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The crypto industry must do more to promote encryption, says Meltem Demirors

Meltem Demirors sat down with Cointelegraph to express why the industry needs to focus on privacy and freedom when it comes to regulations.

“I like to call myself a future, or aspiring, cult leader,” Meltem Demirors, chief strategy officer of CoinShares — a publicly listed investment firm managing around $5 billion in assets — told Cointelegraph.

Demirors, who first entered the Bitcoin (BTC) space in late 2012, further mentioned that it has been “fun to see how big the crypto sector has become,” noting that people from all walks of life are now interested in the cryptocurrency space. As such, Demirors explained that “crypto cults” are bringing people together in a positive manner, especially since it gives people a sense of purpose and belonging.

When it comes to regulations — one of the most important topics facing the crypto industry today — Demirors expressed skepticism. “Having been in this industry professionally for eight years, I’m tired of talking about regulations, particularly in the United States,” she said. While U.S. regulators continue to pass frameworks around the treatment of digital assets, Demirors pointed out that there has been “too much talk and not enough cogent action.” Moreover, Demirors remarked that a number of crypto bills are attempting to minimize consumer use of encryption, which she believes to be the backbone of the internet.

*Meltem Demirors (left) of CoinShares speaks to Cointelegraph at Consensus 2022. Source: Cointelegraph*

Demirors elaborated on this topic, along with the development of decentralized autonomous organizations (DAOs) during an interview with Cointelegraph at Consensus 2022.

Cointelegraph: What are your thoughts on recent regulatory frameworks in the United States?

Meltem Demirors: I do think that the Lummis-Gillibrand bill and the Token Taxonomy Act of 2021 have been good attempts at categorizing and classifying digital assets. But, the challenge I have with so many of the crypto bills and regulations is that all are all focused on financial services and taxation. They are focused on where and how we govern, tax and extract value for the government. Therefore, the biggest issues I’m excited about are those centered around consumer privacy, self-sovereignty and freedom of speech, which are not being addressed in these bills.

Unlike so many bills that focus purely on the side of the financial services, the industry needs to focus on crypto infrastructures like data centers, connectivity, computations, semiconductors and the actual plumbing that makes any technology function. We also need to make sure that the U.S. is a friendly jurisdiction for people to develop not only software but also hardware that can be deployed at scale. Today, we have seen no cohesive action on this. The industry has seen a piecemeal approach with the State of New York taking a very draconian approach, while states like Texas and Wyoming want to become homes for crypto mining.

Moreover, the right to consumer and financial privacy are also not being addressed. In fact, most of these bills want more financial surveillance. As an industry, it’s important for us to continue to push back on this, particularly in a world where central bank digital currencies (CBDCs) are being explored.

CT: Any suggestions on what the crypto industry can do to preserve privacy and financial freedom?

MD: I think the biggest movement we’ve seen has been the crypto wars — and I’m talking about cryptography. In the early 90s, there was a massive debate around encryptions and the use of encryption for a variety of consumer-focused applications. Encryption is truly the backbone of the internet and we are seeing a number of bills now attempting to minimize consumer use of encryption and to create back doors.

Yet, once backdoors to encryption are created, they won’t just be used to surveillance consumers but rather will be used against our government. This is now a matter of national security. Therefore, I think the war of encryption is still alive and well. I also think there is more that we can do as an industry to preserve and promote encryption instead of using taxpayer dollars to run challenges that try to crack encryption algorithms, like SHA-256, which is the backbone of Bitcoin.

I also think that preserving code and speech is important. For example, open-source code is a big part of the crypto community, along with anonymous developers. Unfortunately, there are a number of efforts underway to hold open-source developers criminally liable for how their software is leveraged, which is antithetical to the entire open-source movement.

Recent: What happens if you lose or break your hardware crypto wallet?

In addition, we need to consider the treatment of virtual asset service providers, or VASPs. For example, if someone is running a node or if two people are transacting peer-to-peer on an open blockchain protocol, classifying them as VASPs and forcing them to comply with regulation is concerning. There is a bill now that makes people report their social security numbers to anyone sending crypto over an amount of $10,000. This is preposterous and we don’t have that same rule for cash. These are all factors around privacy that make it easier for the government to target individuals that are in the crypto space, so it’s important that the industry pushes back.

CT: You mentioned DAOs during your talk at Consensus. Can you share your thoughts on this area, please?

MD: Yes, DAOs have been interesting because a lot of what I do at CoinShares is focused on strategy, which means investing, but also looking at what’s happening in the crypto industry and how it’s relevant to the world of investing. So, I experiment with things happening in crypto. For example, I joined a few DAOs recently. I joined Friends With Benefits last year, which was my first DAO experience. I also started two DAOs with friends. One is Hashes DAO, which is an art collecting-focused DAO. The second is a DAO called DAO Jones, which is a funny play, but it’s an investment DAO that uses Syndicate, a platform that allows users to create investment clubs as DAOs that fit into a legal framework.

I’ve learned a lot about DAO tooling, infrastructure and the exciting opportunities around DAOs, along with the inherent limitations. The biggest thing I’ve learned though, is that all communities need leadership. In particular, communities need strong principled leadership to uphold and reinforce community values but to also push the community forward. We have seen so many communities in crypto begin with strong leaders, but then those leaders leave and challenges are created that splinter the community. We saw this with Bitcoin — we saw a struggle for power five years after Satoshi left the Bitcoin community.

Recent: Consensus 2022: Web3, unpacking regulations, and optimism for crypto’s future

Overall, I think DAOs are an exciting area of experimentation, but from an investing perspective, I think DAOs are still very early. There are many people building DAO tooling right now without understanding what emergent behaviors we need to focus on. Governance is not a technology or crypto problem but rather a very human problem that has existed since the early days of civilization. While I’m excited about the future of DAOs, I think there is still a lot of work to do before DAOs get to scale and become implemented in ways that allow for good governance.

CT: What are you most excited about in terms of the crypto space moving forward?

MD: I’m really excited about community-owned infrastructure, or physical infrastructure. Today, crypto is so dependent on centralized service providers like AWS being used for utilities. But, there are a number of efforts underway to build peer-to-peer networks that will enable us to perform computations, have better telecommunications, better broadband connectivity and decentralize and make the energy grid more resilient. I’m excited about taking crypto and combining it with energy computations and connectivity in new ways. This will also make our global systems more resilient, which typically comes with decentralization.

I’m also excited about more developer tools and infrastructure. Right now, the surface area of crypto is so large, so it’s been difficult for people to enter the space to build. Standardization, modulation and convergence around core consensus algorithms are really important. Experimentation has been fun, but we are now learning what does and doesn’t work. Also, thinking about decentralized identifiers and verifiable credentials, along with using Bitcoin as a communication protocol excites me.

Consensus 2022: Web3, unpacking regulations, and optimism for crypto’s future

Despite the crypto winter, the conference drew in 17,000 people to discuss the crypto regulatory landscape, Web3 development and the future of digital assets.

“Everything is bigger in Texas” proved to be true during Consensus 2022. The crypto conference took place June 9–12 in Austin, Texas, this year, attracting 17,000 people from across the globe, despite the 100-degree plus weather. According to the event sponsors, Consensus 2018, which was held at the Hilton Hotel in New York, had previously drawn in almost 9,000 attendees.

Caitlin Long, CEO of Custodia — the Wyoming-based digital asset bank — told Cointelegraph that the event this year speaks volumes. “New York has sent a lot of this industry fleeing to places like Austin, Wyoming and Miami. It will be interesting to see if New York makes a comeback.”

Aside from its new location, current market conditions were another defining factor of the event. However, attendees remained optimistic about the crypto ecosystem as a whole. In general, new projects and the rise of Web3 were the main discussion points rather than cryptocurrency prices. Ray Youssef, founder and CEO of Paxful — a peer-to-peer cryptocurrency marketplace — told Cointelegraph that crypto winters allow for building phases to start, which he fully supports. “We are now seeing projects build platforms that are real and empowering.”

Building the crypto ecosystem in a bear market

To Youssef’s point, Web3 and new tools to advance crypto ecosystems were hot topics of discussion. For example, Meltem Demirors, chief strategy officer of CoinShares — a digital asset investment firm — told Cointelegraph that despite the bear market, she has seen an increase in people interested in different facets of the crypto industry:

“There are different niches and pockets of crypto I’m now seeing, some of which I haven’t even heard of. For example, the STEPN group is here, which is a whole move-to-earn movement. The music NFT and fashion NFT scene is also big here. These are newer communities I’ve read about and have engaged with, but seeing them congregate and host their own events has been really fun.”

Demirors gave a keynote at the event on cults and how the crypto community is currently creating shared identity, belief systems and lifestyle rituals around emerging projects. “Cults usually have a negative connotation, but there is a massive crisis of meaning in our world today. People no longer focus on their occupation, religion or nationality. Crypto is filling this interesting role, bringing together people through memes, capitalism and community values,” she explained. As such, Demirors noted that she believes “crypto cults” are attracting many people because it provides a sense of purpose, along with capital. “There is an interesting convergence happening,” she said.

While the crypto space continues to attract more participants, Staci Warden, CEO of the Algorand Foundation, told Cointelegraph that Alogrand views this crypto winter as an opportunity for building. “We think that there will be some shakeout in the industry and we are ready to innovate,” she remarked.

Specifically, Warden explained that one area the Algorand community is focused on is what Web3 means for financial inclusion. “With Web2, everything went back to huge platforms, but with Web3, creators and contributors receive incentives and benefits for their participation.” With the rise of Web3 on the horizon, Warden shared that Algorand is “laser focused on real world use cases of financial inclusion and the monetization of creators for the work they do.”Web3 is also impacting a number of mainstream industries such as fashion and the creator economy. Shedding light on this, Justin Banon, co-founder of the Boson Protocol — a decentralized network for commerce — told Cointelegraph that last year, the crypto sector witnessed the nonfungible token (NFT) craze, which has prompted the fashion industry’s participation.

“Physical fashion isn’t going away, but digital is arriving. It’s become obvious that the two will combine and become facets of the same thing,” he said. Banon also mentioned that a majority of the world’s population will undoubtedly spend more time in the digital world, which is why he believes there will be a need for digital fashion. “This will allow us to identify and differentiate ourselves,” he said.

Regarding the creator economy, Solo Ceesay, co-founder of Calaxy — an open social marketplace for creators — told Cointelegraph that Calaxy recently raised $26 million in strategic funding to expand its operations and development efforts.

Cointelegraph interviewing Solo Ceesay (left) and Spencer Dinwiddie (right) of Calaxy at Consensus 2022. Source: Rachel Wolfson

While the emergence and growth of Web3-focused projects are notable, it’s also important to point out that current market conditions have been challenging for other key players. Peter Wall, CEO of Argo Blockchain — a cryptocurrency mining company — told Cointelegraph that many Bitcoin miners raised equity in 2021, but this has become difficult for some, given the bear market.

“There are only two ways for miners to raise capital now, which is either through debt or by selling Bitcoin,” he said. Although this may be, Wall elaborated that only miners with a reputable track record will receive loans. “They need to be able to execute with clear plans, while not being over committed to machine purchases and bills they can’t pay.”

Crypto’s regulatory landscape in the United States

Regulations were also heavily discussed at the conference. This shouldn’t come as a surprise, as a number of key regulatory events took place leading up to the event. For example, the bipartisan crypto bill, also known as the “Responsible Financial Innovation Act,” was introduced in the United States Senate on June 7, 2022. According to a statement, the bipartisan bill sponsored by senators Cynthia Lummis of Wyoming and Kirsten Gillibrand of New York, “addresses CFTC and SEC jurisdiction, stablecoin regulation, banking, tax treatment of digital assets, and interagency coordination.”

Senator Pat Toomey, the ranking member of the Senate Banking Committee, told Cointelegraph that he thinks the bipartisan bill is “terrific,” further noting that the bill contains modest differences in how stablecoins are treated compared with his stablecoin approach, which was drafted in April this year. Toomey added that while he has not released a bill yet, there are “bridgeable differences” between his draft and the legislation from Lummis and Gillibrand:

“Kirsten Gillibrand said on our panel that we can bridge those differences on some of the things I said, but it’s also very constructive to have a Democrat and Republican senator introducing a pretty comprehensive bill that sensibly creates a regulatory framework that is meant to allow this space to thrive. From that point of view, I think it’s very constructive.”

Echoing Toomey, Long mentioned that the bipartisan bill is an important advancement for the crypto sector, stating, “This is the bill to watch in Washington. There are now 50 different crypto bills that have been introduced in Congress and there is only one that is bipartisan sponsored by the powerful senator from New York State, along with the powerful senator on senate banking from Wyoming, which is the state leading digital assets. That is quite a combination.”

Long added that stablecoin regulations and central bank digital currencies (CBDCs) will be major topics of discussion this year. For instance, although President Biden released an executive order in March 2022 calling for the research and development of a potential U.S. central bank digital currency, Long remarked that she does not believe the U.S. will issue a CBDC. “The Federal Reserve will put out the FedNow Service by the end of this year, which is only six months away. However, no rules have been revealed yet, so we don’t know what this will look like.”

Moreover, Long predicts that stablecoins will be a main focus for regulators, pointing out that Wyoming’s special purpose depository regime falls into this category, alongside The New York State Department of Financial Services (DFS) regulatory guidance for U.S. dollar-backed stablecoins issued by DFS-regulated entities. Yet, Long explained that “it will be a couple of years before we realistically see what happens in terms of a law that actually passes” regarding stablecoins. She further remarked that regulators have had the opportunity to create regulations around stablecoins but have yet to act. She said:

“Regulators have sat on legitimate applications of parties that have sought permission, while the scams have proliferated in this industry. It’s tough, but I firmly believe the regulators could have acted sooner. A lot of people wouldn’t have been hurt if they had done so.”

Cointelegraph meeting with Senator Pat Toomey at Consensus 2022. Source: Rachel Wolfson

To Long’s point, Toomey said that he thinks there is now pressure and momentum to pass stablecoin legislation. “U.S Secretary of the Treasury Janet Yellen said in front of the banking committee that we should do it this year and I think that is realistic,” said Toomey. He added that the pressure has become greater due to the recent collapse of the Terra ecosystem.

“I think it influences legislation in the sense that it has drawn attention to the crypto space, and it’s a wake up call to the federal government. My own view is that algorithmic stablecoins should be treated separately from fiat/asset backed stablecoins,” he said, adding, “But let’s be clear: Terra was very large, and when something that large can collapse, the natural inclination of a regulator is to look out across the field to see what other similar instruments and products are there, and the dangers that may arise.”

Optimism reigns

Given the current state of cryptocurrency markets, it’s notable that many ecosystem participants remained optimistic about the future. In particular, Austin’s cryptocurrency community appears to be thriving, as it has become a hot spot for crypto mining companies and a number of Web3 projects.

Patrick Stanley, core contributor to City Coins — the cryptocurrency project that has been implemented in New York State and Miami — told Cointelegraph that AustinCoin (ATX) can be activated at any time, noting that there is a group currently working on a proposal for getting new CityCoins up and running.

“We want to be more deliberate about launching AustinCoin. We already have people on the ground in Austin, we have the capital, and there is clear commitment. We just want to ensure all of this before activating AustinCoin.” Stanley added that Austin Mayor Steve Adler is a “cryptocurrency progressive,” noting that he understands that CityCoins leaves less of a footprint than having big tech companies move to Austin. “CityCoins is like getting the tax revenue of a large company without the footprint and real estate going up. This has been very compelling to Mayor Adler,” he shared.

Demirors also pointed out that she is excited about the advancement of crypto infrastructures, such as new data centers, semiconductors and the overall “plumbing” that makes cryptocurrency and any technology function properly. “We need to make sure the U.S. is a friendly jurisdiction for people to develop not only software, but also hardware to deploy at scale,” she said.

While Demirors recognizes that most legislation currently isn’t being drafted around this aspect, she is hopeful that Texas and other states continue to take a welcoming approach to initiatives such as mining. Demirors also noted that the right to consumer and financial privacy isn’t being considered in crypto regulations, remarking that most of these bills want more financial surveillance. “I think as an industry, it’s important for us to push back on that, particularly in a world where CBDCs are being explored.”

Finally, it’s important to point out that the crypto industry is continuing to bring on key players to help with advancements. For example, Grayscale Investments recently hired Donald B. Verrilli, a former U.S. Solicitor General, to join the firm to help push for a spot Bitcoin exchange-traded fund (ETF). Verrilli mentioned during a press conference at Consensus last week that he is trying to take public policy and move it in a constructive direction.

As such, Verrilli aims to convince the U.S. Securities and Exchange Commission (SEC) to convert Grayscale’s Bitcoin Trust (GBTC) into a spot-based ETF. In order to accomplish this, Verrilli explained that it’s “arbitrary and capricious” to treat cases that are alike in a different manner, in which he referenced the SEC’s approval of a Bitcoin futures ETF, but not a Bitcoin-spot ETF. “It seems like this is a common sense point. I am new to this, but looking at it so far, it’s very hard to see what argument there could be for treating these things differently.”

Chinese chip designer reportedly filed for $50M Nasdaq IPO

Chinese mining chip designer Nano Labs has applied for an initial public offering (IPO) in the United States to raise $50 million on Nasdaq amid sluggish market conditions.

According to information obtained by the Renaissance Capital IPO monitoring tool, the Huangzhou-based crypto mining chip maker has filed with the regulator, the U.S. Securities and Exchange Commission (SEC), for its upcoming public offering on Nasdaq, the world’s second-larges stock exchange.

The application for American depository shares is occurring amid a slew of regulatory difficulties in China and the United States, causing a shortage of Chinese issuers’ overseas fundraising. Only two IPOs took place in 2022 in New York, raising $49.5 million, compared to 28 IPOs, which raised $5.8 billion last year.

Nano Labs, however, is pressing ahead with its Nasdaq offering even though it has yet to produce a viable product. The firm plans to transform into a metaverse business, providing computing power for gaming and entertainment.

A metaverse is a new online environment being developed on the blockchain. Users may create avatars and own digital property in these virtual realms, sometimes referred to as “next-generation internet” or Web3 applications.

The two main shareholders of Nano Labs are co-founders Kong and Sun Qifeng, with 32.8% and 22.3% stakes, respectively. Kong was previously the co-chairman and a director at rival Canaan, which became the first cryptocurrency-mining rig maker to list in the U.S. in November 2019. In August 2020, he departed Canaan amid a corporate power struggle, according to reports from China then.

Nano Labs’ products are used to mine cryptocurrencies such as Bitcoin (BTC), Ether (ETH) and Filecoin (FIL). In 2020, the company’s earnings were derived solely from China-based clients. To expand sales overseas, it established a subsidiary in Singapore last year.

After Beijing cracked down on crypto activities in May 2021, China, which was previously the world’s biggest cryptocurrency mining location, witnessed some activities being pushed underground. In July last year, the hash rate, a metric of the network’s computing power for validating transactions and creating new digital assets, briefly went to zero.

Even if the IPO is a success, Nano Labs faces the danger of being delisted. If a U.S. audit regulator fails to examine Chinese accounts for three years, mainland Chinese firms may be delisted from American markets by 2023. Nano Labs claimed it would face this problem as a result of auditing work done by its accounting firm’s offices in China.

DeFi pulls the curtain on financial magic, says EU Blockchain Observatory expert

A researcher from the University of Nicosia elaborates on key controversies of decentralized finance.

As decentralized finance continues its victorious march — although the road is sometimes bumpy — some significant questions on its nature remain. How can DeFi applications be protected from becoming nonoperational under extreme stress? Is it really decentralized if some individuals have way more governance tokens than others? Does the anonymous culture compromise its transparency?

A recent report from the EU Blockchain Observatory and Forum elaborates on these questions and many others around DeFi. It contains eight sections and covers a range of topics, from the fundamental definition of DeFi to its technical, financial and procedural risks. Conducted by an international team of researchers, the report formulates some important conclusions that will hopefully make their way to the eyes and ears of legislators.

The researchers highlight DeFi’s potential to increase the security, efficiency, transparency, accessibility, openness and interoperability of financial services in comparison with the traditional financial system, and they suggest a new approach toward regulation — one that is based on the activity of separate actors rather than their shared technical status. The report states:

“As with any regulation, measures should be fair, efficient, effective and enforceable. A combination of self-regulation and supervisory enforced regulation will gradually give rise to a more regulated DeFi 2.0 emerging from the current nascent DeFi 1.0 ecosystem.”

Cointelegraph spoke with one of the report’s authors, Lambis Dionysopoulos — a researcher at the University of Nicosia and a member of the EU Blockchain Observatory and Forum — to learn more about the most intriguing parts of the document.

Cointelegraph: How should regulators approach information asymmetry between professionals and retail users?

Lambis Dionysopoulos: I would argue that regulatory intervention is not needed for that. Blockchain is a unique technology in the level of transparency and intricacy of information it can provide to anyone at no cost. The trade-offs for achieving that level of transparency are often significant to the extent that decentralized blockchains are often criticized as inefficient or redundant. However, this is necessary for providing an alternative to the existing financial system, whose opaqueness is the root of many evils.

In traditional finance, this opaqueness is given. The everyday saver, charity donor or voter has no way to know if their funds are dutifully managed by the bank or support their preferred cause, or know who sponsored their politician and by how much. DeFi pulls the curtain on the financial magic by encoding every transaction on an immutable ledger accessible to everyone.

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Today, tools such as blockchain explorers allow anyone to trace the flow of money in the blockchain economy, gain information about the apps and services they use in the space, and make informed decisions. It is true that those with funds and advanced knowledge can, and do, take better advantage of this system. However, as the DeFi ecosystem expands, I am optimistic that new tools will emerge that will make more advanced insights available to anyone. My optimism is founded on two factors: First, it is comparatively easier to build such tools in DeFi; and second, inclusivity and openness are the ethos of the DeFi space. The role of regulators should be to facilitate this.

CT: In the report, DeFi is classified as “radical innovation,” while fintech generally is “sustaining innovation.” Could you explain these definitions and the difference between them?

LD: Sustaining or incremental innovations are improvements on existing products or procedures with the goal of better serving the same customers, often for a higher profit too. Fintech is a prime example of this. Indicatively, through e-banking, customers can open accounts faster, initiate online transactions, and gain access to electronic statements, reports and management tools.

Revolut and Venmo make splitting the bill or asking for pocket money easier. All those conveniences are often welcome and demanded by consumers, but also by companies who can find ways to monetize them. Central to sustaining innovations is a notion of linearity and certainty, meaning modest changes that result in modest improvements on how things are done as well as added value.

On the contrary, radical innovations such as DeFi are nonlinear — they are discontinuities that challenge conventional wisdom. Radical innovations are based on new technologies — they can create new markets and make new business models possible. For that reason, they also imply a high level of uncertainty, especially at the early stages. The notion that anyone can be their own bank and that openness and composability can overcome walled gardens are examples of how DeFi can be perceived as a radical innovation.

CT: Is there any data confirming the hypothesis that DeFi can help the unbanked and underbanked? It seems that DeFi is popular firstly among tech-savvy individuals from developed countries.

LD: The notion that DeFi is popular with banked and tech-savvy individuals is both true and short-sighted. For traditional financial service providers, making their services available to an individual is a question of cost-benefit. Simply put, a large portion of the planet is not worth their “investment.” Someone more suspicious might also add that depriving individuals of access to finance is a good way of keeping them subordinate — a look at who the unbanked are might support this terrifying theory.

DeFi has the potential to be different. Its global availability does not depend on the decision of a board of directors — it is how the system is built. Everyone with rudimentary internet access and a smartphone can access state-of-the-art financial services. Immutability and censorship resistance are also central to DeFi — no one can stop anyone from transacting from, or to, a specific area or with an individual. Finally, DeFi is agnostic to the intentions behind sending or receiving information. As long as someone sends or receives valid information, they are first-class citizens in the eyes of the network — irrespective of their other social status or other characteristics.

DeFi is popular with banked tech-savvy individuals for two primary reasons. Firstly, as a nascent technology, it necessitates some level of technical sophistication and thus attracts users with the luxury of acquiring this knowledge. However, there are active steps taken to reduce the barriers to entry. Social recovery and advances in UX design are only two such examples.

Secondly, and perhaps most importantly, DeFi can be lucrative. In the early stages of wild experimentation, early adopters are rewarded with high yields, handouts (airdrops) and price appreciation. This has attracted tech-savvy and finance-native individuals seeking a higher return on their investments. Market shakeouts (such as the recent events of UST/LUNA) will continue to separate the wheat from the chaff, unsustainable high yields will eventually subside, and individuals attracted to them (and only them) will seek profits elsewhere.

CT: The report highlights the problematic aspects of the pseudonymous culture of DeFi. What possible compromises between the core principles of DeFi and the security of users do you see in the future?

LD: DeFi is not entirely homogeneous, which means that it can provide different services, with different sets of trade-offs for different people. Similar to how blockchains have to compromise either security or decentralization to increase their efficiency, DeFi applications can make choices between decentralization and efficiency or privacy and compliance to serve different needs.

We are already seeing some attempts at compliant DeFi, both in custodial stablecoins, programmable central bank digital currencies, securities settlement using blockchain, and much more, collectively also referred to as CeDeFi (centralized decentralized finance). The trade-off is explicitly included in the name. Products with different trade-offs will continue to exist to serve consumer needs. However, I hope this interview makes a case for decentralization and security, even if that means challenging conventions.

CT: The report states that DeFi has so far had a minimal impact on the real economy, with use cases limited to crypto markets. What use cases do you see outside these markets?

LD: DeFi has the potential to influence the real world directly and indirectly. Starting with the former, as we become better at making complex technologies more accessible, the whole suite of DeFi tools can be made available to everyone. International payments and remittances are the first low-hanging fruit. The borderless nature of blockchains, in conjunction with relatively low fees and reasonable transaction confirmation times, makes them a contender for international payments.

With advances such as layer 2, transaction throughput can rival that of large financial providers such as Visa or Mastercard, making cryptocurrency a compelling alternative for everyday transactions as well. What could follow are basic financial services, such as savings accounts, lending, borrowing and derivatives trading. Blockchain-backed microfinancing and regenerative financing are also gaining traction. Similarly, DAOs can introduce new ways of organizing communities. NFTs can also be, and have been, more appealing to the wider market.

At the same time, the idea of using concepts developed in the DeFi space to increase efficiency in the traditional financial system is gaining ground. Such use cases include, but are not limited to, smart contracts and programmable money, as well as the use of the tamper-evident and transparent properties of blockchain for the monitoring of financial activity and the implementation of more effective monetary policy.

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While each of those individual components is important in its own respect, they are also parts of a bigger transition to Web3. In that respect, I would argue that the real question is not how much crypto can influence the “real” economy but how much it will blur the line between what we consider the “real” and “crypto” economy.

CT: The report makes a reserved recommendation to regulate DeFi actors by their activity rather than use an entity-based approach. How would this regulatory structure function?

LD: In the world of DeFi, entities look much different than what we are used to. They are not rigidly defined structures. Instead, they comprise individuals (and entities, too) that come together in decentralized autonomous organizations to vote on proposals about how the “entity” will be involved. Their activities are not well defined. They can resemble banks, clearing houses, a public square, charities and casinos, often all at the same time. In DeFi, there is no single entity to be held accountable. Due to its global nature, it is also impossible to apply a single country’s legislation.

For this reason, our conventional wisdom of financial regulation simply does not apply to DeFi. Moving to an activity-based regulation makes more sense and can be facilitated by regulation at the individual level and the DeFi on-ramps. That being said, there are definitely bad actors using DeFi as an excuse to sell repackaged traditional finance products, only less secure and less regulated — or even worse, outright scams. Regulatory certainty can make it harder for them to seek asylum in DeFi.

CZ visits Palau to kick off BNB Chain-supported ID NFTs for digital residency program

The tiny country introduced its digital residency program at the beginning of the year in the hope that it will help to retain the youthful population and attract business and industry.

The Republic of Palau announced Friday that it will issue identification cards to its digital residents in the form of nonfungible tokens (NFTs) on Binance’s BNB Chain blockchain. Binance founder and CEO Changpeng Zhao (CZ) was on hand in the Pacific Island nation for the unveiling of the NFTs and to meet with Palauan President Surangel S. Whipps, Jr.

Palau introduced its Root Name System (RNS) Digital Residency program in January. California-based Cryptic Labs took part in the development of the program, which provides global citizens with identity cards issued by the government of Palau. Physical cards already exist.

Planned uses for the new RNS ID NFTs include Know Your Customer (KYC) functions, access to digital banking, verified on-chain signatures and accessing services requiring government-issued identification.

“We want to create the Palauan dream,” Whipps said at a press conference, adding:

“And having you here, CZ and Binance, opens that door of opportunity to develop new industries, new businesses here that hopefully can bring our young people back to Palau and be part of the new technology and innovations that’s out there.”

“There’s regulations we need to work on within the digital residency program, but more importantly, the Corporate Registry Act,” Whipps continued. “It’s good to have a commitment from Binance to help us from the regulatory side.”

CZ said in his response, “We will definitely explore further investment in the Palau ecosystem. […] We have already expressed our interest in, outside of crypto, traditional financial service sectors, including payment services, digital banks, etc.”

CZ went on to call Palau, which has a population of less than 20,000, a “very good prototyping ground.” Palau has distinct advantages for innovation, he said, as small countries are able to move fast to innovate, and Palau’s “kind of U.S.-driven” economy is fairly well-developed.

Tourism is open In Palau , and so is blockchain. Come. pic.twitter.com/M7jcTC32cY

— CZ Binance (@cz_binance) June 10, 2022

A life after crime: What happens to crypto seized in criminal investigations?

Like with any kind of property, law enforcement has the right to sell your coins and spend the money.

Earlier this year, during the annual Queen’s Speech in the United Kingdom, Prince Charles informed the Parliament about two bills. One of them — the Economic Crime and Corporate Transparency Bill — would expand the government’s powers to seize and recover crypto assets.

Meanwhile, the United States Internal Revenue Service (IRS) seized more than $3 billion worth of crypto in 2021.

As digital currencies’ monetary stock grows and enforcers’ scrutiny over the maturing industry tightens, the amount of seized funds will inevitably increase.

But where do these funds go, assuming they aren’t returned to the victims of scams and fraud? Are there auctions, like there are for forfeited property? Or are these coins destined to be stored on some kind of special wallet, which might end up as a perfect investment fund for law enforcement agencies? Cointelegraph tried to get some answers.

The dark roots of civil forfeiture

For the newcomers in the room, cryptocurrency is money. In that sense, the destiny of seized crypto shouldn’t differ much from other confiscated money or property. Civil forfeiture, the forceful taking of assets from individuals or companies allegedly involved in illegal activity, is a rather controversial law enforcement practice. In the U.S., it first became common practice in the 1980s as a part of the war on drugs, and it has been the target of vocal critics ever since.

In the U.S., any seized assets become the permanent property of the government if a prosecutor can prove that the assets are connected with criminal activity or if nobody demands their return. In some cases, the assets are returned to their owner as a part of a plea deal with the prosecution. Some estimate, however, that just 1% of seized assets are ever returned.

How do law enforcement agencies use the money they don’t have to return? They spend it on whatever they want or need, such as exercise equipment, squad cars, jails and military hardware. In 2001, for example, the St. Louis County Police Department used $170,000 to buy a BEAR (Ballistic Engineered Armored Response) tactical vehicle. In 2011, it spent $400,000 on helicopter equipment. The Washington Post analyzed more than 43,000 forfeiture reports and reported that the seized money was spent on things as varying as an armored personnel carrier ($227,000), a Sheriff’s Award Banquet ($4,600) and even hiring a clown ($225) to “improve community relations.”

Some states, like Missouri, legally oblige that seized funds be allocated to schools, but as the Pulitzer Center points out, law enforcement agencies keep almost all of the money using the federal Equitable Sharing Program loophole. In 2015, U.S. Attorney General Eric Holder issued an order prohibiting federal agency forfeiture, but his successor under the administration of President Donald Trump, Jeff Sessions, repealed it, calling it “a key tool that helps law enforcement defund organized crime.”

Seized coins’ destiny in the U.S., U.K. and EU

While none of the experts who spoke to Cointelegraph could speak to the technical aspects of storing seized crypto assets, the rest of the procedure tends to be pretty much the same as with non-crypto assets.

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Don Fort, a former chief of the IRS Criminal Investigation Division who heads the investigations department at law firm Kostelanetz & Fink, told Cointelegraph that the only principal distinction is the necessity to auction the digital assets off:

“At the federal level, seized cryptocurrency goes to either the Department of Justice or Department of Treasury Forfeiture Fund. Once the crypto funds are auctioned off by one of the forfeiture funds, the funds can be used by the respective federal law enforcement agencies.”

Fort explained that as with non-crypto funds, the agency requesting forfeited funds has to submit a specific plan or initiative to acclaim the money and spend it, and the plan must be approved by the Department of Justice before the funds can be allocated to the agency.

A similar procedure regulates the allocation of seized crypto in the United Kingdom. The Proceeds of Crime Act 2002 outlines how cryptocurrency proceeds of crime should be dealt with once seized. Tony Dhanjal, head of tax at Koinly, explained to Cointelegraph:

“When it generally comes to confiscated assets — as opposed to cash — the Home Office gets 50%, and the other 50% is split between the Police, Crown Prosecution Services and the Courts. There is also leeway for some of the confiscated assets to be returned to the victims of crypto crime.”

However, Dhanjal believes the legislation needs to be updated to deal specifically with crypto assets, as they are a “unique challenge for crime agencies as anything that has ever come before it.” The aforementioned announcement of the Economic Crime and Corporate Transparency Bill didn’t include any specifics aside from the intention to “create powers to more quickly and easily seize and recover crypto assets,” but an update on the procedure of seized crypto allocation is surely something to be desired.

As it often goes for regulatory policies, the European Union is more complicated. While there are systems of mutual assistance in criminal matters within the EU, criminal legislation falls within the authority of the member states, and there is no single agency to coordinate enforcement or seizure.

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Hence, there are various ways seized crypto is handled. Thibault Verbiest, a Paris-based partner at law firm Metalaw, cited several cases to Cointelegraph. In France, for example, the Agency for the Recovery and Management of Seized and Confiscated Assets (AGRASC) is responsible for managing seized property. Verbiest stated:

“When, as a result of a judicial investigation, assets have been seized, they are, by decision of the public prosecutor, transferred to the AGRASC, which will decide, in accordance with Articles 41-5 and 99-2 of the Code of Criminal Procedure, the fate of these assets; they will be sold at public auction or destroyed.”

But it is not always possible to seize crypto assets. In 2021, 611 Bitcoin (BTC) was sold at a public auction by the AGRASC after it seized the cold storage devices used by prosecuted people, who had stored their encryption keys on a USB stick. As Verbiest explained:

“This was made possible by the fact that the aforementioned articles allow seizures on the movable property, so the USB stick (and its content) could be seized. The case would have been different if the crypto funds had been stored on a third-party server via a delegated storage service, as the aforementioned texts do not allow seizures of intangible property.”

With the practice of property forfeiture remaining highly controversial — with some even preferring to call it “highway robbery” — cryptocurrencies provide their owners at least a relative degree of protection. Still, technology aside, it’s in the area of policy where both coiners and no-coiners will have to fight against the long tradition of law enforcement overreach.