Today, let's dive into a massive stable coin catalyst and of course get into some of the news that broke over the weekend. We've got a special guest also joining us. Let's just jump right in. Before we get started though, I do want to thank our sponsor and that is Tandem. And we're going to be talking to Wallet Connect today. And when you think about Wallet Connect, I want you to think also about self-custody. And the way you can get into self-custody is jump over to Tandem's website and get started. If you're brand new to crypto, this should be on your checklist to get going. A very easy to set up. One of the most secure ways to really store digital assets out there. No bank or exchange stands between you and your funds. Very easy to activate. I can attest to that in terms of setup. It is seedless by design. So, that is another feature that really benefits Tandem users. So, make sure and use our link down below. They've got a lot happening in terms of discounts and some cool stuff around the big football event. So, check out the code down below. It does help you guys get started. I want to bring in Jess Houlgrave who is the CEO of Wallet Connect and dive in a little bit. How are you Jess?
Hi Paul. I'm very good. Thank you for having me today.
We got a chance to report on the Mastercard news last week. Obviously Wallet Connect has been in the news around integration with Eninico and so on. And for those of you who may not know, Eninico is a big POS company that works with retailers around the world. First of all, give us an understanding of what that rollout process would look like. When could we use wallet connect at a retail POS near you?
So, Wallet Connect has been around since 2018 and we provide this very core infrastructure for the crypto and stable coin industry. One of those applications is onchain payments and that means that the payment end-to-end stays onchain. We can offramp at the back end if a partner wants that. But unlike most of the crypto solutions, the crypto cards that are out there, this is a pure onchain payment. And for people who don't know, we have about 40 million merchants globally, they range from petrol stations to luxury goods to hospitality environments and everything in between. And we've been working with them really to refine the user experience around paying with crypto. So, we have our first stores going live in Europe this summer, really as to test those experiences and make sure that they are working well and then we'll be rolling that out globally with Eninico and their acquiring partners after that.
All right. I'm looking at a tweet you guys put out stablecoins part of the day. You guys are using Wallet Connect right there with your SafePal wallet and then of course Eninico as the POS which is the little handheld devices that a lot of times come out to the tables when people are ordering food or maybe you're doing it at all sorts of retail environments in general. What about the expansion beyond Eninico? You've got Verifone obviously and also PAX in this game which would pretty much give you guys maximum coverage in terms of retail. Any plans for expanding with those guys?
Yeah, look I think the point of sale payments landscape is really rapidly evolving, especially in Europe but also around the world to accommodate other payment methods that aren't just cards. And that's historically been what's really dominated that space. So in Europe there are many manufacturers now. You are highlighting a couple here. There are some, there are a lot of them and often they sort of target different spaces in the market. So some are really brilliant for when you don't have a checkout person there, when you're doing that remotely at a gas station for example. Some are designed specifically for restaurants. They've got all this other software built on them. Our goal with Wallet Connect Pay as a product that we build is that this should be really easy for anyone, whether they're the software producer or the hardware manufacturer, to incorporate this as a payment method. The great thing about it is it doesn't require somebody to understand very much about crypto. There's nothing in terms of like knowing the chain, knowing the asset, needing to train people in store on what a crypto payment is. You don't have any of that because this works with every wallet on the Wallet Connect network. It's about 700 wallets globally. It means that regardless of what wallet that person uses, what asset they have, and what chain they're operating on, they'll be able to make that payment without the people in store needing to learn about crypto.
All right. So the way I understand it, it's a QR code that gets integrated into the point of sale. Is that right? So just like anybody's QR code that you use with almost anything out there. So let me ask you this because we cover the point of sales sector pretty heavily because we think payments are going to be so huge in crypto. One of the areas that we've been tracking here in the US is around a company by the name of Toast. Most companies who go through POS companies like that have to integrate through these things that are APIs and with Toast what we have found is it's almost impossible to get in with Toast being one of the big companies out there that have spearheaded the iPad version of point of sales being used at most of the US retailers. Are you telling me that API requirements aren't necessary for you to be able to integrate into payments?
So, we basically offer a holistic back-end system and the way that that can be integrated is in multiple different ways. So, we have SDKs that can plug into existing software, APKs that can be put on Android devices, people can integrate in a headless way or with APIs. We're working increasingly on soft POS, i.e. these methods of accepting payments in store that sit on a mobile phone or an iPad. So you can do that today. We're really agnostic because we see that this space is going to continue to change very dramatically. And I think our core focus — and you mentioned the QR code a moment ago — that is a very familiar form factor for payments in some parts of the world but not in all. So, if you go to Southeast Asia, you're going to see a QR code almost everywhere with every local payment method to be making a payment. But in Europe, certainly in the US, we've become incredibly comfortable and confident with tapping our phone or with tapping a card at the point of sale. And so, one of the things that we're working on in a major way is around tap to pay to make sure that that user experience is familiar for the end user. All of these things also come up in these very regulated environments as well. And so everything that we do is with thought to regulation and compliance, both in terms of the hardware making sure that that's compliant and that we're working with the right partners there, but also just the end-to-end payment flow. The payments company doesn't need to worry about that in terms of the risk and compliance burden.
I see. So, big news over the weekend. Tether is getting delisted in the EU. This, of course, is all in reference to what's been going on with the MiCA regulations that are implementing almost as we speak. So, Jess, how would that affect what you guys are dealing with with regulatory compliance around stable coin usage of something like Tether in the EU specifically? You mentioned a little bit about that. Can you explain?
So, as a platform, we're chain agnostic and asset agnostic. So, that means that the payments partners that we work with can select the array of assets and chains that they want to accept payments on. In this case, we haven't quite seen the effects of this yet, but we've had a couple conversations with partners today. My expectation is that our payments partners in Europe may elect to not accept USDT as a payment method. Now, of course, there are things that we can do from a consumer perspective in terms of onchain swaps and things like that that abstract some of that and may still enable users to use USDT even if the recipient — i.e. the payments company, which is the regulated entity — never touches USDT. All of that is stuff that we're going to have to work through. And I think that what we are seeing though is massive change in Europe around euro-denominated stable coins. And so although we are at this moment where USDT specifically is not going to be able to be used in Europe, we are seeing this huge growth in euro-denominated stable coins. And I think that's actually going to be the biggest catalyst for a change in terms of the assets that people pay with here because if you live in Europe, you're getting paid in euros. You think in euros, you're buying goods and services that are denominated in euros. Actually, I think that those euro-denominated coins or maybe more specific local currencies, Swiss Francs, Swedish krona, things like this, are actually going to be the biggest driver for change in terms of assets this year.
Obviously, this is all happening right now on July 1st. So, we're literally going into this. At the same time, Circle has secured full compliance, which is USDC. So, when you think about that, just in your opinion, do you think this will be basically a landslide for Circle and for USDC usage and we'll start to see more implementation of that? Or back to your point, you're saying that maybe it's the European stable coins that could win this battle. How do you think that plays out?
Tether is still the predominant stable coin that's in use particularly across the Middle East, across Asia. And so, while that's going to have an effect locally in Europe, I don't think that it's going to be a massive driver globally for the downfall of USDT. I think we're certainly going to see uptick in terms of euro-denominated stable coins and other local stable coins but Tether USDT still is that predominant coin that we see as an asset being used in Asia and Middle East and I think Tether is probably, knowing how innovative they are, going to start thinking about other things to do as well.
Okay. I was not aware of this that only 196 crypto companies out of the 3,000 registered in the EU got licensed. So, this is pretty aggressive. Do you think this is going to enable more innovation for the EU or do you think this really gets into a much more regulatory, almost defense mechanisms of allowing innovation to make it into the EU because of these compliance requirements?
You know, I think when I look at MiCA, I think it's certainly not perfect. Rarely does everybody agree that a piece of regulation is perfect. What it has done though over the last few years is give some clarity to companies and ultimately most companies want to be compliant if they need to be. They want to have very clear guidelines about what they do and don't need to do. That I think has been one of the reasons that Europe has been actually quite attractive for crypto companies over the last little while. Ultimately, there was a huge long tail of companies that have been established over the last 10 years in jurisdictions all around the world which don't meet compliance requirements. We will see those companies, you know, this purge that that tweet just mentioned. But actually I think that Europe continues to be very attractive. Specifically there are some countries in Europe that are doing a lot to attract new business, new crypto companies to come there. We see the expansion of big US companies into Europe like Circle really pushing over here. So I think Europe is going to continue to be very attractive for crypto companies.
So, you mentioned that you're working right now toward providing maybe a solution where Tether could still be used in a scenario where it's not compliant, but maybe the retailer doesn't even know that Tether is being used. It's being settled over in a European stable coin or a USDC. How close are you for that to actually become reality? Are you there now in terms of wallet connect?
I think we're going to have to see. So, with Wallet Connect, we're not regulated; we just provide technology to our partners to facilitate these types of transactions. Today in most self-custodial wallets, there is swap functionality that runs through DeFi, i.e. it isn't going through a regulated exchange. It's happening purely onchain. So, the ability to combine that type of technology as part of a payments flow is something that we're able to facilitate. So we can enable a DeFi-based swap and then a regular payment settlement as part of one transaction. Obviously that's going to be up to our partners to decide whether or not they can get themselves and their regulators comfortable with that. We spend a lot of time with partners and with regulators around the world trying to help them to understand this, especially when it comes to self-custody wallets which obviously behave slightly differently than many others but still form the predominant part of our network. So I think we'll have to see. The technology is there. It's just whether we can use it in this use case that still needs to be determined.
So what is the business model for wallet connect? How do you guys make money? Are there fees attached to these? What's the process for you guys to take a cut here?
So, at the core of Wallet Connect, we have this open-source network that is free for people to join and that's what hosts our 700 plus different wallets and our 80,000 plus applications that sit on that network. That's really important because it means that network is somewhere everyone can be. Whether you're a small application or a large application, you can get the benefit of that very wide wallet ecosystem. And that's a service that we're providing really to our wallets and to the ecosystem more broadly. On top of that network, we build specific products for specific use cases. And so, Wallet Connect Pay is one of those very specific products. It's an acceptance product aimed at payments companies to help them accept crypto payments. That's a product that we charge for. Similarly to some of our other products, we have toolkits that developers can use. We have a series and a suite of products that are commercial that we build on top of that network.
Okay. So can you share where the fees start and how those are integrated or is it a wide array depending on the application?
It can be very, very wide. So some of our products look like a SaaS model. They just have a monthly subscription. The one tier starts at $79 a month for example if you're just building that. If you're at the other end of the spectrum and we're building end-to-end compliant stable coin payment flows with you, these are highly customized solutions. They're taking in a lot of different components that's priced very differently. Sometimes with transaction fees and things like that included in them. So it really varies depending on the products that we're talking about. But our goal with payments specifically is to make sure that this can be cheaper than most of the payment methods that are out there today. I think it's really important. There are still hundreds of millions of merchants out there who are operating on very thin margins and they're paying two, three, sometimes five or eight percent for a cross-border payment which really impacts their bottom line. So as we came into this space to actually build more specific payments products, a big part of our goal there was to lower the cost of payments for merchants and take that two or three percent for a payment down somewhere to 20, 30, 40, 50 basis points depending on the flows and everything that's needed. But to make it very meaningfully cheaper for the merchants that want to use this as an option.
Just how does this affect the merchant fees themselves? You're talking about cross-border fees right here, but here in the US, well really around the world, you have merchant fees that mostly the major credit card companies extract from any transactions that go through their network. If you're circumventing that through a wallet connect payment via QR code and it's integrated into point of sale like Eninico or we see more advancements coming, would that give a retailer the ability to maybe reduce their fees overall or do you think there's going to be a scenario where some fees are going to be extracted still?
No, that's the goal with Wallet Connect Pay is that because it's fully on chain, we can really compress that pricing and we don't need a Visa or a Mastercard to be part of that flow. The transaction effectively will work with any wallet on our network depending on things like off-ramp, some of the compliance processes, those variable costs that sit in that, but that's really like 50, 60 basis points that we can get for a single transaction to accommodate all of the partners in the flow, including for example the wallets. It's going to bring that cost for the merchant drastically down from where it is today.
Yeah. And for some of our viewers and listeners, I mean, in some cases, you've got deals that are sweetheart deals of major retailers like a Walmart or maybe a Starbucks where they get under 100 basis points, under one percent. But most retailers are in the two to three range in terms of what they pay for merchant services. So, this would be significantly cheaper when you consider almost 100% of their sales are now going through some sort of electronic payment right now, whether it's a debit or credit. Very little cash is being used. Which reminds me, what about tap to pay? That's very highly used here in the United States. I even find myself now trying to find places that use tap to pay more often, because there's still a lot of places that don't have tap to pay. What about tap to pay for you guys?
Yeah, it's funny. You know, most of the time I leave my home in Europe now, I only ever take my mobile phone with me. I don't even take a card because tap is so predominant here. And I think for us this is about meeting the consumer where they are. And what I mean by that is consumers around the world are used to different payment forms. Some are used to a QR code, others, like me, are now very used to just tapping my phone in order to make that payment. And I think it's really important when we talk about change for consumers that there's a really low barrier for them to get started. This isn't about having to for them to learn to go through a new process or do something that's unfamiliar. This has to be really, really easy for them because otherwise we're going to start to see drop-off. People are going to try and do something, it's not going to work for them, they're not going to like that. That's even worse for the retailer because that transaction may never go through at all. So, closing that gap. And I talk often about this chasm between the web 2 payments experience, which we've all come to find very delightful and easy, and the crypto payments experience, which today is still not there. There are still problems. We're much better as an industry than we were two or three years ago. But there are still a lot of solutions out there in the market where the person behind the counter needs to ask what chain the other person wants to pay with. All of these scenarios that add a lot of friction. So, our efforts to build things like tap to pay, better QR, making sure that all of the selection points happen in the wallet rather than on the device, making sure things are compliant. Every single thing we're doing there is about creating better user experiences which leads to higher conversion, better attention.
What about privacy? Anybody that's using cash, that's the ultimate privacy token out there if you want to call it that. But if I look over on how it works with you guys, there is a bit of data that is collected I guess but it's mainly for the transaction. Is that right? Where it's going to the next person.
Yeah. So this example here is a payment that's set up under European travel rule regulation and everywhere in the world has some variation of what type of information needs to be collected as part of a transaction. That might vary if the transaction is lower than a certain amount. In some countries you don't need to collect any information. If the transaction is over a thousand dollars in a jurisdiction, maybe they want these three or four pieces of information to be collected in order to make that payment compliant. So, our solution enables the regulated party — i.e. the payments company that is processing this transaction — to collect that information from the end user again in a very secure way. It's going through encrypted channels etc. and that is purely being used for compliance purposes to make sure that that payment is legitimate and compliant. Privacy more broadly on blockchains we know is very challenging because blockchains themselves or most of the blockchains out there don't support native privacy. You can look up a transaction on chain. There are design elements in our system that help to keep the user's information and the merchant's onchain information private. But we're also seeing a lot of developments in the industry in this space. Increasingly there are privacy chains, privacy solutions that are out there that will be an important part of how crypto payments scale. I think that's going to be one of the critical things that crypto is going to have to get right for scale is getting into the layer of privacy.
Speaking of regulation that could correlate to this, at least here in the United States, the Clarity Act is now on the verge of either getting through or getting stalled. We don't know just yet, but there are some things that are critical right now. Eleanor is reporting here that it looks like it's logistically impossible. Remember guys, this has to only go through the Senate. And if you look at the dates on this right now, we've got a little bit of time still left before we go into that July 4th target zone, which is what is being looked at. The color coding there, just so you know, both chambers in session on yellow, Senate only in session in blue, and then the House only. So you've got a few days here, end of June that still would give us a window. The reason I say that, Jess, how would this affect you guys? How would this affect Wallet Connect if Clarity goes through or doesn't go through?
So, I think the biggest thing that we're seeing here is clarity literally for our partners. Whether that's a payments company, a tokenized equity company, the banks that we work with, all of them are really looking for clarity. They're looking to understand the stable coins, the assets, chains, everything that they can use in order to build these solutions. And many of these institutions have been looking at this space for a very long time. GENIUS Act obviously provided a huge catalyst for people to take some of those plans off of the shelves and put them into practice and Clarity will ultimately do the same. I think there's enormous hope across the industry that this is going to get there in the next couple of weeks. Because ultimately that's going to allow everybody to keep innovating with great confidence and ultimately deliver the benefits of this technology like lower cost payments, faster settlement, or anything else to the people that need it.
