Author: Boaz Sobrado Compiled by: Vernacular Blockchain

Bernardo Brites said in the podcast "On The Margin" about the crypto companies that raised a lot of money in the last cycle with a logo and a promise: "I think marketing based on hollow concepts is essentially an air project." In his opinion, this kind of story can only last for a while.

But Brites - co-founder and CEO of Trace Finance - is betting in exactly the opposite direction. The company, which started in Brazil, has just completed a $32 million Series A round of financing, led by CoinFund, with participation from Coinbase Ventures, Paxos, Haun Ventures, Jump Capital, HOF Capital, Chainlink and other institutions. Solana co-founder Anatoly Yakovenko and Circle co-founder Sean Neville also participated.

This set of ideas can be traced back to a child who loved traveling but hated having to change money every time he visited a country. Brites said, why do people have to choose what they are spending when they spend money and use currency? Why can’t there be a layer of abstraction that allows you to go anywhere and buy anything without having to think about the details behind it? Trace said that to date, the company has processed more than $10 billion in cross-border transaction volume, serving clients including dLocal and MoonPay. Brites also said it counts four of the world's top four payment providers operating in Latin America as customers. The new round of financing will be mainly used to enhance transaction processing capabilities and establish a regulated business footprint in the United States, Asia Pacific and other regions of Latin America.

Why the "pipeline layer" is important now

Brites said users may not even know they are using stablecoins or what is going on behind the scenes. For example, what kind of "pipeline" is driving their cash application? Most people who are exposed to stablecoins have never actually seen one.

Now, this invisible infrastructure has been brought under supervision. Brazil has included stablecoins in the foreign exchange regulatory system, and transferring US dollar stablecoins overseas is regarded as the same act as converting reals into US dollars. Brites explained that if you use stablecoins to send money out of Brazil, you must comply with the same capital control rules as if you convert BRL into dollars and then send it out. He added that non-bank virtual asset service providers face a limit of $100,000 and cannot process third-party payments, which makes institutional-level transaction volume naturally flow to bank-level infrastructure. Today, Trace has been cleared through a fully regulated banking system.

In Brites' view, tighter regulation reflects more caution than hostility. He said of Brazilian regulators: They want to allow innovation and also want to allow crypto assets to be adopted, but they are really thinking carefully and cannot allow new entrants to have too much power and too much freedom. They don’t want an event like the Terra Luna crash, or other similar crashes, to affect stablecoins tied to the Brazilian real. He also pointed out that the United States is also moving in a similar direction with the GENIUS Act and Clarity Act, while Brazil’s own digital asset service provider rules play a similar role locally. I’ve written before that banks are now targeting the $323 billion stablecoin market; at the same time, as these regulatory rules take shape, the size of local currency stablecoins has exceeded $1.2 billion.

"USD Account" trading in emerging markets

Bitget Wallet's Alvin Kan, speaking on the "On The Margin" podcast about how emerging market users use stablecoins, said they treat it more like a dollar-denominated account than a trading wallet. For these users, stablecoins are more like a tool for holding dollars rather than chips for betting. For companies operating across Latin America looking to reach users in Brazil, Mexico and Colombia without holding local currencies, USD stablecoins provide just such a settlement method. The logic behind this is actually consistent with the fact that stablecoins are gradually moving towards the "Eurodollar system" that has existed in the offshore market for a long time.

Raj Kamal, co-founder and CEO of cross-border payments company TransFi, said the real volume isn’t where most people are looking. They're just scratching the surface of what's possible, he said on the podcast. The really difficult part is that this part of the chain must be synchronized with the part off-chain, and the part off-chain is where fiat withdrawals actually happen.

Brites originally started with this problem. In 2018, he was running one of the largest institutional Bitcoin trading desks in Brazil, many of whom were using Bitcoin for cross-border transfers. Because it's faster, cheaper, and better, and there's a reason behind it. In his view, before encryption can truly be fully on-chain, someone must first build the layer that connects the banking system. The stablecoin rail has since surpassed ACH in monthly trading volumes, driven by corporate demand rather than retail traders. Brites said they needed to put some sort of Web 2.5 layer in place before this Web 3 adoption and expansion could really happen, because at the time 99% of cash was still in traditional financial markets.

Compliance is both a moat and a source of controversy

The CEO of on-chain neobank UR said on the "On The Margin" podcast that everyone is taking the easiest path in Web3. You take a stable currency like USDC and issue a card, and suddenly you become a neo bank, and users can also spend money. This sounds cool; but from a structural and core perspective, nothing has changed. Not everyone agrees: As long as you issue a USD Token, you are building something truly new.

For Brites, the work of real structural value is not in the Token itself, but in regulatory adaptation. He has no interest in the "rush now, fine later" entrepreneurial model. He said that if you want to deal with a flow of money like Amazon, you not only have to have everything structured right, you can't just do it well in one country and have a lot of legal limbo in another country. In his opinion, Brazil is the most difficult training ground. Starting a business in Brazil basically means solving the most difficult challenges first. In this way, future expansion into less regulated markets will be more about removing some requirements, rather than discovering the existence of these requirements for the first time then.

The road was not friendly at first. Brites said Trace won an early lawsuit against a bank when one tried to close its account. He said that the other party did not give any reason, and the judge found that the bank regarded the crypto company as a competitor. Today, the company has come to rely on banking partners, including Cross River, and is working with regulators it had no access to back then. They actually have to get banks and the entire financial infrastructure - including regulators - to feel comfortable about this and willing to be on the same side.

The company is also expanding rapidly. In 2021, Trace completed a seed round of financing of US$4.3 million, at a time when its valuation was approximately one-tenth of this round. Earlier this year, the company had about 20 employees; now it has nearly 50. Brites says it's been fun to more than double the size of the company in six months, but the volume of transactions itself has also doubled at the same time. Currently, Trace has operations in Brazil, Colombia, Mexico, Argentina and the United States, and is extending its payment network to Singapore and Europe. "Our goal this year is to cover 60 countries."

Finally, his advice to entrepreneurs is not so much a methodology in the payment field, but a reminder on how to stay at the poker table. He said that when you look back one, two, three years, you usually find that, just like Bitcoin, you are actually standing higher than you were three years ago. So, keep building, keep working; keep being original, and good things will come your way.