Investments

Where in the world are the 3AC founders? Speculation abounds

Rumor has it that they are heading to, or are already in, Dubai, says a lawyer with 30 years of experience. But can they stay there forever?

The creators of Three Arrows Capital are missing. According to reports, when court-appointed liquidators recently visited the firm’s Singapore headquarters, all they discovered was a locked door and a stack of outdated mail.

Singapore-based 3AC is among the flagship cryptocurrency firms that have crumbled in recent weeks under bear pressure and faced liquidity issues driven by the market sell-off.

In June, a court in the British Virgin Islands, where 3AC had moved its registration, appointed consulting firm Teneo to liquidate 3AC’s assets.

Teneo senior managing directors Russell Crumpler and Christopher Farmer informed the court on July 8 that the whereabouts of Su Zhu and Kyle Davies, the co-founders of 3AC, were still unknown.

Most recently, a Singapore court approved Teneo’s petition order against 3AC issued in the British Virgin Islands. This recognition will give Teneo the legal ability to request access to 3AC’s financial records kept in Singapore.

David Lesperance, a lawyer with over 30 years of experience as a taxation and citizenship adviser, told Cointelegraph that he believes the founders have availed themselves of a backup plan and gone underground. Pioneer founders in previously unregulated industries, such as gaming and crypto, need to maintain a power balance when regulators inevitably come calling.

He added that it is best to maintain parity in the relationship when negotiating to adjust business practices to the newly established standard. This is best done at a distance, where it is difficult for the regulator to bully. According to Lesperance, this allows the company lawyers to negotiate with liquidators, courts and regulators on an even playing field.

Lesperance further explained that in the 1990s, former New York Attorney General Elliot Spitzer mastered the technique of nabbing CEOs and making them do the “perp” walk. Then, hours before the market’s opening bell, Spitzer would call up the board and offer them a plea bargain deal. Negotiating from a position of great weakness, the boards would capitulate and concede to charges that — per Lesperance — Spitzer really had no real chance of “winning at trial, solely to save the company’s share price.” 

“During the time that online gaming and sports book sites were coming into their own, I had several founder clients who successfully stayed out of the clutches of overzealous American prosecutors while their corporate lawyers adjusted their businesses to new United States regulatory rules that had been pushed through by their brick-and-mortar Vegas competitors,” Lesperance said, adding:

“These founders continued to legally live and operate in more friendly jurisdictions during this negotiation period. Their competitors, who fell into the hands of the U.S. authorities during this period, saw their businesses collapse and were subsequently bought up for pennies on the dollar by my clients.” 

He added that now that the founders of 3AC have fled Singapore, investor suspicions have been strengthened that the firm was an illegitimate operation. To add to this point, 3AC once boasted that it had around $10 billion worth of assets under management, leaving some in the space to believe that the recent bankruptcy filing was a cover-up for the founders’ escape plan.

The Three Arrows founders have provided a spreadsheet with details of the company’s assets to the liquidators, according to a post from Zhu’s verified Twitter account.

The 3AC co-founders will continue working to find details of other assets but are displeased with the behavior of the liquidators, according to the tweet. The hedge fund’s liquidators traveled to Three Arrows’ office address in Singapore in late June in an attempt to track down the founders. 

Recent: How blockchain technology is changing the way people invest

“It appeared dormant: The door was locked, computers were inactive, and mail was stuffed under the door. As is appropriate in this strategy, the liquidators spoke with lawyers for Davies and Zhu via video conference last week, according to court papers, but did not speak to the founders directly,” Lesperance stated. “It is worth noting that at this point, the liquidation is a civil matter, and no criminal charges have been made against either founder.”

Rumor has it that they are heading to or already in Dubai, said Lesperance.

According to a Finance Magnates report, the 3AC founders had already planned to “move the business to Dubai.” Zhu also added that they “have to go there soon to assess whether we move there as originally planned or if the future holds something different for” them. 

In addition, Zhu’s Twitter account shows that he is in the United Arab Emirates, with his last tweet being from July 12. However, Davies’ Twitter location is still showing Singapore.

Can the co-founders hide in Dubai?

Dubai has recently become quite fashionable among crypto entrepreneurs, according to Lesperance. Changpeng Zhao, the founder of Binance, is one example. It is relatively “simple to obtain visas for commercial or private planes that allow you to enter Dubai,” he added.

However, it is not a reliable “hideout” if criminal charges are ever levied, said Lesperance. The Nigerian fraudster Hushpuppi found this out the hard way when he was arrested by Dubai police and flown directly to the United States.

It is worth noting that the UAE has extradition treaties with 37 different territories, including several whose regulators are most likely looking at the actions of Three Arrows Capital. The United States, the United Kingdom, Canada, Singapore and Hong Kong are all signatories to extradition treaties with the UAE, according to Bloomberg.

If the rumors are true and the founders of 3AC have in fact fled to Dubai, they may be in for a rude awakening if criminal charges are ever brought against them, Lesperance added.

What else might they do besides relocate to Dubai?

“Both Kyle and Zhu are American citizens and passport holders. It is not known whether they obtained another citizenship, such as Singaporean. Therefore, if they are only traveling on U.S. passports, they are at significant risk,” the lawyer stated.

“Their passport” is not really theirs. Rather, it is the property of the United States, said Lesperance, “which allows them to use that passport right up to the moment that they no longer allow them to use it.” In short, if their U.S. passports were canceled while they were in another country such as the UAE, Singapore or elsewhere, then they would be effectively trapped in that country, the lawyer added.

This is because they would not have a travel document that would allow them to enter a third country. In addition, life without a valid passport is not easy. For example, it may prevent them from making a residence application or opening a bank account.

“If they are smart, they will lawyer up and try to fight any charges in the United States,“ Lesperance said. “If they are found guilty, maybe they can negotiate a deal that includes some form of house arrest or other alternatives to prison. But if they are convicted and sent to prison, it is very likely that they will never see the light of day again.”

Can they apply for citizenship by investment?

Both Zhu and Davies can apply for citizenship by investment (CBI) in a number of countries, including Dominica, St. Lucia, Antigua and Barbuda, Grenada, St. Kitts and Nevis, and Vanuatu, said Lesperance.

Under most CBI programs, the applicant must make a significant financial investment in the country, usually in the form of a real estate purchase or a government bond. In return, they are granted citizenship and a passport, which allows them to live and work in the country and travel visa-free to many other countries.

While CBI programs may offer a way for Zhu and Davies to obtain second citizenship and a second passport, it is important to note that they would still be subject to extradition to the U.S. if criminal charges are ever brought against them.

Lesperance added that contrary to popular belief, countries that have citizenship by investment programs have screening and due diligence procedures. Therefore, given the publicity surrounding these gentlemen and the possibility of criminal charges in the future, there is no currently operating CBI program that would consider granting them a passport, he said.

The other thing to remember is that such citizenship is not granted overnight. Rather, it takes three to four months and requires a valid existing passport to process successfully, Lesperance said. If the U.S. were to cancel their passports in the near future, “They would be trapped.”

In short, Davies and Zhu’s fiscal house is being scorched by a liquidation. Therefore, the time to seek “fire insurance for a second passport is long past.” If there are any future potential criminal “arson” (i.e., fraud) charges, they will have to face the music. But without a second passport, they will be doing so from a prison cell, the lawyer told Cointelegraph.

Recent: How to tell if a cryptocurrency project is a Ponzi scheme

3AC, on the other hand, was formerly one of crypto’s largest, best-known funds, managing roughly $10 billion. However, poor investment in Terra’s LUNA token prompted investors to demand their money back, ultimately compelling 3AC to seek Chapter 15 bankruptcy protection and causing its founders to flee a swarm of creditors and regulators.

The crypto hedge fund owes $3.5 billion to 27 different companies, including $2.3 billion to digital currency lender Genesis Global Trading, according to a court filing in the firm’s bankruptcy made public last month.

Although 3AC’s story is a cautionary tale, it does not necessarily spell doom for the crypto industry as a whole. Instead, it is a reminder that even the most well-funded, experienced investors can make mistakes and that even in the digital age, due diligence and risk management are essential.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

Where in the world are the 3AC founders? Speculations abound

Rumor has it that they are heading to or already in Dubai, says a lawyer with 30 years of experience. But can they stay there forever?

The creators of Three Arrows Capital are missing, according to reports, when court-appointed liquidators visited the firm’s Singapore headquarters recently, all they discovered was a locked door and a stack of outdated mail.

Singapore-based 3AC is among the flagship cryptocurrency firms that have crumbled under bear pressure and faced liquidity issues driven by the market sell-off in recent weeks.

In June, a court in the British Virgin Islands, where 3AC had moved its registration, appointed advisory firm Teneo in June to liquidate 3AC assets.

Teneo senior managing directors Russell Crumpler and Christopher Farmer informed the court on July 8 that the whereabouts of Zhu Su and Kyle Davies, the co-founders of 3AC, were still unknown.

Most recently, a Singapore court approved Teneo’s petition order against 3AC issued in the British Virgin Islands. This recognition will give Teneo the legal ability to request access to 3AC’s financial records kept in Singapore

David Lesperance, a lawyer with over 30 years of experience as a taxation and citizenship adviser, told Cointelegraph that he believes the founders have availed themselves of a backup plan and gone underground. Pioneer founders in previously unregulated industries, such as gaming and crypto, need to maintain a power balance when regulators inevitably come calling.

He added that when negotiating to adjust business practices to the newly established standard, it is best to maintain parity in the relationship. This is best done at a distance, where it is difficult for the regulator to bully. According to Lesperance, this allows the company lawyers to negotiate with liquidators, courts and regulators on an even playing field.

Lesperance further explains that in the 1990s, former New York Attorney General Elliot Spitzer mastered the technique of nabbing CEOs and making them do the “perp” walk. Then, hours before the market’s opening bell, Spitzer would call up the board and offer them a plea bargain deal. Negotiating from a position of great weakness, the boards would capitulate and concede to charges that — per Lesperance — Spitzer really had no real chance of “winning at trial, solely to save the company share price.” 

“During the time that online gaming and sports book sites were coming into their own, I had several founder clients who successfully stayed out of the clutches of overzealous American prosecutors while their corporate lawyers adjusted their businesses to new U.S. regulatory rules that had been pushed through by their brick-and-mortar Vegas competitors,” Lesperance said:

“These founders continued to legally live and operate in more friendly jurisdictions during this negotiation period. Their competitors, who fell into the hands of the U.S. authorities during this period, saw their businesses collapse and were subsequently bought up for pennies on the dollar by my clients.” 

He added that now that the founders of 3AC have fled Singapore, investor suspicions have been strengthened that the firm was an illegitimate operation. To add to this point, 3AC once boasted that it had around $10 billion worth of assets under management, leaving some in the space to believe that the recent bankruptcy filing was a cover-up for the founders’ escape plan. 

Lesperance says that the Three Arrows founders have provided a spreadsheet with details of the company’s assets to the liquidators, according to a post from Zhu’s verified Twitter account.

The 3AC co-founders will continue working to find details of other assets but are displeased with the behavior of the liquidators, according to the Tweet. The hedge fund’s liquidators traveled to Three Arrows’ office address in Singapore in late June in an attempt to track down the founders. 

Recent: How blockchain technology is changing the way people invest

“It appeared dormant: The door was locked, computers were inactive and mail was stuffed under the door. As is appropriate in this strategy, the liquidators spoke with lawyers for Davies and Zhu via videoconference last week, according to court papers, but did not speak to the founders directly,” Lesperance stated. “It is worth noting that at this point, the liquidation is a civil matter and no criminal charges have been made against either founder.”

Rumor has it that they are heading to or already in Dubai, says Lesperance.

According to a Finance Magnates report, the 3AC founders had already planned to “move the business to Dubai.” Zhu also added that they “have to go there soon to assess whether we move there as originally planned or if the future holds something different for” them. 

In addition, Zhu’s Twitter account shows that he is in the UAE, with his last tweet being from July 12. However, Davies’ Twitter location is still showing Singapore.

Can the co-founders hide in Dubai?

Dubai has recently become quite fashionable among crypto entrepreneurs, according to Lesperance. Changpeng Zhao, the founder of Binance, is one example. It is relatively “simple to obtain visas for commercial or private planes that allow you to enter Dubai,” he added.

However, it is not a reliable “hideout” if criminal charges are ever levied, says Lesperance. The Nigerian fraudster Hushpuppi found this out the hard way when he was arrested by Dubai police and flown directly to the United States.

It is worth noting that the UAE has extradition treaties with 37 different countries, including several whose regulators are most likely looking at the actions of Three Arrows Capital. The United States, the United Kingdom, Canada, Singapore and Hong Kong are all signatories to extradition treaties with the UAE, according to Bloomberg data.

If the rumors are true and the founders of 3AC have in fact fled to Dubai, they may be in for a rude awakening if criminal charges are ever brought against them, Lesperance added.

What else should they do besides relocating to Dubai?

“Both Kyle and Zhu are American citizens and passport holders. It is not known whether they obtained another citizenship, such as Singaporean. Therefore, if they are only traveling on U.S. passports, they are at significant risk,” the lawyer stated.

This is because “their passport” is not really theirs. Rather, it is the property of the United States, says Lesperance, “that allows them to use that passport right up to the moment that they no longer allow them to use it.” In short, if their U.S. passports were canceled while they were in another country such as the UAE, Singapore or elsewhere, then they would be effectively trapped in that country, the lawyer added.

This is because, he says, they would not have a travel document that would allow them to enter a third country. In addition, life without a valid passport is not easy. For example, it may prevent them from making a residence application or opening up banking facilities.

“If they are smart, they will lawyer up and try to fight any charges in the United States. If they are found guilty, maybe they can negotiate a deal that includes some form of house arrest or other alternatives to prison. But, if they are convicted and sent to prison, it is very likely that they will never see the light of day again,” Lesperance says.

Can they apply for citizenship by investment?

It is possible for both Zhu and Davies to apply for citizenship by investment (CBI) in a number of countries, including Dominica, St. Lucia, Antigua & Barbuda, Grenada, St. Kitts & Nevis and Vanuatu, per the lawyer.

Under most CBI programs, the applicant must make a significant financial investment in the country, usually in the form of a real estate purchase or a government bond. In return, they are granted citizenship and a passport, which allows them to live and work in the country and travel visa-free to many other countries.

While CBI programs may offer a way for Zhu and Davies to obtain second citizenship and a second passport, it is important to note that they would still be subject to extradition to the U.S. if criminal charges are ever brought against them.

Lesperance adds that, contrary to popular belief, countries that have citizenship by investment programs have screening and due diligence procedures. Therefore, given the publicity surrounding these gentlemen and the possibility of criminal charges in the future, there is no currently operating citizenship by investment program which would consider granting them a passport, he said.

The other thing to remember is that such citizenship is not granted overnight. Rather, they take three to four months and require a valid existing passport to successfully process, Lesperance says. If the U.S. were to cancel their passports in the near future, “they would be trapped.”

In short, Kyle and Zhu’s fiscal house is being scorched by a liquidation. Therefore, the time to seek “fire insurance for a second passport is long past.” If there are any future potential criminal “arson” (i.e., fraud) charges, they will have to face the music. But, without a second passport, they will be doing so from a prison cell, the lawyer told Cointelegraph.

Recent: How to tell if a cryptocurrency project is a Ponzi scheme

3AC, on the other hand, was formerly one of crypto’s largest and best-known funds, managing roughly $10 billion. However, poor investment in Terra prompted investors to demand their money back, ultimately compelling 3AC to seek Chapter 15 bankruptcy protection and causing its founders to flee a swarm of creditors and regulators.

The crypto hedge fund owes $3.5 billion to 27 different companies, including $2.3 billion to digital currency lender Genesis Global Trading, according to a court filing in the firm’s bankruptcy made public last month.

Although 3AC’s story is a cautionary tale, it does not necessarily spell doom for the crypto industry as a whole. Rather, it is a reminder that even the most well-funded and experienced investors can make mistakes, and that even in the digital age, due diligence and risk management are essential.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

What the Taliban crackdown means for crypto’s future in Afghanistan

The Taliban have finally banned crypto in Afghanistan, but many users and traders call it one of the “worst” policy decisions made by the government so far.

When the Taliban again rose to power in August 2021, Afghanistan faced global sanctions that led to many international organizations and money transaction services halting operations in the country. This made room for digital currencies and stablecoins to be widely used, at least to send or receive remittances.

However, according to the provincial news website ATN-News, the Taliban government recently banned cryptocurrencies and has arrested 16 local exchanges in the northwestern city of Herat in the past week.

According to the report, the exchanges were initially given a grace period to comply with the government’s regulations but were ultimately shut down after failing to do so. The Afghan government has now asked locals to refrain from using digital assets and has warned them of the risks associated with such activities.

However, people familiar with the matter — who want to stay anonymous for security reasons — told Cointelegraph that “no previous announcement or warnings were given.”

“Da Afghanistan Bank (central bank) stated in a letter that digital currency trading has caused lots of problems and is scamming people, therefore they should be closed. We acted and arrested all the exchangers involved in the business and closed their shops,” the head of the counter-crime unit of Herat police, Sayed Shah Sa’adat, told ATN-News.

People familiar with the matter believe there were no crypto-related scams involved in the government’s “stupid” decision. “We mostly used the Binance crypto exchange and a wallet to trade, send or receive assets,” they added. “Right now, we don’t have standard banks or monetary services, and the Taliban banned our only hope.”

In June, the Taliban-led central bank of Afghanistan banned online foreign exchange trading in the country. A spokesman told Bloomberg that the bank views forex trading as both illegal and fraudulent, saying “There is no instruction in Islamic law to approve it.” After the Taliban regained power in Afghanistan, local residents’ finances worsened as billions of dollars in foreign aid was cut off and their overseas assets were frozen under United States sanctions, per Bloomberg.

Why did the Taliban ban crypto?

According to the ATN-News report, the main reasons for the ban are the volatile nature of cryptocurrencies and assets like the U.S. dollar leaving the country since crypto exchanges are not based in Afghanistan. Another reason noted in the report is that digital currencies are new and “the people are not familiar with them.”

The head of the fiat exchangers’ union, Ghulam Mohammad Suhrabi, also claimed that crypto was used to scam people. However, people familiar with the matter do not know of any crypto-related crime or scam, and Suhrabi also didn’t provide any specific data.

Recent: Blockchain audits: The steps to ensure a network is secure

Some believe that the only reason for the ban is the decentralized nature of cryptocurrencies and their underlying blockchain technology. “They banned it because they cannot control it,” a trader with over six years of crypto experience told Cointelegraph, adding:

“The government wants to see, control and manipulate everything in the country. Crypto is volatile, I agree, but everyone who uses it must know that. We also have stablecoins like Tether, USD Coin and many more for the people who just want to send or receive remittances to/from other countries.”

Cointelegraph’s sources further stated that the Taliban have also told traders and crypto-to-fiat exchanges that cryptocurrency use is like “gambling,” calling it haram — which means forbidden under Islamic law. They added that the government wants people to use local banks to transfer money, while “Most of the local monetary services are limited and do not allow us to withdraw all of our money at once.”

“We can only get around 20,000 afghanis (roughly $220) per week from the local banks that one should stay in line for hours sometimes,” a crypto user who gets money from their brother from Germany told Cointelegraph. “In addition to all the difficulties in withdrawing money from banks, another problem is the expensive transaction rates that we are just trying to avoid.”

They added that there are always a bunch of hidden fees when using services like SWIFT, Western Union, MoneyGram and the local Hawala system. The crypto user said that the transaction rates sometimes go up to 20%.

Risk of crypto in Afghanistan

After Afghanistan was hit by the wave of sanctions, many looked for an alternative way to get money from their family and friends abroad. The situation made room for cryptocurrencies, as the local money transfer services were either banned or very expensive.

Furthermore, popular payment transfer companies like PayPal and Venmo are not supported by banks in Afghanistan, which limits the financial services that these establishments provide. In addition, it is difficult to open a bank account due to the number of requirements one must meet, such as providing a house deed and working statement.

“We could receive thousands of dollars in crypto assets from our families without worrying about the transaction fees or the complexity of the [digital] exchanges,” locals said. “Using apps like Binance or some [crypto] wallets is super easy. We even have some illiterate people who can now easily send or receive cryptocurrencies.”

Friday Mosque (Jumah Mosque) in Herat, Afghanistan. Source: Koldo Hormaza.

According to Google Trends data, the interest in the search terms “Bitcoin,” “crypto” and “cryptocurrency” has risen more than 100%, especially in the Herat, Kandahar, Kabul, Nangarhar and Balkh provinces. 

Furthermore, Afghanistan was ranked 20th among 154 countries in “The 2021 Global Crypto Adoption Index” by Chainalysis in 2021. This is a positive indication that the people of Afghanistan are willing to invest and use cryptocurrencies in their daily lives, one individual told Cointelegraph.

“Crypto is the only way I can get paid online because we do not have access to a service like PayPal,” said an online worker. “I receive my salary with cryptocurrencies, and this is the way I put food on the table for my family of nine. But I’m really hopeless now.”

Recent: Why interoperability is the key to blockchain technology’s mass adoption

One source added that the Taliban might be trying to create a central bank digital currency and could have plans to use blockchain technology. However, most traders believe there is no need for a CBDC when cryptocurrencies offer what people need. The Taliban have not yet announced any plans related to CBDCs.

“Just imagine what a frictionless, global digital payments system with appropriate controls for illicit finance could do for people in places like Afghanistan — if relatives abroad could easily send remittances, or if NGOs could pay their staff halfway around the world with the click of a button on a smartphone,” U.S. Deputy Secretary of the Treasury Wally Adeyemo said at Consensus 2022.

Adeyemo pointed out the weakness of local banks in Afghanistan in providing enough cash for “ordinary people.” While the situation in the country is becoming worse every day, he believes that “It is critical that we balance both sides of this proverbial digital coin, the risks and the opportunities.”

What the Taliban crackdown means for crypto’s future in Afghanistan

The Taliban have finally banned crypto in Afghanistan, but many users and traders call it one of the “worst” decisions taken by the government so far.

With the rise of the Taliban last year in August, Afghanistan faced global sanctions that led to many international organizations and money transaction services halting operations in the country. This made room for digital currencies and stablecoins to be widely used, at least to send or receive remittances.

However, the Taliban government has recently banned cryptocurrencies and arrested 16 local exchangers in the Northwestern city of Herat in the past week, according to the provincial news website ATN-News.

According to the report, the exchanges were initially given a grace period to comply with the government’s regulations but were ultimately shut down after failing to do so. The Afghan government has now asked locals to refrain from using digital assets and has warned them of the risks associated with such activities.

However, people familiar with the matter, those who want to stay anonymous due to security reasons, have told Cointelegraph that “no previous announcement or warnings were given.”

“Da Afghanistan Bank (central bank) stated in a letter that digital currency trading has caused lots of problems and is scamming people, therefore they should be closed. We acted and arrested all the exchangers involved in the business and closed their shops,” the head of the counter-crime unit of Herat police, Sayed Shah Sa’adat, told ATN-News.

People familiar with the matter believe there were no crypto-related scams involved in the government’s “stupid” decision. “We mostly used the Binance crypto exchange and a wallet to trade, send or receive assets,” they added. “Right now, we don’t have standard banks or monetary services, and the Taliban banned our only hope.”

In June, the Taliban-led central bank of Afghanistan banned online forex trading in the country. A spokesman told Bloomberg that the bank views forex trade as being both illegal and fraudulent, saying “there is no instruction in Islamic law to approve it.” After the Taliban regained power in Afghanistan, local residents’ finances worsened as billions of dollars in foreign aid were cut off and their overseas assets were frozen under United States sanctions, per Bloomberg.

Why did the Taliban ban crypto?

According to the ATN-News report, the main reasons for the ban are the volatile nature of cryptocurrencies and assets like the U.S. dollar leaving the country since crypto exchanges are not based in Afghanistan. Another reason noted in the report is that digital currencies are new and “the people are not familiar with them.”

The head of the fiat exchangers’ union Ghulam Mohammad Suhrabi also claimed that crypto was used to scam people. However, people familiar with the matter do not know of any crypto-related crime or scam, and Suhrabi also didn’t provide any specific data.

Recent: Blockchain audits: The steps to ensure a network is secure

Some believe that the only reason for the ban is the decentralized nature of cryptocurrencies and the underlying blockchain technology. “They banned it because they cannot control it,” a trader with over six years of crypto experience told Cointelegraph, stating:

“The government wants to see, control and manipulate everything in the country. Crypto is volatile, I agree, but everyone who uses it must know that. We also have stablecoins like Tether, USD Coin and many more for the people who just want to send or receive remittances to/from other countries.”

Cointelegraph’s sources further stated that the Taliban have also told traders and crypto-to-fiat exchangers that cryptocurrency use is like “gambling” and call it “Haram,” which means forbidden under Islamic law. They added that the government wants people to use local banks to transfer money, while “most of the local monetary services are limited and do not allow us to withdraw all of our money at once.”

“We can only get around 20,000 Afghanis (roughly $220) per week from the local banks that one should stay in line for hours sometimes,” a crypto user who gets money from his brother from Germany told Cointelegraph. “In addition to all the difficulties in withdrawing money from banks, another problem is the expensive transaction rates that we are just trying to avoid.”

He added that there are always a bunch of hidden fees with using services like SWIFT, Western Union, MoneyGram and the local Hawala system. The crypto user said that the transaction rates sometimes go up to 20%.

Risk of crypto in Afghanistan

After Afghanistan was hit by a wave of sanctions that limited its reach to international banking and trade, many were looking for an alternative to getting money from their family and friends abroad. The situation made room for cryptocurrencies, as the local money transfer services were either banned or very expensive.

Furthermore, popular payment transfer companies like PayPal and Venmo are not supported by banks in Afghanistan, which limits the financial services that these establishments provide. In addition, it is difficult to open a bank account due to the number of requirements one must meet, such as providing a house deed and working statement.

“We could receive thousands of dollars in crypto assets from our families without worrying about the transaction fees or the complexity of the [digital] exchanges,” locals said. “Using apps like Binance or some [crypto] wallets is super easy, that we even have some illiterate people who can now easily send or receive cryptocurrencies.”

Friday Mosque (Jumah Mosque) in Herat, Afghanistan. Source: Koldo Hormaza.

According to Google Trends data, the interest in the search terms “Bitcoin,” “crypto” and “cryptocurrency” has risen more than 100%, especially in Herat, Kandahar, Kabul, Nangarhar and Balkh provinces. 

Furthermore, Afghanistan was ranked 20th among 154 countries in “The 2021 Global Crypto Adoption Index” by Chainalysis in 2021. This is a positive indication that the people of Afghanistan are willing to invest and use cryptocurrencies in their daily lives, one individual told Cointelegraph.

“Crypto is the only way I can get paid online because we do not have access to a service like PayPal,” said an online worker. “I receive my salary with cryptocurrencies and this is the way I put food on the table for my family of nine, but I’m really hopeless now.”

Recent: Why interoperability is the key to blockchain technology’s mass adoption

One source added that the Taliban might be trying to create a central bank digital currency (CBDC) and could have plans to use blockchain technology. However, most traders believe that there is no need for a CBDC when cryptocurrencies offer what people need. The Taliban have not yet announced any plans related to CBDCs.

“Just imagine what a frictionless, global digital payments system with appropriate controls for illicit finance could do for people in places like Afghanistan — if relatives abroad could easily send remittances, or if NGOs could pay their staff halfway around the world with the click of a button on a smartphone,” the U.S. Deputy Secretary of the Treasury Wally Adeyemo said at Consensus 2022.

Adeyemo pointed out the weakness of local banks in Afghanistan in providing enough cash for “ordinary people.” While the situation in the country is becoming worse every day, he believes that “it is critical that we balance both sides of this proverbial digital coin, the risks and the opportunities.”

MAS doesn’t trust retail crypto investments, mulling more regulations

Regulators in Singapore say cryptocurrencies are problematic due to high market volatility and warn against retail investments in cryptocurrencies.

The managing director of the Monetary Authority of Singapore (MAS), Ravi Menon, addressed the agency’s mixed signals on crypto in the public sphere at a seminar on Monday.

The public claimed that local regulators were spreading crypto-positive sentiments while simultaneously threatening more regulations. According to the new statement from Menon, the observation is not entirely wrong. He says the agency needs to do “a better job explaining” the situation.

Overall, MAS is pro-digital assets, as directly stated by Menon, “yes to digital asset innovation, no to cryptocurrency speculation.” Regulators want the island country to become a hub for fintech innovation and distributed ledger activity.

Though according to recent statements, where the problem lies is within cryptocurrencies themselves.

This is where MAS’ “stringent and lengthy licensing process” for crypto services comes into play, Menon explains. It also is the reason for warnings against cryptocurrency retail investments and restrictions on retail cryptocurrencies.

“Cryptocurrencies have taken a life of their own outside of the distributed ledger — and this is the source of the crypto world’s problems.”

Regulators cite the extreme volatility of the crypto market, which rules them out from being considered viable currency or an investment asset. MAS claims that the price of said currencies does not correlate with “underlying economic value related to their use on the distributed ledger.”

Related: Singapore venture firm launches $100M Web3 and metaverse fund

These comments come after a string of recent developments from local Singaporean authorities on the topic of digital currencies. On Friday, Aug. 26, MAS sent questionnaires to clients on business activity and holdings ahead of any final decisions.

Crypto trading platform Crypto.com scored approval from regulators in Singapore to set up operations in the country on June 22.

In July, it already had its eye on limitations to retail participation in cryptocurrency-related activities.

How to tell if a cryptocurrency project is a Ponzi scheme

Crypto Ponzi schemes have increased over the past couple of years. This is how to spot them.

The crypto world has experienced an increase in Ponzi schemes since 2016 when the market gained mainstream prominence. Many shady investment programs are designed to take advantage of the hype behind cryptocurrency booms to beguile impressionable investors.

Ponzi schemes have become rampant in the sector primarily due to the decentralized nature of blockchain technology which enables scammers to sidestep centralized monetary authorities who would otherwise flag or freeze suspicious transactions.

The immutable nature of blockchain systems that makes fund transfers irreversible also works in the scammers’ favor by making it harder for Ponzi victims to get their money back.

Speaking to Cointelegraph earlier this week, Johnny Lyu, CEO of crypto exchange KuCoin, said that the sector was fertile ground for these types of schemes due to one main reason:

“The industry is full of users eager to invest their money, and there is virtually no regulation that would stop projects from hiding their malicious intentions.”

“Until clear and internationally approved financial regulation of the crypto industry is set in place, it will continue to witness the rise and collapse of Ponzi schemes,” he added.

How Ponzi schemes work

The Ponzi scheme phrase emerged in 1920 when a swindler named Charles Ponzi marketed a high-returns program to investors which supposedly leveraged postal reply coupons to achieve impressive earnings. 

He promised investors returns of up to 50% within 45 days or 100% interest within 90 days. True to his word, the first group of investors got the claimed returns, but unbeknownst to them, the money they received was actually from later investors. The cycle was designed to lure new investors and enabled Ponzi to steal over $20 million.

While he wasn’t the first to use such a scheme to scam people, he was the first to use it to such a scale. Hence, the technique was named after him.

In a nutshell, a Ponzi scheme is a fake investment program that promises astronomical gains to clients but uses money collected from new investors to pay early investors. This helps the swindlers behind such operations to maintain some semblance of legitimacy and entice new investors.

That said, Ponzi schemes require a constant flow of cash to be sustainable. The ruse usually comes to an end when the number of new recruits falls or when investors choose to withdraw their money en masse.

How to spot a crypto Ponzi scheme

There has been a sharp rise in the number of Ponzi schemes in recent years in tandem with the crypto market’s uptrend. As such, it is important to know how to spot a Ponzi scheme.

The following are some of the aspects to look out for when considering whether a crypto project is a Ponzi scheme.

Promises of ridiculously high returns

Many crypto Ponzi schemes claim to reward investors with hefty returns with little risk. This, however, contradicts how investing in the real world works. In reality, every investment comes with a certain amount of risk.

Typical crypto investments fluctuate according to prevailing market conditions, so such claims should be viewed as a red flag. In many cases, investors who join such networks never get any returns on their money.

Khaleelulla Baig, the founder and CEO of KoinBasket — a crypto index trading platform — told Cointelegraph that transparency should be the topmost factor to consider before investing money in a crypto project:

“What really matters is the transparency about the project details. Most founders build their business on hope and rosy projections. Check the past track record of the founding team’s delivery track record vs. commitment.” 

He also advised investors to stay away from projects with obscure fundamentals that are based on external influences.

Unregistered investment projects

It is important to confirm whether a crypto company is registered with regulatory organizations such as the United States Securities and Exchange Commission before investing any money. Registered crypto companies are usually required to submit details regarding their revenue models to their respective regulatory authorities to avoid penalties. As such, they are unlikely to participate in Ponzi schemes.

Projects registered in jurisdictions with lax crypto regulations that additionally have Ponzi-like characteristics should be avoided.

Some jurisdictions, such as the European Union, have already come up with elaborate crypto regulations designed to protect crypto investors against these types of scams. According to a recent proposal passed by European Council, crypto companies will soon be obligated to abide by Markets in Crypto Assets (MiCA) rules and will be required to have a license to operate in the region.

Putting crypto companies under MiCA will compel them to reveal their revenue models, and this will temper the rise of crypto enterprises relying on Ponzi-like plans in the bloc.

Use of sophisticated investment strategies

Ponzi schemes usually allude to complex trading strategies as part of the reason why they are able to obtain high yields with minimal risks. Many of their outlined growth strategies are usually hard to understand, but this is usually done on purpose to avoid scrutiny.

The Bitconnect Ponzi scheme that was unveiled in 2016 is an example of a Ponzi scheme that utilized this tactic to trick investors. Its operators encouraged investors to buy BCC coins and lock them on the platform to allow its “sophisticated” lending software to trade the funds. The platform claimed to provide monthly yields of up to 120% per year.

Ethereum co-founder Vitalik Buterin was among the first notable figures to raise the alarm on the project. The scheme was brought down by U.S. and British authorities, who declared it a Ponzi scheme. Its closure in 2018 triggered a BCC price drop that led to billions of dollars in losses.

High level of centralization

Ponzi schemes are usually run on centralized platforms. One crypto Ponzi that was based on a highly centralized network is the OneCoin Ponzi scheme. The pyramid scheme, which ran between 2014 and 2019, defrauded investors out of some $5 billion. The project relied on its own internal servers to run the ploy and lacked a blockchain system.

Subsequently, OneCoin could only be traded on the OneCoin Exchange, its native marketplace. The tokens could be exchanged for cash, with fund transfers being made via wire.

The OneCoin marketplace also had daily withdrawal limits that prevented investors from withdrawing all their funds at once.

The scheme went down in 2019 following the arrest of some key members of the operation. However, there is an outstanding federal arrest warrant for OneCoin founder Ruja Ignatova, who is still at large.

Multilevel marketing

KuCoin’s Lyu noted that the ominous red flags hadn’t changed much over the years and multilevel marketing  was still at the heart of many Ponzi schemes:

“Complex earning schemes involving multiple tiers of users, referral programs, percentages, sliding scales, and other tricks are all signs of a Ponzi scheme that feeds the upper tiers using the funds injected by the lower tiers without actually doing any business.” 

Multilevel marketing is a controversial marketing technique that requires participants to generate revenues by marketing certain products and services and recruiting others to join the network. Commissions earned by new recruits are shared with the up-line members.

One Ponzi scheme that recently made headlines for making use of this hierarchical system is GainBitcoin. The pyramid scheme headed by Amit Bhardwaj had seven primary recruiters who were based in India and on different continents around the world. Each of them was tasked with recruiting investors into the network.

The scheme guaranteed users 10% monthly returns on their Bitcoin (BTC) deposits for 18 months.

The scheme is alleged to have collected between 385,000 and 600,000 BTC from investors.

Ponzi schemes have been used by scammers for over a hundred years. However, they have been able to thrive in the crypto industry due to the lack of elaborate regulations governing the sector.

Because the crypto world is susceptible to these types of schemes, it is important to exercise caution before investing in any novel project.

Alameda Research and FTX merge VC operations: Report

Alameda’s investment arm, FTX Ventures, and crypto exchange FTX will reportedly continue to operate independently from each other.

The investment arm of Sam Bankman-Fried’s cryptocurrency exchange, FTX, has reportedly absorbed the venture capital operations of Alameda Research in response to the ongoing crypto bear market.

According to a Thursday Bloomberg report, Alameda’s Caroline Ellison said in an interview that the merger had happened prior to former co-CEO Sam Trabucco announcing his resignation on Wednesday, leaving Ellison as the firm’s sole CEO. The investment arm of the crypto exchange, FTX Ventures, launched in January — when the absorption of Alameda reportedly began — with $2 billion in assets under management.

Amy Wu, who runs the VC fund, reportedly said there were no payments made as part of the deal, and Alameda’s investment arm was entirely under FTX Ventures, with the two operating independently from each other and the crypto exchange. According to Wu, the two firms were still running at “arm’s length,” with the Alameda team not “working too much on the venture side day-to-day.”

Related: SBF and Alameda step in to prevent crypto collapse contagion

In July, Voyager Digital rejected a joint offer from FTX and Alameda to buy out its crypto assets and outstanding loans as part of its bankruptcy proceedings. The firm’s legal team said, at the time, that the proposed acquisition could “harm customers.” Alameda has made its own offerings, including backing crypto custody firm Anchorage Digital.

Ellison reportedly said Alameda would consider continuing to offer bailouts to crypto firms hurting for liquidity amid a bear market. She added that “the more systemically important someone is, the more important it would be to try to support them.”

Why $20.8K is a critical level for Bitcoin | Find out now on Market Talks with Charlie Burton

What is the critical support level for Bitcoin and what happens if the market drops below it? Join us as we discuss this and other topics with Tim Warren, co-host of Coffee N Crypto, and Charlie Burton.

In this week’s episode of Market Talks, we welcome professional trader Charlie Burton.

Charlie is a professional trader with 24 years of experience and has been trading full-time since 2001. He is the founder of EzeeTrader and Charlie Burton Trading. He is also undefeated in the annual London Forex show live trade-off for the five years it was running. He has also been featured in the hugely popular BBC documentary “Trader, Millions by the Minute.” Charlie is one of the very few trading educators who is also a professional money manager trading FCA-regulated capital.

The main topic of discussion with Charlie will be the current support level for Bitcoin (BTC) and why it is so critical. If Bitcoin goes below its current support, what are other major price levels you should be keeping an eye on? We also get his insights into what caused the collapse of the recent bear market relief rally.

There are a few major market events that are scheduled for the last few days of August — we ask Charlie which ones he is going to be keeping an eye on and how they might affect the market and more importantly his trading strategy. Will things in the crypto market and traditional markets improve as we move toward the end of the year or can we expect more volatility and downward price action?

Everyone has been talking about Ethereum’s (ETH) performance recently and how it has outperformed Bitcoin, so we ask Charlie how he compares Ethereum’s performance to Bitcoin’s from a trader’s perspective and whether he changed his strategy slightly because of it.

China has been in the news again recently due to the potential looming collapse of its economy. Being the superpower it is and having the second largest economy in the world, the possible collapse of China’s economyis possibility is bound to make waves in the markets. We ask Charlie what his thoughts on the situation are and whether he’s keeping a close eye on China.

Being a professional trader, one must have strategies for every trade. But should your trading strategy for crypto markets differ from traditional markets and if so, how should they be different? These are uncertain times and everyone would like an insight into how professional trader functions during these times, which is why we get the insights from the professional himself.

Tune in to have your voice heard. We’ll be taking your questions and comments throughout the show, so be sure to have them ready to go.

Market Talks with Coffee ‘N’ Crypto’s Tim Warren streams live every Thursday at 12 pm ET (4:00 pm UTC). Each week, we feature interviews with some of the most influential and inspiring people from the crypto and blockchain industry. So, be sure to head on over to Cointelegraph’s YouTube page and smash those like and subscribe buttons for all our future videos and updates.

How blockchain technology is changing the way people invest

Blockchain technology has changed the way modern people invest in assets, attracting younger and less affluent investors into the space.

Over a decade after the release genesis block on the Bitcoin network, blockchain technology has changed how people invest their money, with many platforms in the crypto space having much more relaxed requirements for investors when compared with traditional finance. 

It’s easier for investors to buy into cryptocurrency than traditional assets. Anybody can download a free Bitcoin (BTC) or multi-crypto wallet and sign up for one of the many available cryptocurrency exchanges. Many exchanges still don’t require users to verify their identity, while others only require ID verification once certain limits have been reached.

Compare this to buying stocks, where almost every platform has Know Your Customer (KYC) procedures that users must complete before buying their first stock. On top of this, users can only buy stocks from publicly listed companies and cannot own any shares from a private company.

On the other hand, crypto investors can invest in tokens that public or private companies have created. Investors in the crypto space can also participate in early-stage funding rounds, including seed-stage funding.

In traditional markets, usually only accredited investors and high-net-worth individuals are allowed to participate. In contrast, seed-stage funding in crypto projects can allow anyone with a wallet to take part. It’s all at the discretion of the founding team. Jeremy Musighi, head of growth at Balancer — an automated portfolio manager and trading platform on Ethereum — told Cointelegraph:

“Crypto investors have access to a level of transparency that goes way beyond what’s possible in other asset classes. In contrast to stock market investors who can analyze quarterly reports written by a self-reporting company, a crypto investor can permissionlessly dig into data on a decentralized protocol’s performance and track key metrics in real-time or on a historical basis.”

Musighi continued: “The transparency of communication between a crypto project’s core contributors amongst themselves and with the wider community is also lightyears ahead of the way publicly traded companies operate. Access to accurate and thorough information is key to investing, and I think that’s night and day when comparing crypto with any other asset class.”

Due to the lack of centralization and lower barriers to entry for crypto investors, the industry has seen a lot of popularity in developing countries. In Nigeria, for example, 35% of the population aged 18 to 60 (33.4 million people) have owned or traded crypto this year, with 52% (17.36 million) holding half of their assets in crypto. This is due mainly to the lack of access to affordable traditional financial services in the nation. Cryptocurrency is an easier, more widely accessible alternative to traditional financial, or TradFi, services. TradFi usually comes with restrictions and red tape that make it different for the average Joe to partake in.

Cryptocurrency has also attracted younger investors into the space, with competition between friends and family being one of the driving factors behind this. Unfortunately, many of these young investors mistakenly believe that the crypto market is regulated, despite its low barrier to entry. Easier access to financial tools may attract younger investors who may not meet the requirements to participate in traditional finance.

Musighi believes that younger investors are more inclined toward cryptocurrency since they have grown up around technology, saying, “Younger investors are more tech-native. They spend more time online, they recognize the value of digital assets more naturally, and they more easily grasp the concept of cryptocurrency. It’s no surprise that the digital generation is more attracted to digital money.”

Recent: Bitcoin Lightning Network vs Visa and Mastercard: How do they stack up?

Misha Lederman, director of communications at Klever — a decentralized crypto wallet — told Cointelegraph, “Anyone with a smartphone and a passion for learning can invest in cryptocurrencies. Wall Street has played the stock market and commodities markets by different rules than Main Street for decades. With Bitcoin and crypto, a new generation of average investors is able to participate, compete and accumulate early and fairly in the most exciting industry of our time.”

How investors are making money in the crypto space

Cryptocurrency isn’t just easier for investors to access, it also provides multiple avenues for investors to make money. There are different subsectors within the crypto market, including token sales and decentralized finance (DeFi).

Token sales were one of the first subsectors to increase in popularity within the crypto space. Token sales are fundraising rounds where investors can buy a crypto project’s native tokens before they hit the open market. The idea is that investors can “get in early” and make a profit once the tokens are listed. This is based on the expectation that a token’s price will increase after a listing due to speculation and increased liquidity.

Token sales come in different forms, including:

The ICO market first peaked in popularity, surpassing the $1 billion mark in 2017. ICOs and the newer iterations (IEOs, IDOs, IGOs, etc.) were attractive to investors since they were initially very easy to get into, with users needing only a crypto wallet to participate. Now, however, there are additional requirements such as KYC (for IEOs), whitelists and limits on how much investors can contribute to a crowdsale. 

Regardless of these new requirements, it’s still relatively easier for users to get involved in token sales than TradFi sales. Initial public offerings, for example, have tighter requirements. Also, some platforms require investors to have at least $250,000 in their account or to have traded three times before they are eligible.

DeFi is another sector in the crypto space that has attracted a lot of investor interest. This is because the sector has many protocols within the space, including yield farming — a process where liquidity is provided to DEXs in exchange for rewards in a project’s native token — crypto lending and borrowing platforms, and staking, which enables investors to earn interest on crypto assets locked into a particular network.

Such platforms usually require investors to have a personal noncustodial wallet where they control the private keys. Investors need to connect this wallet to a protocol they’ll be using. For example, many investors use MetaMask to connect to DEXs and other platforms when engaging in DeFi. Users then interact with protocols directly with their related smart contracts to carry out staking, liquidity farming or lending/borrowing. 

DeFi has given investors more control over their finances than TradFi, where users typically have an asset manager or broker handle the processes. However, some protocols automate specific processes within the DeFi sector.

HyperDex, for example, is a platform that enables standard financial products to be accessed via DeFi. The platform works via containers called cubes, similar to liquidity pools on DEXs. Smart contracts power these cubes, and users can choose a cube according to their preferences. In addition, they can engage in different protocols, including fixed income staking, algorithm trading and race trading, a protocol similar to prediction markets.

Yearn.finance is another platform that uses smart contracts, in this case to automate the process of yield farming. The smart contracts automatically switch liquidity pools based on which one has the highest payout. So, while DeFi does require users to be more hands-on with their investments, there are still protocols that can handle particular tasks via smart contracts. Contrast this to traditional finance, where a third party would be required to handle tasks instead of automated smart contracts that keep the user close to the protocol and their holdings.

Volatility is a double-edged sword

Volatility is another factor in the crypto market that has affected how people invest their money. Since cryptocurrencies are much more volatile than traditional assets, investors can expect much higher returns. For example, the average return in the stock market is 10% annually. 

Conversely, cryptocurrency investors have seen anywhere from 50% in a month with blue-chip coins like Ether (ETH) to 100% in a day with memecoins like Dogecoin (DOGE). However, increased volatility brings a possibility of a higher downside, too. For example, this year alone, many cryptocurrencies, including 72 of the top 100 coins, dropped over 90% during the recent market downturn.

While the cause of this high volatility may not be known, experts have speculated that it could be due to factors such as lack of regulation and a low amount of institutional money in the space.

Regardless of the reason for the high volatility, many investors have tried to capitalize on it. For example, many investors in the United Kingdom tend to see cryptocurrency as a “get rich quick” scheme, according to a study covered by Cointelegraph in 2019. Many of the respondents in the study lacked an understanding of cryptocurrencies and were more likely to invest without any due diligence.

Ellie Le Rest, CEO of Colony — an Avalanche ecosystem accelerator — spoke to Cointelegraph about volatility in the crypto space, stating:

“We believe volatility is a good thing, simply because it did draw profit-seeking investors into the marketplace and shall continue to do so. Their presence encourages the development of even more sophisticated protocols and reliable, scalable infrastructure.”

A lack of research by investors has led to many of them getting scammed by fraudulent projects in the space. For example, over $1 billion worth of crypto was lost to scammers in 2021, according to a report covered by Cointelegraph. The same report noted that nearly half of all crypto-related scams came from social media platforms. 

“It is still early days for DeFi, so it entails a lot of risks. Hacks and exploits have cost billions of dollars. In order to make DeFi a safe, attractive tool for new investors, DeFi industry players need to prioritize user protection and increased security as a top priority,” says Lederman, continuing:

“That being said, when understanding the risks involved and properly adjusting for those risks, DeFi can open up a new world of opportunities for young crypto investors in place of centralized lenders or legacy financial institutions.”

Findings further show that many investors are not researching the coins or projects they invest in. Instead, they tend to follow recommendations by social media or YouTube influencers with the hopes of striking it rich. Despite this, there are still many savvy investors in the space. For example, in March, many investors followed their favorite projects and profited when their native tokens rose in value after large announcements. This process is known as “buying the rumor and selling the news.” Investors can find insights by joining the project’s community and finding out about future announcements and news.

Pros and cons of the crypto market for investors

The benefits for investors in the crypto space include reduced entry barriers due to less red tape and regulation in the space. Investors also have more control over their funds since they don’t need to rely on a broker or middleman to manage their holdings. Additional benefits include a higher potential for returns through holding and trading crypto and the many protocols within the DeFi sector.

Recent: Tornado Cash saga highlights legal issues affecting the crypto market

The drawbacks to investors include a higher chance of loss due to user error, scams and hacking in the space. And one of the most significant downsides is the volatility of the crypto market in general, with huge upsides usually followed by considerable drawbacks.

Investors have an easier path toward building wealth through cryptocurrency since it is much easier to get into than traditional finance. However, investors still need to perform due diligence on the projects they intend to invest in and risk only the money they can afford to lose.

Tornado Cash saga highlights legal issues affecting the crypto market

As support for Tornado Cash developer Alexey Pertsev mounts, questions regarding the legality of his arrest and the future of DeFi innovation continue to come to the forefront.

Things have not been looking too good for the crypto market in recent months, with the market seemingly being gripped by one piece of bad news after another. To this point, on Aug. 8, the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued legal sanctions against digital currency mixer Tornado Cash.

As per the regulatory body, since the platform’s inception in 2019, it has been used for a host of illicit money laundering activities estimated to be worth $7 billion. Of this sum, it is estimated that $455 million was controlled by the notorious Lazarus Group, a North Korean state-sponsored hacking group. Additionally, Tornado Cash was also used to launder over $96 million of ill-gotten funds derived from June’s Harmony Bridge hack and $7.8 million from this month’s Nomad heist.

Before proceeding any further, however, it would be best to understand what exactly a cryptocurrency mixer is. Simply put, it is an offering that helps obfuscate potentially identifiable or tainted cryptocurrency funds with others to erase any trails linked with the assets, thus making it impossible for anyone to trace the tokens back to their original source.

Creator arrest leads to public outcry

On Aug. 12, Alexey Pertsev, the creator of Tornado Cash, was arrested by Dutch authorities. According to a press release issued by the financial crime authority of the Netherlands — the Fiscal Information and Investigation Service — the arrest was made based on Pertsev being involved in the “concealment of criminal financial flows and facilitating money laundering.”

While Tornado Cash can potentially be used by bad actors to hide criminal proceeds, it can and is also be used to facilitate a wide array of legitimate activities. The Dutch police have yet to make it clear as to which exact rules Pertsev broke, even though different media outlets have speculated and offered varying explanations as to why he was arrested. The Tornado creator has yet to be charged with any wrongdoing.

Following Pertsev’s detainment, a mass of protesters gathered in Amsterdam’s Dam Square on August 20 to voice their displeasure with the handling of the matter. And, while the demonstrators did not directly comment on the legal issues surrounding the arrest, they did claim that Pertsev’s arrest signaled a dark future for the fast-growing Web3 ecosystem. Not only that, but they also believe that it could have a chilling effect on the Netherlands’ existing blockchain ecosystem.

Mark Smargon, CEO of decentralized payment network Fuse, told Cointelegraph that while he is very disappointed to see a developer being arrested for simply having written a piece of code, to avoid such scenarios in the future, crypto finance entities — especially those who see mainstream adoption on the horizon — should be willing to meet regulators halfway to mitigate existing security issues while ensuring people’s rights to individual privacy.

However, Abraham Piha, CEO and co-founder of Web3-focused firm Tomi, told Cointelegraph that government sanctions like these are scary if one starts looking at them objectively:

“Tornado existed only because most blockchains were not private enough. If successive updates of Ethereum or Bitcoin include protocol integrations like Mimblewimble, will the next step be to block them as well? This act is yet another reason to push for Web3, a free web, controlled by users and not by some big brother governments.”

A spokesperson for crypto policy think tank Coin Centre noted that the nonprofit is considering taking the matter to court since it believes that the core argument prohibiting the platform from operating is unjustified. Not only that, but the independent body also believes that the Treasury’s actions may have exceeded its statutory authority.

Was Tornado’s forced shutdown unconstitutional?

In a recent interview with Bloomberg, Jesse Powell, CEO of digital-asset exchange Kraken, argued that the Treasury Department’s actions to shut the Tornado Cash could be “unconstitutional,” stating that people have a right to privacy and thus, it will be interesting to see if the regulatory body’s assertions can hold any sort of ground in a court of law. He further stated that the subsequent removal of Tornado’s native code repositories was a “totally unnecessary step.” 

Recent: Ethereum Merge prompts miners and mining pools to make a choice

Following the sanctions, USD Coin (USDC) stablecoin issuer Circle decided to block all Tornado Cash addresses, to which Powell reacted: “Having a digital currency that’s so controlled and able to be controlled by maybe unconstitutional government action is a little bit scary.”

Kenny Li, co-founder and core developer for Manta Network — a privacy-preservation protocol — told Cointelegraph that the Treasury’s decision to sanction Tornado Cash is far-fetched and extreme even though in the past, certain individual crypto wallet addresses have been subject to the same treatment. But, in most cases, he said, there was a clear case of fraud, hacks or a Ponzi scheme:

“In this case, smart contract addresses are being blacklisted. Smart contracts aren’t people. Not only that, but people forget that Tornado Cash is a protocol, not a person or an entity, which means it will continue to run regardless of the sanctions. It is time that we realize privacy and anonymity aren’t the same, and Web3 is all about privacy.”

On the subject of people moving their USDC to other stablecoins following Circle’s decision to block Tornado Cash wallet addresses, Li noted that, unfortunately, there has been an increase in the number of platforms blacklisting wallet addresses maintained via Tornado Cash. 

He pointed out that the move was due to Circle’s status as a regulated platform, thus obliging it to comply with any sanctions issued by a government body whose jurisdiction it operates under.

Lastly, he believes that Circle’s actions of blocking the movement of millions of dollars worth of USDC can potentially inhibit innovation within this space. Li concluded:

“No one wants their funds to be blocked, especially for activities they aren’t involved in. That said, there’s no certainty that tomorrow Tether won’t block addresses that have touched Tornado Cash. Ultimately, this action from the Treasury will likely instigate a domino effect, most of which is yet to be felt.”

Human rights violations brewing?

One aspect of Pertsev’s detention that has drawn public attention is that since his arrest, he has reportedly been denied visits of any sort, including those from his wife, Ksenia Malik. 

In recent correspondence with Cointelegraph, Malik said, “He’s kept in prison as if he were a dangerous criminal,” despite simply “writing open source code.”

With Dutch authorities continuing to bar any contact with the outside — not even “one short call” — several rallies are being organized to support him. Decentralized finance aggregator 1inch tweeted that the arrest stands to establish a dangerous precedent, one that could potentially “kill the entire open-source software segment” if developers are continued to be held accountable for any misuse that emanates as a result of the software they create.

Decentralized finance aggregator 1inch tweeted that the arrest stands to establish a dangerous precedent, one that could potentially “kill the entire open-source software segment” if developers are continued to be held accountable for any misuse that emanates as a result of the software they create.

Despite the heartfelt sentiments of the open-source development community, it is pertinent to highlight a recent report from blockchain security platform SlowMist, which found that approximately 74% of all funds stolen from the Ethereum network over Q1 and Q2 of this year made their way to Tornado Cash, with researchers noting:

“The platform accounts for most of the initial funding for these security incidents. There have also been reports of withdrawals from exchanges, trading platforms, and personal wallets to fund these security incidents.”

Lastly, it should be noted that despite the outpouring of public support for Pertsev, his arrest hasn’t been entirely disapproved of by members of the global finance arena. For example, in a recent interview, venture capitalist Kevin O’Leary stated that platforms like Tornado Cash — which are advertised as “privacy tools” — have created a culture where it is fine to tinker around with federal regulations. 

Recent: Ethereum advances with standards for smart contract security audits

In his view, Pertsev’s arrest was necessary and that it’s fine to have “sacrificed him” because it will, in his view, help introduce a high degree of stability within the market in the long run.

Therefore, moving forward, it will be interesting to see how legal issues such as these continue to be dealt with by regulatory agencies across the globe.