Part 4: The Product Canvas for building with and in Web3
We distill the complexity and costs of end-to-end crypto into simple, cost-effective APIs and SDKs to enable your business idea to go from paper to product with minimal uplift and expense.
If you’re just starting to take a look at building something in the crypto space, you may find the level of effort to get started surprising. Let’s walk through a few areas you should consider.
The Crypto Product Checklist
Getting a crypto product from idea to production can be a large uplift. You’ll need the people, skill sets, and technology required to cover front and back end within a ‘normal’ development environment, overlaid with the skill sets, knowledge and complexity required for nodes, gas fees, networks, protocols, blocks, wallets, keys, coins & tokens, security - and that’s without discussing liquidity partners and infrastructure to move capital between fiat and virtual currencies.
Let’s walk through the major areas to consider and plan for.
The first step in building a crypto product is to ensure you’ve got the right engineers. Demand for high quality engineering talent that can understand this space has been incredibly high, and so are the associated salaries for this talent. Depending on the level of complexity of the solution you’re planning to build, you need to expect 4-8 engineers, at premium engineering salaries.
Additionally, supporting these engineers will require the right product and design folks which can add the ongoing cash outlay.
Legal Advice and Opinions
Many of the areas in crypto are brand new, and not sufficiently documented or regulated, making it a murky and gray area to operate in. You’ll want to make sure you’re engaging knowledgeable lawyers in the crypto space, in order to advise you on the best way to structure your crypto business. Additionally, you may want to go as far as getting an official legal opinion (though this may be tough in some scenarios) in order to feel comfortable that the way you are operating your business is on the right side of the regulations and law.
This type of legal advice is not cheap, so expect to easily spend 6 figures to get the right advice, structure your business operations, and get the appropriate customer agreements completed.
Finding Liquidity Providers
In order to be able to swap from fiat currency, such as USD, to cryptocurrency, such as BTC, you’ll need one or more liquidity providers. These providers are able to source a large volume and variety of crypto currencies and are often market makers on a number of exchanges.
Liquidity providers can easily swap your fiat currencies for whatever desired crypto currencies your customers want. You’ll need to ensure that settlement for both the fiat and crypto sides of liquidity are sorted out.
Determining a Custody Solution
One you’ve landed on liquidity providers, you’ll need to decide where purchased cryptocurrency is being delivered to. There’s a number of different custody options available, including hot (connected wallets) and cold (disconnected wallets), as well as a middle-ground option, often referred to as warm wallets, which may have some mix of hot and cold, and have numerous additional securities and policies in order to execute transactions.
A key question you’ll need to answer is whether your organization will custody the crypto on behalf of your customers, or if you will simply send the crypto direct to customer wallets. While the former full custody solution may provide a better customer experience, there may be additional regulatory requirements, such as additional registrations. The latter is certainly easier to handle, but comes with additional AML efforts to ensure wallet destinations are not criminally flagged, not to mention all of the risk associated with storing crypto will now land on the end customer.
Lastly, in some instances you may be required to use a Qualified Custodian, which means selecting the right custody provider, or becoming a qualified custodian yourself.
Ledgering and Accounting
After solving for liquidity and storage of crypto assets, you’ll need to make sure that you are properly accounting for every transaction, both in and out of your platform, and for fiat as well as cryptocurrencies.
This is not just important for internal accounting purposes, but also for generating end-of-year tax documentation for your customers. In most cases, gains made on cryptocurrency are calculated as capital gains from a tax perspective, and it’s important to provide customers with clear tax information so they're ready for tax season.
Trade and Swap
While liquidity providers enable you to provide a fiat onramp / offramp, they often don’t provide the capability to swap directly between crypto currencies that are already being held. There are a couple of options to enable this swapping, ranging from directly holding crypto yourself, to integrating with centralized or decentralized exchanges.
Holding a balance of your own crypto exposes you to potential volatility, so working with an exchange is the better option. Evaluate your user acquisition and retention strategy when determining which type of exchange to work with. If you decide to select a centralized exchange, be aware that they may be competing for your customer, as many exchanges are happy to pay referral fees to get a user in their ecosystem, potentially selling many other services including different accounts and cards.
If protecting the customer relationship is important, then working with a decentralized exchange might be the best option as you can keep assets directly on-chain, and decentralized exchanges are not interested in your users.
Staking and DeFi
As the crypto IQ of your users improves, they may become interested in more advanced capabilities such as staking or other decentralized finance opportunities.
Staking provides a mechanism whereby users can lock their crypto assets into the underlying blockchain in order to participate in the operation of the network. As part of this participation, they will receive rewards in the form of new cryptocurrency coins. It’s a logical next step when holding on to coins, as it lets you increase the size of your holding with little to no additional risk.
DeFi is probably large enough for its own section, but the main thing to remember is that there are decentralized bank products emerging that provide everything from lending and borrowing to high yield opportunities. The return rates of some of the DeFi protocols are quite attractive, and in some circumstances can outshine the best rates available at existing banking institutions. Take extra care when looking at DeFi options as this is the most forward leaning side of crypto, and there have been some problems with protocols and coins that have resulted in significant losses.
Disaster Recovery and Insurance
If you’ve decided to custody the cryptocurrency on behalf of your end users, you need to make sure that you have an appropriate disaster recovery plan in place. Without a disaster recovery plan, it’s possible that a catastrophic failure could occur and the private keys that provide access to wallets could be destroyed. If the private keys are lost, there is no way to access funds in those wallets again, so it’s imperative that there is a recovery plan in place.
Closely related to your DR plan, is what you plan to do for insurance. Certain infrastructure providers will provide some level of insurance, but usually it’s a fairly low and limited amount. Optionally, there are insurance providers that offer additional levels of insurance that you could either include in the cost of your platform, or pass downstream to your end customers. Expect a cost of at least 1.25-1.5% of total assets protected.
Completing Regulatory Registration
Based on your technical solution, the legal advice you received, and how you’ll be operating your business, you need to file the appropriate registrations. Depending on the geography your business is operating in, and the types of cryptocurrency products you plan on releasing, you’ll need a number of different registrations, from money services business to more specialized licenses like restricted dealer in Canada, or broker-dealer in the US.
Expect registrations to take anywhere from a month (for simple MSB) to 6-12 months (for securities dealer). Along with this timeline, expect to spend beyond 6 figures to ensure you’re submitting properly, with all of the right information and paperwork.
Setting up Compliance
Once you’ve completed financial registrations, you’ll be bound by a set of compliance rules including KYC/B (know-your-customer / business), AML (anti money laundering), ATF (anti-terrorist financing) and others. You’ll need a Chief Compliance Officer or equivalent to head up compliance operations, and to put all of the appropriate documentation together covering how you will operate your policies and procedures for KYC, AML/ATF, reporting, and record keeping.
As part of ongoing compliance, you’ll need to identify and pay for partner services that provide the correct identity checks for KYC onboarding, as well as PEP/HIO (Politically Exposed Persons / Heads of International Organizations) screening.
Putting these procedures together, hiring and paying the compliance staff, and integrating with the right compliance partners will run well over 6 figures annually.
The Crypto Product Canvas
Summarizing these various steps, below is an easy to reference the Crypto Product Canvas example.
Jump into Part 5 of this series, ROI and choosing a partner.