Modern Treasury's Stablecoin Sandwich
After acquiring Beam, Modern Treasury wants to become the developer-first API for moving money in any form.
Stablecoins will have truly achieved adoption when we no longer need to talk about stablecoins.
When you pay with your credit card, the last thing you want to know about is the infrastructure involved in it. What you want to see is the green light, the check mark, the “Accepted” message. The end user of a card doesn’t even want to think about the payment at all.
The best payment experience is the one where you think that the money was instantly transferred. Even when it wasn’t.
The biggest promise that stablecoins are making is that it won’t change anything in the real world. That stablecoin’s actual goal isn’t to upend the payments industry, but to clean house. Ideally, using stablecoins to move money around might change the players, but leave everything else the same.
Sweeping clean the messy back, but leaving the facade alone.
On another level, the same thing has to happen to payments engineers. Stablecoins have to feel exactly like ACH, FedNow and Wire: battle-tested protocols for transferring money that, to some extent, are interchangeable.
So, apropos of their launching of a new integrated PSP for fiat and stablecoins, I sat down with Sam Aarons, CTO and co-founder of Modern Treasury, and Dan Mottice, founder of Beam, and now Head of Stablecoins at Modern Treasury following Beam’s acquisition.
The team at Modern Treasury and I have been circling each other for quite some time since I published an article on their approach to ledger authorization using events a while ago.
Finally, the timing and the topic have aligned completely. As I told them, I wanted to have a conversation so that we could talk shop and have a good time, with complete freedom to write an article afterwards that was valuable to readers.
This article is the result of that conversation.
I’m Alvaro Duran, and this is The Payments Engineer Playbook. It is the only newsletter on Earth tailor-made for engineers of money software. Every week, we investigate the technology that moves money around, so that you become a smarter, more skillful and more successful payments engineer.
And we do that by cutting off one sliver of it, and extract insights from it.
This week’s article is the first interview-based article I’ve done in The Playbook. Following my skeptic take on stablecoins, I sat with two of the engineering leaders of Modern Treasury to put my skepticism at ease, and see what the future holds for payments as this interesting piece of tech gains adoption.
Enough intro, let’s dive in.
A new form of liquidity
Seems like I hit the nail in the head a couple of weeks back when I said that stablecoins were the international transfer method that you would’ve come up with if you really didn’t want to deal with banks at all:
The good thing about crypto, and the reason why the transaction costs are so low, is because there’s nothing central about it. The recipient may be on the other side of the world, and they have the same level of access and visibility to it than you. It may be slow, but not SWIFT slow. And it’s way cheaper.
So what we probably need is something that’s crypto-like, to retain the global aspect of such a ledger, but without the volatility of cryptocurrencies. One way to do that is to have a blockchain that distributes the value of a predefined pool of resources, something that doesn’t change in value against a fiat currency.
So that’s what stablecoins really are. And they’re now facilitating $30bn of transactions daily.
When I mentioned this to Sam and Dan, they both laughed. “We internally call that Stablecoin Sandwich.”
It’s so visual: you have fiat on both ends of the transfer, but there’s a black box in the middle, responsible for moving value from left to right, in which your Canadian dollars get converted to stablecoins by an on-ramp partner, and then into dollars by an off-ramp partner. Modern Treasury then can send those dollars with traditional rails like ACH or FedNow.
Fiat on both sides, with stablecoins in the middle.
The stablecoin sandwich is what bridges the crypto and the fiat world. It’s what makes stablecoins “feel” like fiat, even though they aren’t.
Cross-border payments have been clunky since time immemorial. SWIFT, or more generally correspondent banking, was devised when most “long distance” transfers were made by flying checks in bags all over the US. Western Union, or money transmission, was the first private approach to solve cross-border transfers, by setting up a massive enterprise with agents in multiple countries around the world on the ground.
Then came Wise, whose founders realized that money didn’t need to move cross-border at all. Payment aggregation simulates “sending money” by finding and crossing supply and demand for foreign currency within the country of origin and destination separately.
Still, there’s always a company in the middle. Unlike other cross-border transfer methods, stablecoins are interoperable: the blockchain is publicly accessible, and moving money on top can be done without the need for intermediaries.
Stablecoins are a bit more difficult to use, and that’s why you may benefit from using liquidity providers to make things easier. But you don’t need them, not in the sense that you need banks to send money via ACH.
And not needing a bank is precisely what Modern Treasury is aiming at.
No bank? No problem
It’s not that banks are a problem. It’s that dealing with them makes everything way slower:
Too many companies are held back by unreliable payments infrastructure and slow, complex bank integrations. With Payments, we’re giving teams a faster path to market than BaaS or securing their own bank sponsorships.
— Matt Marcus, CEO of Modern Treasury, on the Payments announcement
MT’s strategy is to move from nothing to providing financial services as fast as possible. But payment orchestration and ledgering are just the technical steps; non-technical steps like bank partnerships and compliance with regulators across countries are also required.
There are two ways to approach this problem.
One is to Bring Your Own Bank, an acronym that I keep seeing in the fintech space even though it was first used elsewhere. With BYOB, you handle the non-technical side of things yourself, and bring a technical partner like Modern Treasury or a BaaS into the mix. BYOB sounds complex, but it’s sometimes the only option available. Most BaaS work exclusively with one bank, coupling your choice of BaaS with your choice of bank.
On the other hand, an integrated PSP handles everything for you. Modern Treasury’s PSP handles most of the paperwork and the banking relationships, and you deal with MT directly.
You trade control for go-to-market speed.
Problem is, in the beginning, you may not have support for some features, even when you’ve done everything you could to start. That’s where stablecoins come in. Since no bank is required, you could theoretically start transferring value in stablecoins right away.
This was the missing piece in the PSP puzzle that is now available thanks to stablecoins. But there are more things you can do with them.
The Flow and The Meta-flow of Funds
Yes, cryptocurrencies were built on speculative use cases. But that’s a boring form of skepticism.
Given where crypto has evolved to, stablecoins represent a maturing phase of decentralized finance. One that acknowledges that fiat isn’t going away, and attempts to bridge some of the functionality that’s useful about blockchain (decentralization, trust-less value transfer) to the world of the normies.
There’s the flow of funds, and there’s the meta-flow: moving more of fiat into usable crypto.
Bank accounts become crypto wallets that store stablecoins. You can now hoard dollars, even when you can’t hold them.
Treasury management becomes “hybridized”: moving actual dollars may be difficult, or incur taxes, but moving stablecoins isn’t.
Yes, there was a time when private keys were much more exposed and easier to steal; the industry is now aware of this problem. Blockchain is trustless, but you can trust someone with your keys and never have to fend off hackers anymore.
That’s not the thing you must be alert about stablecoins.
The Skeptic’s Last Question
Stablecoins are cheaper and faster than fiat. They’re not volatile like Bitcoin, and are even programmable, so you don’t have to deal with lawyers, but with transparent code.
So what’s the catch?
In what way are stablecoins inferior to the traditional way of moving money across countries, that accounts for more than 99 percent of the total flow of funds right now?
The answer is: usability.
“Stablecoins are unforgiving” is how Sam put it. There’s no takesies-backesies in the crypto world. That’s what removes banks from the equation. In ACH, you get your funds returned when you send money to a dead person; in crypto, you have to ensure that everything is correct in advance, because once you hit Pay, there’s no going back.
In a world where the rules are written in code, comments are for information, not control.
“The plus side of this”, Sam followed up, “is that some players may like this trade-off, which wasn’t available for them before”.
Stablecoins are consistent payments experience
For crypto to become usable, developers must not have to use a different set of APIs to deal with them.
This echoes an idea that I’ve continually come back to: the mistake that Stripe made when they assumed that all payments were card payments:
Payments are deceptive.
Representing a Payment with a single object sounds simple, but that’s because you’re moving the complexity elsewhere. The Token/Charge architecture was the obvious choice, but it made integrating other payment methods way more difficult.
And that could work if all you need is credit card payments. But that is less likely than it used to be.
In time, Stripe’s engineers understood that 7 lines of code wasn’t everything. They looked at the problem as a whole, and asked how they could make adding new payment methods easier.
That, in the end, is what’s making developers more productive. Which was Stripe’s goal all along.
What MT is trying to do here is something similar: build an API that’s consistent across all forms of money transfer.
Sure, faster go-to-market is a good thing for many companies. But the real boost is in the technical integration and expansion of those who are interested in crypto, but deeply embedded into fiat.
How can they test the waters with minimal developer effort?
Major businesses, even when curious, aren’t going to deploy a team of engineers just to see if stablecoins are hype or not. They want to get their feet wet, and therefore won’t commit to it unless it requires almost no effort to do so.
Such an approach is only possible when both fiat and crypto use the same set of endpoints to operate.
Thanks to Sam Aarons and Dan Mottice for taking the time to answer my questions. You can find more about Modern Treasury’s Integrated PSP for Fiat and Stablecoins here.
That’s it for this week in The Payments Engineer Playbook. I’ll see you next week, on Wednesday, as usual.