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CBDC vs Cryptocurrency: Are CBDCs a Threat to Crypto?

CBDC vs Cryptocurrency: Are CBDCs a Threat to Crypto?

June Katz 6 min read
The growth of the cryptocurrency market fuels the interest of society and business in the industry and does not allow states to stay on the sidelines. Dozens of countries are developing their digital currencies, and some of them will be launched as early as 2022. In this article, we will help you understand what digital currencies issued by the state are and how their appearance will affect citizens. What is CBDC The CBDC, or central bank digital currency, is a government-issued and government-backed digital analog of fiat money. CBDCs are created using blockchain technology, just like other cryptocurrencies. However, the digital assets of the Central Bank are not the usual cryptocurrency due to the centralized nature of the issue. The CBDC exchange rate is stable and equal to the exchange rate of the state currency in a ratio of 1:1. This is the principle of a stablecoin — a digital analog of the state currency, whose rate is tied to it and secured by it. For example, USDC or USDT are stablecoins tied to the value of USD. The main difference between those coins and CBDC is that the central bank of the country acts as the CBDC’s issuing center, and not a private company or a community of people. Two Ways of Financial Evolution The emergence of CBDC is designed to change the banking systems of all countries and strengthen the role of central banks. There are two points of view on what these changes will be. Supporters of state regulation of crypto believe that all crypto assets, except for the digital currency of the state, should be banned. This is the way that China's central bank cryptocurrency goes. Operations with CBDC will be transparent and will make it possible to track the history of each transaction and each participant in the chain . Banks will only have to work with companies and citizens: to serve customers and improve their products and services. The burden on financial monitoring will disappear. In a sense, the banks even want it. The second option for CBDC development is recognition and regulation. In this model, digital coins and crypto will be equated to shares, considered a digital value or a payment asset. In this case, the cryptocurrency market will develop systematically, and CBDC will be a full participant in the crypto world. This is Singapore's way. How CBDC Works From the point of view of the approach to the issue, the Bank for International Settlements identifies two basic concepts of digital currencies of central banks (combinations are possible): Account-­based (balanced): according to this concept, the creation of a Central securities exchange takes place by opening personalized accounts in the central bank for all economic agents. The features of this concept are the growth of the regulator's costs for maintaining accounts and the risks of disintermediation (reducing the role) of traditional financial intermediaries. Indeed, for commercial banks, the consequences of the emergence of such a retail CBDC can be revolutionary. For example, if individuals and legal entities have the opportunity to receive and store funds in accounts with the central bank, this may provoke a massive outflow of funds from commercial banks. Some European commercial banks are already raising the question of how, in such a system, the central bank will provide funds to banks for lending to the economy. Value token-based concept assumes a digital cash issue (token) distributed through commercial banks, replacing cash. In this case, the central bank relieves itself of a significant part of the costs and risks associated with checking and servicing customers, providing them with additional services, as well as creating and operating technologies. Tokens in such an ecosystem will effectively represent digital versions of cash. However, commercial banks fear that the launch of such digital money may simplify the entry into the financial sphere for large technology companies, which will increase competition in an already low-margin and competitive market, further reducing the industry's revenues. The form in which the Central Securities Exchange will be launched in a particular country can vary greatly from state to state, depending on the specific tasks assigned to the regulator.  When and Where Will the First CBDC Appear If you do not take into account the Sand Dollar issued by the central bank of the Bahamas, no major country in the world has yet reached the stage of launching its own CBDC. As of November 2021, more than 50 countries of the world were developing CBDC. China has come closest to real use, where the digital yuan has been tested for about a year. South Korea, Canada, France, the United Arab Emirates, South Africa, Nigeria, Ghana, and Uruguay are at the pilot testing stage. There is another approach to using crypto as the official currency of the state. This is an example of El Salvador, which in September 2021 recognized bitcoin as a means of payment on a par with the US dollar. Why Do States Need CBDC? One of the main tasks of the Central Bank's digital currencies is the security and transparency of financial transactions. Firstly, the technology underlying CBDC is the most modern means of controlling cash flows. Secondly, central banks strive not to be late for the trend and monitor each other. It is impossible to ignore the development of cryptocurrencies, therefore, to avoid a new round of money flowing into the gray zone, the state needs its digital currency. As they say, if you can't stop them — lead them. For many years, some states have been struggling with the outflow of money to offshore and other jurisdictions that are more favorable from the point of view of taxes and doing business. Previously, this happened with cash, then with non-cash, and now the process has almost entirely switched to cryptocurrencies. There is a threat that people and companies that create stablecoins will control too many processes and resources and will become stronger than some states. Therefore, CBDC for states is also a tool to combat gray financial flows. Are We Moving to Digital Currency? Most likely, a link between CBDC, stablecoins, and crypto will exist and their exchange for cash will be possible for quite a long time. But it is possible that in some countries, cash and digital values, except for their own CBDC, will remain in the gray zone and will be banned. For example, in China. Criticism Writer Dominic Frisby, author of the book "Bitcoin: the Future of Money?", believes that the main disadvantage of CBDC is its programmable capabilities. While fiat currency presupposes certain freedom, digital currency completely excludes it. Governments will also have direct access to users' wallets, which will make it easy to collect taxes or fines — you just need to change a couple of lines of code to do this. The programmable functions of money can be used against certain undesirable persons or as a weapon in an economic war. Integration with social rating systems opens up even wider opportunities for punishments or rewards. Your bank knows almost everything about your spending model, knows where you live, who you work for, and which store you prefer to buy groceries at on Mondays. He is well aware of your financial situation and state of health. Knows what devices you use, and in some cases even has biometric data. All this information opens up great opportunities for analysis, including behavioral analysis. However, information about consumers is of interest not only to the private sector but also to the state. Moreover, central banks are among the first to queue for user data. In the current realities, the introduction of national digital currencies by several countries is a matter of "when", not "if". As with fiat currencies, their strength will be determined by the strength and influence of the central banks behind the issue. A former employee of the NSA and the CIA, Edward Snowden, considers the tool "the newest danger hanging over society."  In a world where CBDCs are a priority means of settlement, including cross-border ones, there will be no room for privacy. After all, a tool that is positioned as a way to increase financial inclusion, in the end, can only tighten the noose around the neck of economic freedom.
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The Drawbacks of Centralized Crypto Exchanges: Binance Russia Case

The Drawbacks of Centralized Crypto Exchanges: Binance Russia Case

June Katz 4 min read
On April 21, Binance released an official statement according to which it will restrict access to its services for users who live in Russia and have assets worth more than $10 thousand. Such clients will no longer be able to deposit additional funds to their accounts or trade on the exchange. They will only be able to withdraw funds. In March, Binance denied that it was preparing to freeze the accounts of Russians, as this contradicts the concept of the cryptocurrency industry. The company said it was not going to impose restrictions on Russian bidders with the words: "Cryptocurrencies are designed to provide greater financial freedom to people all over the world. A decision to unilaterally ban consumers from accessing their cryptocurrencies would be contrary to what this industry exists for". It is worth saying that in the current situation, cryptocurrency is the only financial instrument that allows Russians to try to protect their savings from inflation. A few weeks ago, the Central Bank of the Russian Federation persistently convinced Russians that the cryptocurrency market is extremely risky for private investors and that the only way to save and increase their savings is through the Russian stock market and the national currency. Such news reminds us that one of the biggest problems of cryptocurrencies at the moment is the centralization of services. Blockchain processing requires a lot of computing resources and time. Therefore, ordinary users who just want to transfer a few coins prefer to use centralized services for this. Most Bitcoin users trust blockchain.info, Ethereum users trust myetherwallet, etc. If these popular wallets are compromised, the funds of a huge number of users will be stolen.. Trust in centralized services leads to the appearance of a single point of failure in cryptocurrencies, allows censorship, and endangers user coins. As another example, we can cite the protests of truckers in Canada, when the court froze the protesters' funds in cryptocurrency for millions of dollars. These events have shown us that the state has leverage to carry out censorship in the sphere of cryptocurrencies, which seemed to many before, was beyond their control. Unfortunately, any centralized financial institution can block access of their clients and users to funds: payment systems, banks, classic or crypto exchanges. The problem with crypto exchanges is that they operate based on issued licenses, they have services that are responsive to the regulator and the competent authorities of the countries that issued the license, up to criminal liability. Therefore, at the request of the regulator, a centralized exchange must restrict access or seize its client's funds. Centralization as solution Centralization is increasingly seen as a solution to problems. A large network is slowly synchronized, so many cryptocurrencies offer to use a limited number of trusted "master nodes", "witnesses", etc. to "solve the problem" of too many nodes in the network. The number of these trusted nodes may be different, but by using this method to solve scalability problems, developers are also destroying the decentralized nature of the blockchain, since the result of this will be the formation of a cryptocurrency with one functioning node that processes transactions very efficiently, without delays, confirmations, and forks, but in this case, the blockchain becomes unnecessary. Today, most users do not understand the technical details, so such centralized blockchains will continue to attract them, because centralized services will always be easier to develop and more convenient for the user. Decentralized Exchanges : an Alternative Decentralized exchanges (English Decentralized Exchanges, or DEX) are an alternative to CEX. Here you don't have to trust your assets to someone else. Unlike traditional CEX, transactions and trades on such platforms are automated using smart contracts and decentralized applications, and DEX acts only as a platform that only connects the buyer with the seller who wants to sell their tokens. DEX cannot be closed by any government and regulators, since no organization is responsible for them. But such decentralization has its price. This is a low trading volume, low liquidity, lower transaction speed, and a poor UI, as a result of which it is more difficult to work with such exchanges. Also, the differences between decentralized and centralized exchanges include the fact that some DEX bet on experienced users. For example, they do not have support services, and they also do not use fiat gateways, unlike CEX. Decentralized exchanges are aimed at more experienced users who work only with their wallets and want to fully control their digital assets. At the same time, they sacrifice other benefits provided by centralized exchanges. This is an easier user experience, a large trading volume, and higher liquidity. Examples of DEX’es are Binance DEX, Uniswap , and SwapSpace . Summary We have already written that although governments can't ban blockchain use they can marginalize it and slow down its growth until the necessary tools for control will appear.  If a few years ago the marginalization of cryptocurrencies was facilitated by its widespread use on the black market and opacity , now users' fears of simply losing access to funds due to belonging to any social group or nationality have been added to this. Of course, the listed risks do not outweigh the convenience of CEX for everyone, but it is important to understand that the original essence of cryptocurrency was that an ordinary user could be outside countries, governments, and banks, so attempts to take it away are very alarming.
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Where Is the Crypto World Going: Crypto Censorship Resistance

Where Is the Crypto World Going: Crypto Censorship Resistance

June Katz 2 min read
Financial censorship or cutting off access to the global banking system is one of the most powerful tools that government has to punish their enemies. Whether financial censorship is used for the good cause or not the question is - does a global decentralized monetary system takes this weapon away from authorities? Tendencies For now, a government crackdown on crypto might look quite real: the Biden administration introduces a crypto bill and the Canadian court freezes millions in Convoy protestor funds — including Bitcoin . The situation in Canada also shows us methods of crypto tracing the government already has. Bitcoin may be uncensorable but it's also radically transparent and law enforcement has been remarkably successful at connecting bitcoin addresses to their users. Practice Bitcoin only solves the problem of financial censorship when individuals hold the keys to their own coins. When kept on an exchange the companies in charge maintain custody - just like any other bank.  That means that the government can put pressure on exchanges to freeze the bitcoin accounts which is exactly what happened in Canada where protesters' crypto assets were seized. Without an easy off-ramp into cash, spending the funds became a challenge for protesters. Concerns It should be noted that the anonymity of cryptocurrencies such as Bitcoin, Litecoin , Namecoin and others is understood as pseudonymity, in which a single violation of security measures (for example, the purchase of cryptocurrencies through a regular bank transfer) might lead to the disclosure of the owner's identity. Therefore, cryptocurrencies such as Dash and Zerocoin have been developed to enhance anonymity. Although governments can't ban blockchain use they can marginalize it and slow down its growth until the necessary tools for control will appear. The epicenters of the development of cryptocurrencies in the coming years may be some countries where the state and its financial institutions enjoy an extremely low credit of trust among the population.
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Buying Crypto Without KYC: Why, How, and Where

Buying Crypto Without KYC: Why, How, and Where

Ruth Kise 7 min read
More and more countries are beginning to adhere to the norms of KYC and AML, which have already entered ‌force in the European Union and the US. According to them, financial institutions must know their client (KYC) and resist money laundering, scams , and hacking. According to KYC, these databases are checked against various law enforcement agencies' watchlists . Therefore, identification is used to prove that the trader complies with the law and has the right to make transactions. In addition, verification is a method of insurance. For example, in the event of a cyber-hack or a technical failure, the trader will be able to prove that he owns his account and can get his funds back. KYC: Cumbers and Risks To verify the exchange, users might be required to make a passport photo, a selfie with a passport, a photo with the address of the place of registration in the passport, a driver's license, a TIN, and sometimes even an electricity bill. Verification may be required after account registration and/or at the time of withdrawal. In addition, if the transaction seems atypical or suspicious to the moderators, they will require additional documents from the user, for example, confirmation of the source of income (contract).  Due to this, the process can be inconvenient for users – transaction processes are delayed, traders lose on rate changes during verification, or the exchange may block the account because of formal inconsistencies in documents, although the trader trades honestly. Another point is that the requirement to provide documents contradicts the key principle of cryptocurrency – anonymity, freedom and lack of control over the movement of the financial flow . Moreover, providing data to minimize the likelihood of fraud also carries some risks: data leaks are almost inevitable; your data can be shared with third parties and government agencies; leaked or stolen data can be used in an attempt to steal your coins (phishing). Thus, the desire to keep anonymity is so clear and it is still possible. Privacy is Legal First, let’s say that privacy is one of the internationally fundamental human rights. You don’t break the law if you operate within the imposed limits on cash payments (usually around $10,000). And if some users prefer to remain anonymous, some simply want to start trading as quickly as possible, without wasting time waiting for confirmation from the exchange administration; this does not mean that they are necessarily fraudsters. So if you are one of those who wants to stay anonymous and ready to lake risks – the following information will help you ‌make the right choice and deal with your crypto safely. Where to Go to Avoid KYC Most of the crypto exchanges allow you to operate anonymously, but some have withdrawal limits and can feature partial KYC verification. Let’s overview usable types of exchanging platforms: Altcoin Trading Exchanges Binance To open an account on this world’s largest cryptocurrency exchange, you only need an email address. After it users are free to deposit, withdraw, and trade up to 0.06 BTC per day without KYC verification. Spot trading on Binance doesn’t also need verification. However, users who transact large volumes of BTC will need to complete the KYC procedures so that they can transact on the platform. KuCoin This one also offers a wide variety of coins to choose from, as well to purchase with a credit card. All in all, it is a great alternative to Binance. The blockchain imposes withdrawal limits up to 5 BTC per day without KYC. IDEX This decentralized cryptocurrency exchange is specially designed for trading Ethereum and Ethereum-based tokens ( ERC-20 ). To identify themselves, traders only need their wallet addresses. After unlocking your Ethereum wallet, you need to deposit tokens on the exchange, and you can start trading. Also, we should say that if you are going to trade cryptos for fiat, then you should expect to do KYC as well. But there are some ways to get cryptos without ID. Peer-to-Peer Exchanges P2P exchanges don’t hold users’ funds, but rather connect buyers and sellers. HodlHodl   A noncustodial Bitcoin exchange provides escrow service by creating a multi-signature wallet between the users. They do not force you to fill in KYC details, therefore giving you the option to stay anonymous. HodlHodl has a rate of 0.6% shared between both parties and no limits.  Bisq It is the world’s only fully decentralized p2p exchange with a 0.001 BTC – 0.001 BTC rate. This platform is one of the most advanced in the industry and lets you sell and buy bitcoins for fiat. However, it still has low volume and might be difficult for new users. AgoraDesk This fully non-custodial exchange offers a variety of benefits. However, if you want to buy bitcoins for cash, you can find a person who will sell you bitcoins at a meeting – the exchange supports the purchase and sale of BTC for cash. It even offers cash by mail, no KYC, noJS mode, Tor, and I2P, and not even email are needed for registering.  Instant Swap Exchanges Another way is to use instant swap exchanges, such as the ones offering their services at SwapSpace , where you can avoid KYC and currency limits. Such platforms do not require account creation, and they have a large variety of coins to choose from. Xchange The platform provides competitive rates and high transaction volumes. It also operates both web and CLI versions, and can therefore be utilized inside Tails, or Whonix operating systems. StealthEX StealthEX is a privacy-focused noncustodial cryptocurrency swap exchange. They provide over 300+ assets with limitless trading potential. Additionally, StealthEX swaps can also be done through the Telegram bot. SimpleSwap This platform has an extensive set of over 300 different altcoins to choose from, no signs ups are required. It offers both fixed and floating fees, and unlimited swaps, of course. What can trigger KYC? However, blockchains are still on the lookout for frauds and some transactions can cause random identification requests. So there are few trigger events that can cause selective verification.  Going over the withdrawal limits. Unusual transaction activity. For example, an unusually short period of holding funds or frequent selling of coins at significant losses. Also, larger and unusual transactions in cash form also can seem to suspect exchanges. Rise of suspicion that your tokens have a criminal background. If you are going to operate with big amounts, check your Bitcoins for cleanness.
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El Salvador Adoption of Bitcoin as Legal Tender: Why Is This Exciting and How to Understand It Better

El Salvador Adoption of Bitcoin as Legal Tender: Why Is This Exciting and How to Understand It Better

June Katz 8 min read
For the past few weeks, the crypto world has been abuzz with the news of El Salvador’s official adoption of Bitcoin as legal tender. But why is it such a big deal? Let’s review the regulatory situations concerning digital money, look at why cryptocurrencies are special among them, and in the process find out what makes El Salvador’s case so unique. Types of Digital Money There are many kinds of digital money, many of which differ only in detail. So, for the purposes of this article, they can be roughly divided into three groups: centralized virtual currency, central bank digital currency, and cryptocurrency. Centralized Virtual Currency This is a type of currency that is accepted in some environments, like online game communities. Such currencies have a central authority that has the right to mint them and impose policies — for example, the publisher of the game. Those are not usable in the world outside the community, and there’s no real chance of any government to adopt any of them. Central Bank Digital Currency Central bank digital currency (CBDC) has been widely discussed in several countries for a long time. It’s a fiat currency that’s supposed to be minted digitally, not corresponding with the physical bank reserves but “in parallel” with them. On its face, a digital currency that is accepted as legal tender sounds innocent enough and incredibly convenient, as it’s basically an official endorsement of the touchless payment systems liked by many people already.  However, depending on the country, CBDC can be used as a part of a larger effort to regulate the payments market within its territory. One of the most obvious examples of this is China, whose digital renminbi has been in the works since 2014 and is slated for the country-wide rollout in 2022. At the same time, China has been slowly tightening regulations on cryptocurrencies, banning crypto exchanges, prohibiting financial institutions from dealing with crypto, clamping down on crypto mining. There’s no reason to assume that those regulations will loosen any time soon; if anything, it seems like China is looking to offer its citizens the user experience associated with crypto, but replaced with the CBDC, and drive the crypto community out of the country.  Cryptocurrency Obviously, this is the most interesting (and intriguing) one. After starting out as just a small subgroup of virtual currencies, crypto can be said to have won its unique position among digital money.  As opposed to most virtual money, its use is not limited to one community (even if some opponents claim that the only people using cryptocurrency are criminals and drug lords — we all know it isn’t true). On the other hand, most governments are wary of crypto, and probably rightfully at that, as it’s unregulated (more than that, even if you wanted to regulate it somehow, nobody understands yet how to do it in practice) and can be used to avoid capital control. The cryptocurrency case is a curious one, as it’s been invented with the exact purpose of being a decentralized, non-governmental form of money, but at the same time, crypto developers and users are clamoring for the widespread crypto adoption (and there’s nothing wrong with that, obviously). But the adoption trend contradicts the initial idea of crypto, which is evidenced by the high-profile clashes between the regulators and crypto communities. We will probably see many more of those in the future, although there can always be exceptions.  Regulatory Practices: A Short Overview We have looked at three types of electronic money. Now let’s quickly lay out what people and institutions may or may not be allowed to do with it in general, before talking about what’s being done in reality. Without diving deep into the regulatory waters, we can say that there’s basically a spectrum: the asset (or currency in this case) can be banned outright within a certain country, under the fear of criminal proceedings; it can be fully legal (for currencies — with the status of legal tender); or it can be somewhere in between. A government can ban a class of asset, citing lack of regulation, caring about the citizens, or some traditions prohibiting the use of this asset.  The governments that are open to more nuanced interpretation of the laws may put some partial restrictions, for example, on banking or use as a payment tool, or just discourage the use of an asset without passing formal regulations. Others can allow any use of an asset in the private sphere, while not wanting anything to do with it in public and governmental affairs. And on the extreme end of this spectrum is full adoption of an asset class with the full backing of the government. We mentioned the status of legal tender several times here, so to give a quick definition — to be legal tender means for a currency to be accepted in the settlement, or tender, for all debts within the country. This means that the government fully supports the currency, and because of it it’s usually widely accepted by various institutions and merchants. This is why being legal tender is a big deal. The State of Digital Money Regulation in 2021 In practice, the discussion about the digital money regulatory status can be reduced to the question concerning only cryptocurrencies. As any centralized virtual money existing now is essentially private, it’s obvious that it’s not going to enjoy full legal status anytime soon. Virtual money is not banned in most countries (with some exceptions like Algeria and Morocco, where any form of it is illegal), but at the same time, it’s not accepted outside of its community of origin. Central bank digital currency, as opposed to virtual money, is basically obligated to have a full legal tender status, because anything less defeats its purpose. Cryptocurrency regulation, until very recently, could fall on any point of the spectrum described in the previous section — except being backed by the government. Crypto has been banned fully (like, for example, in Egypt, Bolivia, or Nepal), legal (like in the US, Australia, and most of the EU), or partially regulated, taxed, etc. all around the globe. But only in 2021 it became adopted as legal tender for the first time, in El Salvador. So, What’s the Deal with the El Salvador Bitcoin Law? El Salvador is a small Central American country without its own fiat currency, choosing to use the US dollars instead. This has some consequences for the economy: for example, simply put, the El Salvador government has too much debt and too few reserves — not a good situation for the government to be in. To fix the economy somewhat, El Salvador needs to attract new investors. Many El Salvadorians live and work abroad and send remittances to their families, which is good for the economy, but this process is usually slow and difficult; besides, much of the population is unbanked.  These considerations, among others, led El Salvador’s government to propose officially adopting Bitcoin. This, they argued, would revitalize the economy, bringing the new investments and allowing unbanked citizens to manage, send and spend their money more efficiently. In June 2021, El Salvador President Nayib Bukele put the cryptocurrency adoption law through Congress, and on Tuesday, September 7, it went into effect.  The Bitcoin adoption in this country is surrounded by controversy. For example, El Salvador Bitcoin wallet Chivo, officially endorsed by Bukele, has some corrupt officials on its management team, not to mention the accusations of the El Salvador President of being corrupt himself — or, at the very least, a populist. Many people felt the crypto volatility as well — new Chivo owners in El Salvador received $30 in Bitcoin on signup, only to see it lose more than 15% of its value in one day. These and many other “hiccups” led to El Salvadorans protesting Bitcoin adoption and Bukele personally. One of the biggest protests happened on September 15, when El Salvador is celebrating its independence from Spain. Despite the somewhat botched execution in this case, it doesn’t seem to be fair to summarily reject the idea of the governmental adoption of crypto. Other countries have been carefully expressing their interest in following El Salvador’s suit — although, hopefully, if they do, they will learn from each other’s mistakes. Besides, the El Salvadoran story itself is far from over right now, and the potential good effects of Bitcoin adoption, noted at the beginning of the discussion, may still be realized. So, it seems like we need to watch the situation some more to decide whether it’s going to be a net positive. Final Thoughts El Salvador Bitcoin adoption move, while controversial, is also inspiring. The issues we touched upon in this article show that currently, among all digital currencies, crypto is the biggest headache for regulators all over — but for many people, it’s exciting to see what happens next in this new world. The crypto adoption does seem like the final frontier for now, doesn’t it? We will write more about this topic, as the stories unfold — so stay tuned. 
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