins for fiat currencies in many different currencies. 

Pros

- Versatility in accepting various fiat currencies: Centralized exchanges typically accept fiat bank deposits via bank wires or credit cards, in many currencies, in exchange for most cryptocurrencies and stablecoins.

- Convenience of a single platform to on ramp and off ramp: This flexibility can be advantageous for businesses that require access to a wide range of cryptocurrencies and want the convenience of a single platform for their on-ramping and off-ramping needs.

Cons

- High fees, especially for credit/debit card transactions: Credit and debit cards are a popular way for retail users to purchase cryptocurrency via an exchange, but they come with high fees of up to 10% per transaction. Card payments are also on-ramps, but not off-ramps as it is usually impossible to “withdraw” money onto a credit or debit card.

- Risk of being de-banked: Many banks and credit card issuers still consider such transactions suspicious, locking or even closing accounts after learning the nature of the transactions. For exchanges, the credit cards of certain countries — including Russia and Ukraine — are automatically rejected.

Counterparty risks can often be higher: As a deposit-taking institution, it’s hard to assess whether a CEX has the liquidity and solvency to honor their debt obligations. 

4. On-ramp vs Off-ramp: service providers 

The number of options for direct payouts between crypto wallets and bank accounts is growing rapidly. Several players in this space offer these services, including non-bank financial institutions (NBFIs) such as online brokerages like Robinhood, fintech payment processors like Stripe, and neobanks like Revolut, which have recently started offering crypto services. These on ramp and off ramp providers effectively act as their own exchanges and market makers.

Among these providers are over-the-counter (OTC) desks, often operated by centralized exchanges (CEXes). OTC desks are particularly useful for conducting large transactions, typically involving millions of dollars, in a more cost-effective manner than spot purchases on exchanges.

Pros

- Efficient transfers of value: OTC desks are valuable due to their ability to conduct large trades without moving the market against them. This effect is known as “slippage” and occurs when large-scale buying causes prices to immediately rise before the targeted amount of cryptocurrency has been purchased, while selling causes it to fall before it’s all sold.

- Ideal for cases when large amounts have to be off-ramped: Cost efficient for scenarios such as converting a portion of the fiat capital raised in a venture funding round into stablecoins for global payroll purposes, or converting a portion of an organization's crypto treasury to fulfill bill payments that require a significant upfront cash downpayment, such as to landlords.

Cons

- Potential fees and limitations: Fees can vary depending on the provider and the nature of the transaction. Some providers may impose a flat fee per transaction, while others may charge a percentage-based fee calculated on the transaction amount.

Best Practices for On/Off Ramping

Navigating the on/off ramping process in the crypto industry poses challenges for businesses, particularly due to the nature of corporate banking and the associated risks. 

Regardless of which off-ramp methods, or specific service providers you use to convert your fiat to crypto, or vice versa, these are the best practices to consider:

Map out your on/off ramp needs by payment corridors

Remember that on and off ramps ultimately mean having to deal with geographically-bound banking networks. Like the previous generation of web2 fintech payment processors, they are simply relying on a tech-enabled system to scale the ancient practice of Hawala banking to create the illusion of fast, global payouts.

To save yourself the time and frustration of being drip-fed limitations by various on/off ramp providers, you can map out your on/off ramp needs by payment corridors.

Go through your company’s database of employees, freelancers, contractors, and service providers. Map out the various country pairs, and the fiat payments volumes that flow between them. Armed with that knowledge, you will know which regions to prioritize on/off ramps for. This way, you can have more productive discovery calls with on/off ramp providers.

Avoid using on/off ramps to hold your treasury

On/off ramp wallets - especially third-party custodial ones, should never be abused as treasury wallets, to minimize your exposure to counterparty risk from custodians.

Too often, crypto companies are lulled into complacency, and end up misusing CEX wallets to hold significant amounts of their treasury.

If you had decided to move 500,000 USDC from your self-custodial treasury wallet to an FTX wallet now, and leave it there until the end of the month, you would have quickly found yourself out of a job. This is exactly what numerous startups, and even venture funds did for their employees - including FTX’s.

Implement a monitoring regime to screen for de-peg and liquidity risks

Whichever stablecoins you choose to use to on ramp vs off ramp, it is recommended that you set notifications and alerts for social media activity and price action to regularly screen for de-peg risks.

Apart from screening for warning signs for stablecoin de-peg risks on your own personal accounts, consider recruiting the help of your marketing team. They likely already have tools which monitor social media regularly as part of their workflows.

If your organization relies heavily on centralized stablecoin issuers to manage your organization’s on-ramps and off-ramps, you can regularly review the attestation or audit reports provided by these issuers as part of their disclosure regimes. Balance sheet issues could cause fatal bank runs. This also applies to screening for liquidity risks when using other centralized entities like CEXes for on and off ramps.

On the other hand, synthetic stablecoins are also subject to similar risks of their own, largely related to the design of their price stabilization mechanisms. You should review the design of these mechanisms closely, before deciding to rely on them as on-ramp and off-ramp channels. .

Regular screening can enable CFOs to react in a timely manner to protect their crypto treasury from such risks. There are numerous examples of how vigilant monitoring of fear, uncertainty and doubt, (FUD) on social media platforms has allowed individuals and companies to save hundreds of millions of dollars from exposure to collapsing stablecoins and centralized off-ramps.

There is safety in diversity

Ideally, you can use different on/off-ramp channels for different purposes. For instance, you can consider using a CEX to off-ramp crypto for payroll, and a centralized stablecoin issuer to off-ramp when paying SG&A expenses in fiat.

A simple rule of thumb is this - use at least two, uncorrelated, extensively-researched tools for each core activity area in your crypto finance stack: (i) crypto wallets, (ii) banking services providers, and (iii) on/off ramps.

You can focus on using multiple tools to de-risk these three core areas. They are the vital organs of your organization. Tooling failures here will immediately impact your balance sheet and liquidity.

By following these practices, your company can optimize your on/off ramping strategies and safeguard their financial well-being in the dynamic crypto landscape.