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Cryptocurrencies and fiat money are a bit like oil and water. They don’t mix well. Whenever they do meet, fees, theft and crime are often the result. While crime in all its forms is a thorn that won’t budge, fees are something many want to remedy, including Polish startup Ramp Network, and its app that wants to make swapping crypto for fiat as easy as using a bureau de change.
The company has been waiting for finance regulators to make banking sectors a little more friendly to newcomers. In the UK, recent legislation--referred to as either Open Banking or PSD2--has meant banks are required to open their customers’ data to fintech firms, enabling new apps to provide better services for those with bank accounts, and Ramp Network has sniffed an opportunity. Previously banks were closed books, so no apps could make bank transfers on behalf of their customers, keeping options limited. But now they can, and Ramp Network wants to use the facility to allow users to perform atomic swaps--where one cryptocurrency can be swapped directly for another--but with fiat to crypto.
How? When two parties want to exchange funds, the network creates a smart contract that acts as an escrow account--Ramp only works on currencies where smart contracts are built in, like Ethereum, but not on bitcoin. Once a date has been set to exchange those funds, the smart contract executes and the cryptocurrency is released. While Ramp Network sets up the process, it doesn’t touch the funds.
Atomic swaps are considered the holy grail. They enable you to swap one cryptocurrency for another without handing over your money to a third party—even if a third party organizes the transaction. Without these, you have to use a centralized exchange and entrust them with your funds. And this is something many are hesitant to do—with crypto exchanges getting hacked left, right and center.
So, what really happens in this case? In short, the first party makes a bank transfer to the second party. Then, the cryptocurrency which had been held in escrow, is automatically released and transferred to the first party’s crypto account. Depending on the cryptocurrency transferred—and the banks used—the whole process should complete in just a few hours. It sounds too good to be true.
Until now, banks—especially in the UK—have been reluctant to allow customers to buy cryptocurrencies. Many accounts have been frozen and transactions blocked. VISA even designated crypto websites as gambling sites, in December, enabling them to charge fees on transactions sent to them. The reason is often due to know-your-customer concerns, as they can’t be sure where the cryptocurrency has come from. This has also made it hard for any crypto company to get a bank account. But Simon Sypniewicz, founder of Ramp Network, believes this won't be an issue.
“PSD2 [Open Baking] is very interesting because it mandates banks to connect to third parties. We do not need to have any bank accounts for this to operate and it is unlikely they will be shutting down accounts for purchasing CryptoKitties. It will be hard for them to see that this is happening too,” Sypniewicz told Decrypt.
Sypniewicz argued that banks won’t have a problem with this because the banks will just be making fiat-to-fiat bank transfers, a service they provide already. It’s incidental to them that the user has received a CryptoKitty or token in return on a blockchain. However, banks have shown a propensity to crack down on anything that loosely smells of crypto. And this is one of the reasons the app is still in beta—despite it being ready to launch. So, there’s a big hurdle but if it can be crossed, maybe we might have struck oil.