On The Brink with Castle Island - Santi Alvarado (XFX) on Improving FX for Stablecoins (EP.635)

Episode Date: June 19, 2025

Sean is joined by Santi Alvarado, CEO/Co-Founder of XFX, to cover their seed raise and how money moves cross border. In this episode:  Background of Santi and how he made his way into crypto How legacy FX settlement operates today How XFX enables more liquidity for cross border payment companies

Welcome to On the Brink. My name is Sean Judge. Today on the show, I sat down with Santi Alvarado, CEO and co-founder of XFX. Earlier this week, we announced Castle Island invested in XFX's Seed Round of Financing alongside Han Ventures, Oak HCFT, Maya Capital, Coinbase, Paxos, and others. Please enjoy today's conversation with Santy Alvarado. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them where the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guest and host may maintain positions in the assets discussed in this podcast.

You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group,

AIG, $85 billion. This is a different kind of market, and the Fed is a sling. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people started to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. Welcome to On the Brink.

My name is Sean Judge. Today I'm sitting down with Santee Alvarado, CEO and co-founder of XFX. Santee, thanks for joining me. Thank you for having me, Sean. I'm sure to be here. I guess just to start, it would be great if you could share your personal background and how you arrived at working in crypto. I'm actually Peruvian, although I haven't lived in Peru for over a decade. And in what I call my past life, I did something very different to what I'm doing now. I'm a civil engineer, and I worked on infrastructure development across Latin America, mostly in energy and transportation, then got an MBA

degree at Harvard Business School. And after that is when my fintech career started, I have the opportunity to launch and scale digital bank called Tempo in Chile. Interestingly, that's the first time I actually bought Bitcoin. It was out of frustration with my banks, trying to send money back home to Peru, where I got stuck in what I call Swift Limbaugh, where you don't know the money is going to arrive, the fees that you're going to pay. Ultimately, the money ended up arriving seven days later, and they usually charged me around $150, which I thought was unacceptable. So I opened an account at a Chilean exchange, an account of a Beruian exchange, and I started buying Bitcoin with Chilean pesos and selling it for Peruvian solids,

and it took me 15 minutes in the fraction of a cost. I thought there was something very powerful there, although, of course, the user experience was still a bit tricky. So I decided to create a cross-border payments business leveraging blockchain, and Bitcoin specifically, stable coins were not a thing back then. And a friend of mine from business school, who was the CFO at Betzo,

told me, why don't you join BITZO and do this business with us? So about five years ago, I joined BITZO to launch what was then called the cross-border payments business unit, which ended up becoming BITZO business, which is BITS B2B business unit. It's amazing.

I mean, I give BITSO a lot of credit for thinking about that five years ago. I mean, it's obviously very in vogue today, but five years ago is less obvious that this would be a huge opportunity. So you had your experience there. XFX you just raised for earlier this week, and we were proud to be investors in that round.

What is kind of the high-level overview of X-FX? And who did you start this with? In an nutshell, the way that I would describe X-FX is a financial infrastructure for international settlement. And what we provide is we give access to institutions to wholesale FX liquidity and real-time settlement saving in capital costs, right, by not having to pre-fund origin or destination accounts.

I started this business with my two co-founders called Jason Lodge and Alberto, we call him Beto, Sanchez-Di. And we all met at BITZO. So Jason used to lead the engineering team. Beto and Beto led the markets team, which is basically a team that's in charge of the liquidity in the exchange for both retail and institutional business units. Zooming out a little bit, for those listeners that are maybe less familiar with the FX market or cross-border payments market, I think it's pretty jarring when you dig into the numbers.

Can you just share just how big of the market this is and maybe how it operates today? So the FX market is the largest financial market in the world in terms of TPB. It moves $7.5 trillion a day. And if you think about it, it makes sense because ultimately most of financial services actually have to go through an FX transaction, right? If you're thinking about international trade, trading commodities, if you're thinking about global equities or debt, this usually have an FX transaction embedded in debt.

It's an absolutely massive market, but it has its complexities that I'm happy to talk about. So let's start with a settlement piece. Most people have heard about Swift, and Swift really is only a messaging system between banks. But the actual money movement happens across correspondent banks, meaning that each of these banks in that payment chain need to have what are called nostro and vostro accounts at each other. in the corresponding currency for different types of currency purse. There are $4 trillion of tight-up capital in this nostril bostro account. So if you actually think about the cost breakdown of the average cross-border payments transaction, around 60% is composed of the cost of capital, of that type of capital,

and the FX spreads. So that's on the settlement side, right? And then on the trading side, there are also complexities, right? it. Usually the market, and this is very strange for such a large market, is very opaque. If you ask anyone that's engaging regularly with FX providers, they always feel like they're being taken advantage of. There's very new transparency on whether you're actually getting a competitive price. And also, behind the scenes, there are settlement and cost of capital problems. For instance, if you want to trade at the spot rate in the Mexican FX market,

the funds settle T plus two. That also means quite a bit of working capital tied up in the system. And it's no wonder that if you want to trade from Monday to Wednesday, you can get a better rate that if you want to trade Thursday and Friday, because if you trade Thursday, the funds will settle on Monday, therefore there's an additional cost of capital due to the weekend. Incredible, but that's the way the market exists today in 2025. It has largely been unchanged literally since the late 70s.

And then I guess that's where stable coins come in. So most of our listeners will be familiar with stable coins, but maybe in your words, why do you see stable coins as improving upon the existing ways in which money moves cross-border, a lot of that tied up capital? The most exciting thing for me about stable coins is that for the first time, we have an standard that the ecosystem can agree upon and actually built according to that standard, for cross-border payments, right? Not only that, but unlike Swift,

which is only the messaging system, stable coins are both things, right? They're the messaging system and the movement of value. A few relevant components that are missing for the asset class, and by asset class, I mean stable coins, to truly deliver on its intended value proposition, which is real-time cross-border settlement

without pre-funding requirements so that you can actually out-compete that trot-fied mechanisms today. That's why we're actually building X-FX, because we think we can actually build that base layer infrastructure to make sure that that value proposition happens. It makes a lot of sense. And now, were there experiences that you've had

just in your journey working in FinTech and eventually working in crypto where you felt like this just had to exist? It just was very obvious. And maybe just on that, if you could kind of explain in a little bit more detail, who the key players are involved in a cross-border stable coin transaction and where things were starting to break and what you guys are building to help kind of facilitate that.

Let's talk about one use case where this is very visible, where the system is broken, which are remittances and e-commerce. So on the remittance side, you have money transmitters. Those money transmitters promise their end users, same day settlement. but the money does not arrive same day, meaning that there's a gap that they need to pre-fund in order for them to actually meet their payments as late. The same is true for a PSP

that offers same-day settlement for a foreign merchant. So the foreign merchant hires the PSP to manage all the collections domestically, and then they need to settle with them, whichever jurisdiction are incorporated in or half their bank accounts at. And the same working capital problem happens. In fact, it's actually even worse, because they need to process that domestic card network,

which usually settles in two days, and then you have the swift problem. Depending on the origin destination, they could be pre-funding up to, let's say, five days of DPB to meet their SLAs with their customers. And that actually makes no sense, right? Especially if you think about all of the real-time payment networks that are appearing in different markets,

like Pigs in Brazil, Spain, Mexico, Fed now in the US, why does the cross-border payments base still need to happen in batch. That's to a large degree the problem that stable coins can get to solve. That can happen from a programmatic standpoint, but the liquidity is still not there. So the problem that we're solving at XFX is making sure that regardless of the amount that you want to trade, first that you can do it programmatically and that you can access the most competitive liquidity consistently at all times for that asset class. Therefore, really trying to make the cross-border payments a value chain real time on a per transaction basis instead of on a batch basis.

As we've talked about a bunch, we're investors in Felix Pago. And from an end user's perspective, the digital remitters that emerged 15 years ago are able to kind of do, and I'm using quotation marks, instant payments, because for the user it feels that way. But those digital remitters are forced to kind of park capital all over the world to facilitate that. Whereas with stable coins, there's the opportunity to kind of actually do it. instant with less capital tied up. The only issue there is, is there liquidity on the other end,

which is kind of where you guys come into play? Not only that, I would have an additional problem that goes beyond a part capital, is that all of the rebalancing has to happen in batch, and it usually happens in an analog manner. Literally, via phone call or a WhatsApp channel with your relationship manager at a bank or FX provider. Can you share, I guess, just on the product side, what does the product look like today for businesses looking to move money and then maybe what it looks like for the FX market maker side? There's three main product pillars in our product offering. The first is the settlement layer where we actually give access to the domestic banking rails for the currency pairs that we want to support, as well as the stable coin networks

that we want to support. The second is the trade execution capabilities, which is an hour RFQ system plus the trade execution capabilities, which always happen in real time. And with full transparency, you'll always be able to audit the trade breakdown with the system. And third are the post-trade settlement capabilities, which in essence give payments institutions the ability to even improve their working capital further, where they can actually execute a trade with us and then settle T-plus 1, T-plus 2, or T-plus 3. As you guys are talking to folks in the market, are there kind of core aspects of the settlement platform that makes XFX stand out for institutional clients?

Is it that post-trade settlement component? So I'd say that the first thing is the consistency in price and depth for all the currency pairs that we support. It makes no sense to integrate to a platform that cannot deliver on that consistency and visibility for the trading. And unfortunately, that's not the case for stable coins, particularly in less liquid markets like Latin markets. Second is the settlement speed.

All the settlement happens in real time. And that equates to no pre-funding, no tight-up capital. The third thing is the transparency. So if we actually agree on commercial terms, you'll always be able to audit, regardless of the mechanism and the trade size, that that is the spread that you are actually getting, which is, let's say, Bloomberg market rate plus X basis points. And the third thing is that programmability,

to make sure that you have the flexibility to operate either via WebUI and OTC, but most importantly, that you can actually automate this whole operation via a great set of APIs. To get going, obviously, you'll have plans to take, expand, but here initially, what pairs do you plan to support? We're starting with three currency pairs, which are USD Fiat against MXM, USDC against MXN, and USDT against MXN. But our plan is to remain always agnostic to the stable queen that we want to route volume through. We'll always follow the optimal path for settlement speed and liquid.

In terms of roadmap, we want to move to the rest of Spanish-speaking Lebanon. We believe that the places where this technology is really 10x better than the existing Troutfi alternatives is in the less liquid, more exotic markets. So we'll start there, but the idea is to build a global business. Well, I think with this infrastructure, which will enable even more interesting business and consumer applications to get built on top of you guys now that it's making it just that much more efficient. Well, this has been awesome, Santi.

Where can people learn more about XFX and you? You can go to our website, which is xfx.io, or follow us on X. The handle is at official XFX. Well, congrats again on the Cid Round, super pumped to be partnered with you and the team. And thanks so much for joining today. Thank you, Sean. It's been a pleasure.

Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island.vc.com. To listen to all of our podcast episodes, please go to On the Brink dashpodcast.com or just click on the tab in our website. Thanks for listening.