One of the big headlines from Coindesk’s Consensus 2019 in New York City was from a startup project called Flexa, who designed a crypto payments network for retailers. Following their announcement of a $14.1 million funding round in the month before Consensus, Flexa unveiled their first application on their network – Spedn.
Flexa has been working on a cryptocurrency payments network for major retailers at the point-of-sale for more than a year, launching in 2018. With some high-profile retailers available to use the Spedn crypto payment app, such as Whole Foods and Bed Bath & Beyond, Flexa understandably raised some eyebrows at Consensus.
So, what exactly are Flexa and Spedn?
Real-Time Crypto Payments
Flexa, the payment startup, is the company behind the Flexa network — a payments network integrated directly with retailers. Interestingly, rather than building crypto debit card functionality on top of existing payments infrastructure, Flex bypassed legacy payment rails altogether, reaching out to major retailers like Whole Foods and Baskin Robbins directly.
Reconciling the problem of integrating crypto payments into existing payments infrastructure has been challenging and led to several significant hurdles already with other projects, so Flexa decided it would be better to simply circumvent the existing system entirely. According to Flexa:
“Over the past year, we’ve built new connections with tens of thousands of merchant point-of-sale terminals nationwide, to bypass the existing payments infrastructure and push cryptocurrency-based payment authorizations directly to merchants on your behalf.”
So far, Flexa details that payments via the Flexa network (i.e., with Spedn) are available in 30,475 stores.
Directly plugging into retailers can reduce transaction costs by lowering fees and the finality of cryptocurrencies mitigates fraud for merchants.
Tyler and Cameron Winklevoss by a coffee at Starbucks using a cryptocurrency they invented. But that's just the beginning of this story, with Nordstrom and Whole Foods accepting bitcoin, ether: https://t.co/ftcn7tNX1T by @DelRayMan via @Forbes #Consensus2019 #NYCBlockchainWeek pic.twitter.com/lyJlwNiCKp
— Forbes Crypto (@ForbesCrypto) May 13, 2019
From the merchant end, payments through Flexa are automatically converted to fiat (i.e., USD), so merchants don’t have to worry about exchanging in and out of cryptocurrencies — which is currently handled by exchanges on the back-end for Flexa.
Flexa achieves the balance between fiat and crypto for payments via its ‘neutral collateral token’ called Flexacoin.
Flexacoin is an ERC-20 token on the Ethereum blockchain that operates as a form of liquidity for processing real-time payments at the point-of-sale. Flexa details the primary utility of Flexacoin as:
“…Flexacoin token’s utility in the Flexa network is to temporarily secure cryptocurrency transactions while they are awaiting confirmation on the blockchain.”
Basically, Flexacoin acts as the intermediary collateral for assurances to a merchant that a transaction will settle before that transaction actually finalizes on a blockchain.
For example, if Alice (the consumer) wants to pay Bob (the merchant) for ice cream at Baskin Robbins with Bitcoin, Alice will scan her barcode on the Spedn app (which holds Alice’s Bitcoin) at the point-of-sale. Subsequently, fiat will be advanced to the merchant through the Flexa network, completing the transaction in real-time.
In the vast majority of cases, the blockchain transaction (i.e., Bitcoin) will settle, but if it doesn’t — because of an unlikely chain reorganization — the Flexacoin collateral will be liquidated to cover the transaction. However, this begs the question: where does the collateral come from?
Users can actually stake the Flexacoin via their wallets to provide the collateral liquidity required for transactions. Staking is performed through an individual app (only Spedn is available now) and stakers are rewarded with fees from transactions in the app on the Flexa network that they are staking collateral.
As a result of the design, the total unconfirmed payment volume that moves through the Flexa network is equal to the amount staked — making staking a critical job for the network to scale.
Understanding how Spedn is different from the Flexa network is also important. Spedn is the actual app that users download and is a custodial cryptocurrency wallet — it is built on the open Flexa network. Spedn is integrated with payment authorization codes that use barcodes at the point-of-sale with integrated retailers.
Users can deposit Bitcoin, Bitcoin Cash, Ether, or Gemini Dollars into the Spedn wallet, which is then the medium for making payments directly with retailers. However, retailers are not exposed to the volatility of cryptocurrencies and are forwarded the fiat to complete the transaction in real-time, assured by the aforementioned Flexacoin operating as the liquid collateral.
As a custodial wallet, Spedn is also exclusively used for spending cryptocurrencies. Therefore, users should be aware that it is best to keep funds in the Spedn wallet akin to how much cash you would keep in a physical wallet.
Another interesting component of Spedn is Flexa’s partnership with Gemini — hence why the wallet supports Gemini Dollars. Drawing from Gemini’s existence as an NYDFS-regulated cryptocurrency exchange, all custodial funds in Spedn wallets are insured and deposited with Gemini’s regulated infrastructure.
Evaluating Flexa and Spedn Within the Broader Crypto Payments Ecosystem
You may be wondering why it is necessary to go through the details of how a transaction via Flexa network works. It’s relevant because there will inevitably be more and more payment methods using crypto emerge over the coming months and years and it is essential for users to understand the differences between them — as well as their advantages and disadvantages.
For example, Flexa’s integration with prominent retailers is indicative of their desire to incorporate a growing community of crypto users into their merchant ecosystem. Clearly, merchants are interested in crypto.
However, it also reveals what many cryptocurrency proponents are already aware of — Flexa is different from a standard crypto payment.
Rather than a merchant directly integrating a self-hosted payment processor, such as BTCPay Server, where the merchants hold their own funds and process their own payments, crypto is deposited with an NYDFS-regulated, custodial exchange service with Spedn — Gemini. This introduces a financial intermediary into the payment processing cycle, something that is clearly tailored to be comforting to merchants and regulators and a compromise between the P2P nature of cryptocurrencies and traditional payment rails.
Crypto payments through Spedn are funneled through the merchant’s own payment processing system. As a result, Flexa can abstract away the underlying complexity of Alice sending crypto to Bob but does so at a conspicuous cost.
For instance, the details furnished by Flexa about certain merchants not being able to use Flexa payments currently depending on their payment provider is very telling. Payments integration currently hinges on payment processor support.
Although the eventual goal is to provide a native payments network built on top of cryptocurrencies between consumers and merchants, exchanges (i.e., Gemini) handle the back-end conversion of crypto and fiat.
Overall, Flexa adds layers of compliance and trust into a value transfer system predicated on the contrary. The distribution of the Flexacoins is also a tricky long-term prospect to work around. So far, the Flexacoins are distributed akin to a 2017 ICO, and their further expansion to users will play a decisive role in the future success of the network depending on how staking develops.
Making crypto payments more convenient is assuredly a path towards further adoption. However, there are primarily two competing camps striving for similar goals with different preferred means of reaching that goal.
On one end, there are payments solutions more attuned to the original vision of cryptocurrencies as censorship-resistant, P2P payments outside of the traditional financial system. These projects, such as BTCPay Server, are more complex for users and place a larger burden on the merchant to understand crypto and take control of their own funds.
Read: What is BTCPay?
Conversely, projects like Flexa represent more of a compromise between the two payment archetypes, focusing on compliance and ease-of-use for both consumers and merchants. These systems, like stablecoins, introduce another element of trust and are often at odds with the fundamental value proposition of a cryptocurrency like Bitcoin.
However, payment systems that reconcile the differences between the core vision of crypto and traditional payments networks may ultimately prove the prevailing trend in the long-run.
The hurdle of attracting sufficient users and merchants to directly handle P2P crypto payments is daunting, and merchants would likely prefer to offload much of the configuration for accepting crypto payments with a system like Flexa.
Users don’t need to own a credit card or have a bank account to use the Spedn app, which makes crypto and retail payments more accessible to many people. The eventual addition of further applications and open development on Flexa may show more appeal to core cryptocurrency proponents as it progresses also. Spedn is just the first app on Flexa, and the network plans on adding more merchant partners.
The pending release of a wallet SDK and other developer tools should also reveal more as Flexa rolls out more resources.
