Revolutionizing Stablecoin for Cross-Border Payments with Conduit

Speaker A: Welcome to another episode of the Headless Banking podcast. Very excited to have Kirill from Conduit with us, the CEO of Conduit. You guys have had a ton of awesome news lately in terms of fundraising. Also, there's so much happening in the stablecoin market, so a lot we can talk about before we dive in. It'd be great to hear a little bit about your background, your journey, maybe some of the pivots that you guys took at, uh, Conduit and we can go from there.

Speaker B: Yeah, sure, happy to cover that and thanks for having me, by the way, in terms of my journey. I guess maybe I'll start with a little bit of my own background and then dive in into Conduit, the company. I think it'll make more sense. I'm actually from Ukraine, but I spent many years living outside of Ukraine now. Lived in many different countries for the last 10 years or so in the United States. Here I actually spent the last almost 20 years, not quite, but I think maybe 18 or so years in financial services. So before becoming a founder, I was a product manager and most of my product management career actually comes across fintechs, banking, eventual crypto. I got into crypto, I think about seven, maybe eight years ago now. And I was, for example, VP Product at brd, which was a mobile wallet that we ended up selling to Coinbase, which then, um, became Coinbase Wallet. Having gone through this couple of realization that sort of hit me at some point is the fact that probably not saying anything new, but like, financial systems are outdated, legacy systems are pretty terrible. Like, I remember I was in the bank in 2014, right? This was not that long ago 2014, so just about 10 years ago. And the bank's core systems were running on, um, COBOL, on as 400 mainframes. They were literally, not as a metaphor, but literally in a basement. Like in an actual basement.

Speaker A: Yeah, it's still happening.

Speaker B: It's still happening. It hasn't changed since then, right? Like, it hasn't changed at all. And like the code was written. I always say this and it's true. Like the code was written the year I was born. It didn't, uh, age any better than I did. And then everything else is just on top of it, right? All the other layers all the way to the front end and the mobile apps and everything, right? There's just layers on. Nothing has ever been removed or refactored. Nothing has been touched. It's just more. It's like layers of paint, you know, I mean, in an old house, you can start peeling them back and you have 15 layers. And so I was both from the banking side and then obviously fintechs, you work with banks nonetheless, right? You're still limited by the same thing. It's just you're a wrapper on top of a bank. And so I was pretty frustrated about all that. And when I got into crypto, I thought, okay, this is an opportunity for us to change that. Honestly, the reality of it is that the first several years in crypto were not about that. We've seen trading speculation, we've seen a lot of use cases that don't actually contribute to improving real life money movement. But that is what we're doing now. So when I started conduit in 2021, we had this original idea of like, how do we improve access to kind of the better technology? How do we improve access to the blockchain? Essentially by abstracting away the complexity. The first product that we came up with was quite a bit different, however. Right. So this was not stablecoin payments. This was a suite of like APIs and analytic tools for defi protocols. Right. So cloud for defi, if you will, worked really well, by the way, for maybe the first nine or 10 months or so. And then obviously we got into 2022 and like the market changed very slightly in 22. In terms of crypto, a few very minor events happened that year. FTX collapse, FTX Celsius, Blockfi, 3ac genesis. I can go on and on, right?

Speaker A: So there's been so many cycles with crypto, right?

Speaker B: It's crazy. It's crazy, man. Because honestly, building a startup is a roller coaster, as you well know. Crypto is a roller coaster. And so you're riding a roller coaster on top of a roller coaster. Mainly it's like the double pendulum problem. Like in physics, you have the double. You can't predict, like where they're going to go. And this is exactly what we're experiencing, right? We've been through so many of these cycles.

Speaker A: That really desensitizes you, right? Like you're doing a startup and you're in crypto, you can.

Speaker B: No, it still hurts. Still, still hurts. You know, I mean, maybe less and maybe I just deal with this now in the sense that I just know we're going to get through this.

Speaker A: Makes you stronger.

Speaker B: That's what the saying goes. What doesn't kill you? So it doesn't kill us. Didn't kill us. Obviously, we're still here. Uh, I think it did in some sense actually make us stronger. We were Kind of lucky in a sense that we raised our seed round at the end of 21 in November 21st. We raised like a large amount. Not because we were smart, because the market was insane. And so we just got a bunch of cash and that gave us enough Runway. So like we had the Runway, but at the same time in early or middle of 22, we had no product, no revenue, no customers, no nothing. Right. The original product was. The original product worked, right? The API into defi work but the market completely went away, so they became pointless. Right? And so we kind of sunset this and so we started looking for what are we going to do with ourselves here, right? And pretty early on we actually realized that stablecoins are a thing. Not super unique inside there, but not only it's a thing, but it's also a thing that matters a lot outside of the US So like in here in the States we have dollars, we're fine. Elsewhere, especially in emerging markets, you don't have good access to dollars. And I'm sure again the listens here will know this very well, but you're essentially looking to hedge your local fiat currency, right? It's usually volatile currencies, whether that call omnium, peso or Kenyan shillings, whatever, and you want to access dollars and so you want stablecoins. So we got that kind of idea pretty quickly actually. What took us maybe a year and a half or so, or maybe almost two years is to figure out like how can we actually deliver value with this quote unquote insight, right? What can we do that's actually useful? And one of the first attempts was actually an on ramp, so an onramp aggregator API essentially similar to a Moonpay, using bank accounts and for businesses. And that go very far. We built it, the API worked, but it didn't go. We didn't get the traction that we needed. It didn't get the adoption that we were looking for. And we realized that is because of two things. So first of all, there's plenty of local owner apps. Again, if you're, even if you're in Kenya, Colombia, Nigeria, Mexico, whatever it is, you have many options to go from a local fiat into a stablecoin. So that's number one. Then the number two, we also realized that we did have an early set of customers. We did have a few customers and we realized that many of those customers were actually non technical types. There were CFOs, VP Finance folks like that from those businesses because they were not technical. They couldn't just go and integrate an RPI they had to go internally to an um, engineer manager or CTO or somebody like that and say, okay, we need this. And then the CTO would say, yeah, that sounds good. I have a backlog of three months. The first thing that we did is actually, again, we did two things. First, we built a dashboard on top of our own API, so we built our own web app. And now that CFO could just, after the OBC path compliance, they could just log in, right? No need to integrate, just log in. And then the second thing that we did, which uh, was also, uh, really, uh, important unlock for us is actually focus more on the off ramp than the on ramp. Right. So the owner capability was still there. But what was really lacking domestically in these markets is again, imagine you're a business in, let's say Colombia. Uh, again you can go from Colombian peso to USDC or USDT or whatever it is. What happens then is that you have this balance that it's pretty liquid, right? You can't actually use it in your daily business operations because you need to pay vendors that are outside of Colombia, right? So maybe Hong Kong, maybe China, maybe us, maybe Brazil even, right? Doesn't matter. And what they would have to do is essentially offer them back into the local currency, take that currency into the local bank, then Colombia, whatever it is, send us with, right? So you're back into this whole system, right? And you're not having a good time. We realized is that if we can offer them somewhere else, right, so we can offer an offer again locally in Hong Kong to that vendor, uh, or Mexico or in the United States, that was much more valuable for them. And so that's what essentially took off. And we launched this back at the end of 2023, I think around September or October of 23. And then obviously we're basically at zero at that point. And so that's what we're still doing today. And what scaled to like $10 billion in annual volume and led to our Series A and everything else.

Speaker A: That's really interesting story. I think that's where I wanted to go to like where are you guys also seeing these use cases? Right. Amazing how you guys got to this through wild roller coaster. What is. What are like some really interesting use cases that you didn't anticipate for taking in. You taking in local currency, let's call it US Dollars or maybe Colombian peso, converting to stable coins and paying it out.

Speaker B: Yeah, I wouldn't say that like it was. I wouldn't say there were a ton of things that were Unexpected. I would say the scale of those things was unexpected in many ways. And so one is the level of adoption of stablecoins by regular like individuals and businesses, not for the purpose of trading. Right. Because that's again in the U.S. that's how you see stablecoins, right? You, you get USDC to trade Bitcoin or whatnot and that's fine. Right, but, and that was our perception. Like we went into those markets thinking that we would have to do a lot of education, like a lot of marketing type work. That was, I would say that one of the most surprising things that was not the case at all. Not at all. And again, coming out of the bubble right in the US and you find yourself in a co working space in Nairobi, everyone, every single person there will know what USDT is. Most of them will have usdt and again some of them use it for trading on the side, maybe as a hobby or whatever it is, but many individuals and businesses use it for actual payments. So like the level of need I guess was the most surprising part because we tapped into this unlock mean and still to this day, by the way, still to this day I meet US based startups and tech companies and they're saying, yeah, I see these charts that are published by Visa or whatever. Artemis has a really good report on this by the way, you should check it out. But yeah, we see these charts of stablecoin adoption, but that's all blocks trading. I'm like not at all, not at all. And so that was pretty shocking I think. Yeah. Which is, it was good for us obviously.

Speaker A: Yeah, yeah, that is surprising in terms of um. Is there, I've heard also that there's like liquidity issues across coins. Wondering like how are you guys solving that on your back end? There's a lack of institutional grade liquidity.

Speaker B: Right? Yeah, uh, this is improving very rapidly as well. Right. So we're seeing this play out in real time. When we say liquidity, right. What this actually means is that not. Well, so two things here, maybe three things here actually. The USD, peg, stablecoins, usdc, usdt, obviously they have tremendous supply, right. There's no shortage of USDT in the world or even USDC nowadays, right? Like that's fine. Where there's a liquidity crunch is essentially when you want to go from that into a fiat currency. Right? So like you go to a uh, USDT and you want to off ramp into mxn and that's where you find issues. And historically most of these issues come from the fact that if you're using a local exchange, regardless whether that's Mexico or Brazil, Kenya or Nigeria, whatever it is. Right. If you're using a local exchange, what's going to happen is that the exchange has a strong retail trading side to them and they have an order broke on the retail side. But if you're coming in as a business and you want to do a transaction of um, even a few like tens of thousands of dollars, let's say 20, 30, $50,000, not to mention an actual large corporation that's going to send millions of dollars. Right. What you run into is you run into the issues of the exchange simply cannot support an order of that size. You need to assemble like the book, the book collapses. Right. And so it becomes uneconomical or impossible. So that's a major, there used to be a major issue, today it's actually much less of an issue. And number one, there's many more providers, OTC desk liquidity providers that are coming up to support this need. Where there's a need there's going to be somebody that's going to, that's going to fix it. And then number two like what we're doing is conduit in particular, we actually work with banks. So wherever we're going to be, we're now in nine or 10 countries today and we work with 23, 24 I think actually right now, banks and financial institutions across these countries and we'll source the local fiat liquidity from the source almost. Right. So from a local bank, from a local FX desk or whatnot. And that's very helpful because they will have the 50k pesos over whatever it may be. Right. So they'll have that. And so that's how we solve this.

Speaker A: And these local bank providers, so they're converting your USDC into the fiat currency for you, correct?

Speaker B: It depends because some certain ones, yes there is a few that will do like a stablecoin conversion, certainly convert the

Speaker A: USD and send them USD or sometimes.

Speaker B: Yeah. So like sometimes. So there's essentially three ways we can do it. One, as you mentioned, we just do a stablecoin off ramp directly into local currency. There's a few banks that can do that, not a lot. The second one is essentially converting dollars first and then converting dollars into local currency. And again that market is much larger so there's a lot more liquidity and there's still efficiencies in terms of sending a stablecoin and just having a reserve of local MXN, whatever to off ramp it into. But then there's also the third case that is now becoming more prevalent and actually more efficient, uh, and more cost effective is a local non USD stablecoins. If you have a local stablecoin that you can now ramp into and then burn that token, right. And essentially get the underlying asset and pay out from there, that's a great use case. Lots of challenges there by the way, specifically because a lot of these local stablecoins don't have enough supply to support this. There's challenges there, but there are several that are very well backed and depending on that this bot comes out, we will have some news about working with a very large bank in Brazil that's doing these domain stablecoin. We're working with them. So there are solutions to that now that are coming up and I think that is what's gonna win the market eventually.

Speaker A: Yeah, yeah, I agree. These bank backed stablecoins will make it much easier. Whereas today we all have. These are just private companies like Circle.

Speaker B: Correct.

Speaker A: That are generating. I think if, if isn't there a conglomerate working in the United States?

Speaker B: There, there is, or at least it's forming. There has been several, by the way. This is not even the first one. We'll see how far this goes. I'm a bit skeptical for several reasons. One of the reasons is if you see in the Genius act, uh, the reserves of a stablecoin have to be held one to one as opposed to like normal deposits that can be fractionalized and lent out.

Speaker A: I think banks don't want to do that. Right?

Speaker B: Yeah. So there's not necessarily strong incentive for banks to actually do that. But on the other hand, depending how it's structured, if you. So essentially if you're a bank and you want to have a stable coin for the purpose of like similar to Circle or Tether, that's probably not going to be a good idea. If you have a stable coin that's designed for movement for Cross Border payments that can actually be effective banks that are not Citi and JPM and the smaller regional banks. For them Cross Border is a cost center. Right now they're only doing it because customers need it and they will go somewhere else if they don't support it. But generally speaking that's not what they want to do. There's an opportunity here to flip the script and say actually you can make money doing this and you can serve your clients better and have a better experience overall. So I think that one will win.

Speaker A: So the news, it becomes like a global clearing system more so than obviously assets under management.

Speaker B: I think that's the future of stablecoins, at least in the cross border use case. It's a clearance system, um, it's a settlement layer that can natively talk to a bunch of different currencies in a way that it doesn't actually exist today. Swift doesn't talk to current, it's just a messaging system between banks. But there's no connectivity between even Euro and the dollar. They do not talk to each other at all which is pretty crazy. But if you have Euroc and um, USDC or several other ones there are ways like you can actually swap between them on chain and so you can do it in a much more native like much better way.

Speaker A: This has been the problem forever when I was at Currency Cloud two. It's the correspondent banking network, right.

Speaker B: And it's terrible. The fact is the reality is most banks also hate it. Right. There's maybe three, four, five banks in the world that are like benefiting from this. The hubs, um, Citi, jpm, so on. Right. They're making money in Swift but most of the thousands and tens of thousands of banks around the world, they don't. They're not benefiting all that much. Their customers hate it and lots of challenges there.

Speaker A: Yeah, we've been all over the place. I know we have a hard stop here so I wanted to. Before we wrap up, let's talk quickly about regulation. How are you all tackling that uh, in the US and globally, how does it work exactly?

Speaker B: Yeah, almost everywhere. It's like a uh, wait and see approach. Us obviously now has a bunch of regulation that's going to come out very soon and we're obviously watching this very closely. Brazil is maybe another really good example because they're very advanced on this side and they will also have regulation that's going to come out soon. And essentially what we're doing is so first like right now we're abided by all the kind of money transmission regulation right now and essentially that is what we're doing. But as soon as more clarity specifically uh, on stablecoins comes out we'll obviously adhere to that. And again in Brazil we're already doing that with the expectation that we'll be grandfathered in once the new VASP licensing comes out in September, October timeframe.

Speaker A: And do you have mtls or E Money licenses or you don't need any of that?

Speaker B: No, we. So the way we work normally is we work with banks as sponsor banks and so mostly like 20 something that I mentioned, 23 or 24 banks, they're essentially acting as sponsor banks for us. And so we're using their licensing, if you will. We do have NMSB here in the US and in Canada as well and several others. But that's our normal operating kind of procedure is to partner with the bank

Speaker A: and so you don't then you onboard. Do you need the full KYB onboard these customers?

Speaker B: Absolutely everything. Yeah, everything is very compliant. So full lock kyba.

Speaker A: Yeah.

Speaker B: Sanction screening, transaction monitoring. Like essentially all these banks have a Reliance program with us. We'll collect the compliance information, we'll pass it over to them. But yes, we are responsible for doing that. Yeah.

Speaker A: So you're kind of like the front end stablecoin treasury payments for these orchestrate

Speaker B: I guess today the term that is often used as orchestration. Right. Stablecoin orchestration in that layer essentially.

Speaker A: So you guys have seen nice adoption from the banks. They haven't pushed back, they're open to.

Speaker B: Oh no. Like what, you think this was easy? Not at all. This was definitely very hard. We've seen challenges and pushback. We built this up, almost front loaded the effort in a way. We did a lot of hard work upfront to convince these banks that yes, this is fine, this is compliant, this works. I mean and now we're actually seeing the results of that in terms of we can scale faster. Right. Because we're closest to the metal from, from everybody else. Meaning we have the access to local rails. So again picks in Brazil, Spain, Mexico, like native access to the local rail, not through another metal. We have access again to local currency and it was a difficult, lengthy effort and we're not done by the way. Like this is a forever process for us. It's never ending. We're always talking to more partners, more banking partners. We're always like this is never going to stop probably. So what's interesting is that we're offering our clients something that most of them have never seen before, which is instant payments. Right. Instant payouts. And especially if you're in the kind of import export business you will, you're used to like net 30, net 60, net 90 kind of terms and instead we're telling you actually you can send the payment immediately. And so many of the financial professional CFOs and whatnot that we work with, they have to wrap their heads around this and say okay, maybe I want to have my working capital for longer here. So what ends up happening somewhat frequently actually is they'll go back, they'll negotiate with supplier, they'll get discount instead because the supplier is very interested in receiving this money faster. And so they will offer a significant discount, obviously case by case or like 20%, whatever it may be, if they're able to get paid, uh, fast discount.

Speaker A: That's real.

Speaker B: Again, like case by case basis. Right. You do your own negotiating. But yeah, that's what I've seen in certain cases in the market. I've seen pretty steep discounts for faster payments. And so it completely changes the model of. No, I'm just going to keep my working capital for the extra 60 days and maybe I'll get some yield on it or whatever it is. Vers. There's no. I'm actually going to negotiate this guy, uh, up front and send it today. Like today. And so, yeah, I think that's going to be interesting how as we see more companies adopt this and how this evolves, but it has the potential to disrupt a lot of the trade finance in the industry, I think already.

Speaker A: Yeah, absolutely. That's super interesting. There's a company called oatfi that's doing some of this stuff as well, which I've been following. Their position is that every B2B payment is a credit tool, which I was

Speaker B: in some sense right now it is, right with Fiat, it is. But my position is the opposite. It actually doesn't have to be. Every payment can be instant and that has its own advantages for everybody. And so, uh, it's just different mindset. But. Yeah, no, it doesn't. It can be created, but it doesn't have to be.

Speaker A: Yeah, yeah. All right, I know we got to stop. Listen, we could. We should do this again. We could go on for hours like you said. So really appreciate it. Best of luck with Conduit and we'll do this again soon.

Speaker B: Awesome. Thank you, man. Cheers. Thanks, Karl.

Speaker A: Bye.