Why we invested in Fiat Republic: How to do BaaS for Crypto
Fabric Ventures joins $7M in a seed extension round.
Banking as a Service (BaaS) has been a recurring investment theme for the team at Fabric, having backed multiple investments in Web2 (Modulr, Railsr, Banked) from their prior time at Firestartr and PayPal.
These companies provide regulated access to payment rails, IBANs, and cards for fintechs and have enabled the boom in “embedded finance”. The primary premises of these BaaS investments arises from the complexities for the business customers of executing regulated payments and banking themselves which would require managing, cost-effectively, a regulated business, ensuring an optimal transaction “acceptance rate”, and with full programmability and easy integrations often not afforded by the incumbent banks themselves. In addition, as the clients scale geographies the complexities multiply by region requiring significant maintenance and integration efforts and local compliance as well. This aggregation of local long tail payment rail model has also been successfully invested in by the team at Fabric, when at PayPal (via the investment in PPRO), and has seen other successes such as D-Local.
Within crypto, the Fabric team continued this theme of BaaS, initially in direct card-based on and off ramp via APIs via the investment in Ramp Network. For businesses managing crypto, in addition to the above-mentioned drivers to adopting BaaS, they face substantial challenges in onboarding and servicing of their customers using current fiat-crypto piping due to the perceived high risk nature of the industry and a real lack of innovation on part of the existing providers of these pipes. These systemic risks have existed for several years, most notably Coinbase lost access to the faster payments fiat banking on/off ramps in the UK back in 2019 when their banking partner Barclays stopped banking them. More recently we have seen many more retail banks restrict these flows and/or require substantial compliance KYC information (RFI process) to remove them from “on hold”. In the US, the demise of Silvergate, First Republic and Signature Bank and a hostile macro regulatory environment present a real macro level challenge for crypto companies in securing fiat banking.
Enter Fiat Republic, founded by a team who have all worked together before in the fiat open banking industry. Think of Fiat Republic as a transactional (i.e. payments focused) banking layer for regulated crypto companies which leverages the bank payment service which they provide to also help their crypto customers streamline and automate; B2C fiat money-flows by opening virtual accounts for their end customers, treasury management (via their EagleNet liquidity pool), and FX. Ultimately, Fiat Republic sits in between these regulated crypto Virtual Asset Service Provider (VASP) clients such as Centralised Exchanges (CEXs) where end consumers usually first engage on-chain to move funds and their supplier partner banks (and fiat BaaS partners) who provide the custody of fiat source/destination funds, the wholesale FX, the IBANs and the access to the payment pipes.
The company is centred at its core around a simple but difficult to pull-off arbitrage of how-to de-risk the servicing of crypto clients by established tier-1 fiat banks (such as Deutsche) and fiat BaaS providers (such as Modulr) who, without Fiat Republic, do not have sufficient DNA, compliance nor risk management capabilities nor appetite to address regulated crypto clients.
Fiat Republic enables their fiat banking partners to instead fully service these crypto customers with comfort as delivered by (i) Fiat Republic’s compliance and KYC onboarding standards as befits that of a regulated EMI business (in the UK and Holland), (ii) their specialism of understanding crypto transactions and (iii) their AML transaction monitoring-as-a-service solution, Oxygen, which currently provides an end-to-end picture of fiat transactions and will link fiat and crypto transactional data for better traceability and visibility. From the crypto client’s perspective, Fiat Republic also provides the 1-stop shop for aggregation and redundancy to multiple country currency IBANs and payment rails as well as access to an intra-customer settlement network, EagleNet, for faster/cheaper liquidity.
Similar to how Ramp Network strives to improve the card ‘acceptance rate’ in on-ramping to the “high risk” industry of crypto, in the bank transfers market, where Fiat Republic operates, the equivalent phenomenon is to reduce the RFIs that result from banks putting a bank transfer on hold and subject to a compliance review by the bank. These RFIs and bank-led audits are not immaterial: Not only are they manual and costly to solve and can, for several providers, relate to almost 20% of total transactions above 10k EUR/GBP/USD but many fiat BaaS providers are also being challenged by their central bank regulators for lack of governance and understanding of the crypto flows of their customers (UK and Lithuanian central banks and financial regulators have been particularly inquisitive here as witnessed first hand by the likes of Solaris, Railrs and Modulr). Fiat Republic strives to lower RFI rate because of its unique position between the 2 main actors (the fiat bank and the VASP).
Fabric believes that more and more mass-market consumers will engage with crypto and that this will be primarily driven by the very institutions they know and trust or at least as a first step by adopting CEX’s hosted wallets for simplicity and convenience. In other words, the more on-ramping activity from the mass market the more need for VASPs to build the required reliable and broad coverage of bank connectivity. However, longer-term we believe that the principle of open web/self-sovereignty will increase the desire for self-custody (also driven by the continued diminishing trust in traditional banking institutions especially in developing markets). Fiat Republic solves for key pain points for VASP clients, indirectly enables self-custody transactions by making sure there’s more trust at the intersection of fiat and crypto and that the critical fiat / trad-fi touchpoints (without which the next generation of users won’t onboard into crypto) are as frictionless as possible. Along this journey, its end-to-end transaction monitoring solution and liquidity network will create defensive moats and opportunities to add to its already fast-growing multi-million dollar ARR payments revenue stream. Fabric strives to invest in infrastructure solutions that remove the hurdles in increasing liquidity via mass market adoption of crypto and as such we welcome them to the Fabric family, with our open (banking) arms.
