The False Promises of Payments App Strike

In its almost fifteen year existence, crypto has produced many a tale. The latest one is that of payments app Strike.

The app claims to use the Lightning Network (LN), bitcoin’s second layer, to expedite cross-border payments and make them cheaper. That network is still under construction and has myriad problems.

But that hasn’t stopped Strike from making tall claims about its service. Except for a couple of online videos, there is no real proof of Strike’s capabilities.

Meanwhile, in keeping with crypto’s rampant double-speak, Strike has hijacked social causes to raise tens of millions of dollars in funding. The app’s business model – is it a payments app or a brokerage platform? – is not clear and the technology it espouses is still under development.

Strike’s story encapsulates all that is wrong with crypto. It is profit-making disguised as social justice and a hyperbole of techno-babble for actual performance. There is also a generous dash of melodrama and entertainment courtesy its CEO.

The Bitcoin Social Cause

At the 2021 Bitcoin conference in Miami, Strike CEO Jack Mallers cried for the common man on stage. He was talking about his experience living for three months in El Salvador, a country that had classified bitcoin as legal tender in June of that year. “There was a lot of dirt roads. There wasn’t much hope,” he sniffed while wiping his tears. He railed against privileged kids in the United States who order drinks in bars.

In case you were wondering, Mallers’ grandfather was a Chairman at the Chicago Board of Trade and his father sold a discount brokerage platform for futures trading for $6.3 billion in 1999. Strike also sponsored a bitcoin-themed car at the Indy 500 in 2021. The Mallers family were early investors in Bitcoin and Jack developed a bitcoin wallet Zap to facilitate payments for their portfolio of businesses in the cannabis industry.

An El Salvador Story

But back to El Salvador. Mallers met El Salvador’s president in 2021 and, after the meeting, posed for a photograph of himself with a security guard. The guard is holding a blue umbrella over Mallers head in the photo. On the drive back to his place, Mallers talked about the “beautiful thing” that had just happened.

At this year’s conference, Mallers said he plans to use that footage in a documentary someday. Thereafter, Strike became a consultant to the El Salvador government and was granted a digital asset license to operate in the country this year.

The El Salvador experiment with bitcoin as legal tender turned out to be a dud in spite of multiple government incentives.

Mallers has also moved on from his teary-eyed performance two years ago. This year, he talked about making the app available to residents in 65 countries, predominantly situated in the “global south” – a term used to collectively describe emerging and developing countries.

As usual, the move was dressed in a flimsy stitching of social causes. Mallers repeatedly invoked the urgency of creating a “moral and equitable” world. Given the absence of comprehensive and uniform crypto regulation across the globe, it is not clear whether the announcement amounts to much or, for that matter, to anything at all.

Strike also announced a move of its headquarters to El Salvador at the conference. The company’s offices there, if they do exist, must be pretty empty since almost all of its employees live in the global north. More than half of them are situated in the United States. Mallers, himself, often pontificates and proselytizes about bitcoin and Strike from, what appears to be, a big and empty closet of white shelves in Chicago.

Making Sense of Strike’s Claims

To be sure, hyperbole and drama are the currency of media coverage. At times, they are even necessary to drum up excitement about a technology’s potential and demonstrate its possibilities. But bitcoin’s blockchain is not really radical. It is a distributed database that makes payments efficient by distributing nodes to process them all over the globe.

Therefore, the supposedly new financial ecosystem will simply be an adaptation of the old system. The Visa or Mastercard network will change into lightning network nodes. Banks, which extract fees and profits from the correspondent network, will work with applications like Strike that are masters of the new chain.

After raising $80 million from investors earlier this year, Mallers told CNBC that the app’s mission was to create a “cheaper, faster, more inclusive, more freedom-based” payment system. That’s quite a mouthful. As is always the case in crypto, it is important to read between the lines.

A Cheap Transaction

First, there’s the promise of cheap transactions. At presentations and in media appearances, Mallers often whips out figures, usually less than a dollar, for payment transfers using the Lightning Network. Those figures are misleading.

Fees on the Lightning Network are a complex topic whose economics are still being worked out by node operators. This is because the network is a competitive marketplace and the fees themselves are a combination of multiple costs, including routing (fees to act as an intermediary between two distant nodes) and settlement fees (the fee to settle and record transactions on bitcoin’s blockchain).

There are many variables to consider while calculating fees. For example, a low routing fee may not be sufficient to recoup node setup investment costs or the risk of holding bitcoin in hot wallets to ensure liquidity. A high fee, on the other hand, could mean losing out on business.

There’s also the problem of high transaction fees and long settlement times on the main bitcoin blockchain that is yet to be solved. Liquidity, the amount of bitcoin already stored at a node to ensure efficient outgoing and incoming transactions, is also important. All of this means Lightning Network fees are delicate dance between competition and market share.

Not that these things should matter to Mallers.

While others deliberate on scaling the network to multiply the number of nodes, Mallers says the “free market” will figure it out. Meanwhile, he is happy to offload an assortment of fees onto his customers. Strike’s business terms state that customers are responsible for network fees, including mining fees and routing fees.

Collecting Customer Data and Bitcoin for Freedom

In his media appearances, Mallers often talks about “human freedoms” enabled by Strike and bitcoin. What does this freedom mean? It means freedom from the mainstream economic system of financial interdependencies and banks.

Strike has many of those dependencies. The startup also holds money transmitter licenses in various states to facilitate its brokerage business.

The app’s users are also hardly free.

Strike’s app store listing states that the app collects customer data relating to financial information, location, and usage data among other things. The terms of service place further restrictions on user activity and appoints Strike as a “limited agent for the sole purpose of receiving, holding, and settling proceeds.”

That appointment enables the app to control customer payouts and, possibly, monetize customer data by selling it to third party services. It can defer or restrict settlement amounts in cases of dispute. The app can also suspend access to purchase or sale of crypto and prevent users from checking their bitcoin balance.

A read through of customer complaints for the app in Apple’s app store listing shows that the app is not shy of exercise of those restraints.

There’s more. Recently, just weeks before Strike’s former custodian Prime Trust filed for bankruptcy, Strike transitioned to self-custody. This means that customers bitcoin are stored inhouse.

In his post announcing the move, Mallers claimed that all bitcoin was backed 1:1. But such claims have been proved false in crypto many times in the past. So much so for inclusive and free payments.

Payments App or Brokerage?

In the current correspondent banking system used in payments, banks use Nostro and Vostro accounts to ensure adequate liquidity and mitigate counterparty risk.

The Lightning Network adds another leg to this setup. At the sending node, fiat currency should be converted to bitcoin for transportation across the network and, at the destination, a reconversion to fiat takes place.

There is a problem with this arrangement. While fiat currencies are stable representations of value, bitcoin is not. The cryptocurrency’s quicksilver price changes mean that value of the amount being transferred also changes constantly.

The Lightning Network also requires each node operator like Strike to maintain sufficient liquidity in the form of bitcoin balances on its channel. The liquidity – for incoming and outgoing transactions – ensures that transactions on its network do not fail.

Again, bitcoin price’s instability means that liquidity requirements constantly keep changing putting current transactions into jeopardy. LN node operators must also account for a constantly changing exchange rate between bitcoin and fiat.

What’s more, in Strike’s case, the company works with third parties to squeeze out a margin from its trading activities for bitcoin. The ecosystem of third parties involved in crypto trading was already limited earlier and is now fast dwindling, meaning fewer players and more volatility in bitcoin price.

Where are Strike’s Customers?

To fulfill its social mission, Strike claims to serve customers in 65 countries. But it is not clear whether they exist or benefit from the move.

To enable cross-border payment processing using the Lightning Network, nodes are required at both end to send and receive bitcoin. Three countries – United States, Canada, and Germany – currently account for 43.26% of all LN nodes. Their channel capacity or the amount of money that can sent through their channels runs into millions of dollars.

There are very few nodes in Mallers’ global south. El Salvador, where Strike is supposedly headquartered, has two nodes with a channel capacity of $57,999 as of this writing. That’s hardly enough in a country heavily dependent on remittances for its economic well-being.

In a presentation earlier this year, titled appropriately enough “Adopt Bitcoin or I’ll Leave” Mallers referenced India as another remittance market for his app. But India currently has only one LN node with a channel capacity of $37,354.

Where are Strike’s customers located? And what do they do?

They might be in the United States and engaged in the cannabis business. Or, they are using the app to buy and sell bitcoin. Mallers told CoinDesk last month that Strike was the largest bitcoin brokerage in the United States.

A Lightning Strike

There are many more points that can be made about the app and its false promises. Its CEO Mallers’ frequent media appearances and promises are reminiscent of another crypto entrepreneur who promised much and delivered little. In the end, FTX turned out to be a house of cards. Strike is not far behind in that respect.

It may not have far to go, however. Bitcoin’s rapidly-declining price and liquidity has veered close to extinction in recent months. And Strike’s business – whether it is brokerage or payments – depends heavily on bitcoin.

At the end of his 2021 address at the conference in Miami, Mallers said he was “going to die on this fucking (Bitcoin) hill.” He should be careful: hills are susceptible to lightning strikes.

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