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KYC in Stablecoins

Summary: Issuers of today’s fiat-backed stablecoins (such as PAX, USDC and TUSD) need to identify (or KYC) only those users who convert between bank account money and stablecoin, not all holders. Some people might be surprised that intermediate users of stablecoin may transact without needing to being identified by the issuers. Yet few people know that there … Continue reading KYC in Stablecoins

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Summary: Issuers of today’s fiat-backed stablecoins (such as PAX, USDC and TUSD) need to identify (or KYC) only those users who convert between bank account money and stablecoin, not all holders.

Some people might be surprised that intermediate users of stablecoin may transact without needing to being identified by the issuers. Yet few people know that there are kill-switches built in that can hinder bad actors. This arrangement can be described as permissioned pseudonymity. Stablecoin issuers have permission by their regulators to have pseudonymous users in their network.

Permissioned pseudonymity is positive for innovation while the industry explores the most productive uses for stablecoins.

💹 Which stablecoins?

In this post I am specifically discussing USD denominated stablecoins which are redeemable for USD in commercial bank accounts, and whose issuers seem to work with financial regulators to stay compliant with applicable laws and regulations. Popular stablecoins in this category are:

  • PAX issued by Paxos
  • USDC issued by Circle and Coinbase
  • TUSD (TrueUSD) issued by TrustToken

(Note: USDT issued by Tether (the company) is the most popular USD stablecoin by far, but the working relationship between the issuer and financial authorities unclear to me.)

📇 Knowing Your Customer

Many people think that all financial institutions need to know all of their customers all the time. In many cases, it’s true – think of the documents you need to produce when you open your bank account.

But in other cases this isn’t so. Often issuers can take a risk-based approach. In some jurisdictions you can buy and load prepaid cards up to certain limits and use them widely. Hong Kong’s Octopus card is one example. In other cases you can hold small amounts in digital wallets before you hit transaction or balance limits.

The rule certainly isn’t “You must always know all your customers all the time”. Fortunately we live in a world of nuance and risk-based approaches. Stablecoins provide another example of something somewhere in the middle.

😨 Not Knowing Your Customer

When you want to buy a stablecoin from an issuer, you send them money through the existing banking system. The issuer then transfers stablecoin tokens to your blockchain wallet. Redemption is the opposite of this: You send your stablecoins back to the issuer and they send money to your bank account.

Purchasers and redeemers of blockchain-based stablecoins need to have a Know-Your-Customer or “KYC” relationship with the issuer. Yet once you hold a stablecoin, you can send it to anyone with a cryptocurrency wallet. The stablecoins can be passed from unidentified account to unidentified account, with transactions recorded on the underlying blockchain (currently Ethereum is the most popular blockchain for this). Only the redeemer, who brings the stablecoin back to the issuer, needs to be identified by the issuer.

This is similar to physical cash: customers who wish to convert bank deposits into physical cash or vice versa need to be identified by the bank and have a KYC relationship. But outside of the banking system, cash can be passed between people without them having a direct KYC relationship to the bank.

😱 Oh no, unidentified money!

Relax. While pseudonymous accounts may sit uncomfortably with people believe that all money should be identified (lest terrorists become enabled). blockchain-tracked digital money is no worse than other ways of transferring money in the existing financial system. In fact, in some ways it’s more traceable.

Today, people can use numbered bank accounts or bank accounts controlled companies with nominee directors. Criminals British companies because you can set one up for under £20 in less than 20 minutes. And you don’t have to provide any identity information. Then you just set up a few more companies in different jurisdictions, and you can make large amounts of money disappear. Here’s How Britain can help you get away with stealing millions: a five-step guide by Oliver Bullough in The Guardian.

In fact, due to the nature of the blockchains that record these transactions, stablecoins are more traceable than money moving around the traditional financial systems, recorded as debits and credits in different independent banking systems. On the blockchains, law enforcement can see in realtime the movement of funds from account to account, without needing to subpoena anyone or trying to cooperate internationally or across jurisdictional lines.

This is also of course is much more transparent than physical cash, which does not leave any record of ownership; but it’s much less financially inclusive than physical cash, which everyone knows how to use.

🥶 Freezing and wiping accounts

If you look into the smart contract code that defines the stablecoins, you can see that accounts can be frozen using special transactions sent to the blockchain.

For example, Paxos (my previous employer who sets a high bar for regulatory compliance) states in its Terms and Conditions (retrieved 29 Oct 2019) that they can freeze all tokens regardless of where they are held:

A law enforcement user can freeze and wipe PAX balances associated with specific Ethereum accounts. Search for “freeze” in the PAX smart contract code. This is different to physical cash!

This means that although the issuer may not be able to map a real world identity to the pseudonymous account holding their stablecoin, they can effectively freeze and wipe the account – presumably on demand from a financial regulator or law enforcement. This ability gives comfort to those who want to see a “kill switch”. Here’s an article about it from TheNextWeb.

🎉 Enabling innovation

So with approved stablecoins, we have:

  • Low-volatility assets (typically, fiat-backed stablecoins trade within 1% of their underlying fiat price, ie between 0.99 and 1.01 to 1)
  • Money that can move with a lot less friction than money in bank accounts (banks have opening hours, they may not allow programmatic instructions, they may overburden their customers for unnecessary information requests as they over-comply with regulations)
  • Money that can move as long as the blockchain is working (instead of catering to scheduled and unscheduled system downtime that exists with centralised financial service providers)
  • Money that can be programmed, escrowed, released, automated in smart contracts defined by code
  • Money that leaves an ownership trail on their respective blockchains, that can be analysed
  • Money that can, if needed, be frozen and wiped

Permissioned pseudonymity seems to be a sensible balance between allowing innovation without enabling large scale abuses of the financial system.



‘Bitcoin maxis’ like Solana, but is there sound logic to that



Recent changes in cryptocurrency market dynamics have fueled the popularity of altcoins like Solana [SOL]. It recently became one of the most trending blockchain platforms around on the back of its surging price.

The cryptocurrency, in fact, had a 1-year ROI of over 4,200%, despite dropping by 34% since its peak in early September. Despite the latest hiccup in value, however, market observers believe the project has managed “winning over a significant number of Bitcoin Maxis or near-maxis.”

Ikigai Funds’ Travis Kling offered this observation on Twitter when he said,

“After talking to a bunch of folks over the last couple months, it’s pretty clear that SOL is successfully winning over a significant number of BTC Maxis or near-maxis, which have previously owned zero ETH or very little ETH.”

While the crypto-space is competitive, the tech-twist to the age-old saying – “competition of your competition is your ally” also holds true. Solana is not competing with Bitcoin. Instead, it is competing with Ethereum’s position in decentralized finance, NFTs, and smart contract offerings. Given the fact that transacting on Ethereum is still a pain for some users, Solana’s cheap and fast transactions provide a better alternative to many.

Solana’s DeFi projects recently crossed $3 billion, despite Ethereum hosting the maximum number of DeFi and NFT projects. While Bitcoin “maxis” are also opting-in for smart contracts, they prefer SOL over ETH, according to Kling.

Why? According to the exec,

“I think maxis look at ETH vs SOL and think –

Well as long as its not going to be all that decentralized, might as well have a smart contract platform that can actually handle enough throughput with cheap enough fees where it can really scale, instead getting choked up like ETH.”

However, not everyone agrees with Kling’s opinions. Many believe the decentralization narrative to be wrongly used by Kling, with another Twitter user @mikemcg0 noting that Ethereum is “more decentralized than BTC.” Anyone can run an Ethereum validator,” he said, “but only a select few oligopolies can mine BTC.”

Even so, Bitcoin mining has spread out even more after the recent China crackdown. Although the process is extensive in terms of effort, time, and money, according to another user, “anyone can” mine BTC “if they have the entrepreneurial mindset.”

Now, the latest outage faced by Solana did raise questions about the level of centralization. However, that has not really discouraged those who want to indulge in DeFi, NFTs, and smart contracts. As Solana forges new contracts with Hacken Foundation and, others institutions like Osprey Funds and Grayscale are in a race to include Solana in their respective bouquet of products.

In fact, Osprey Funds has already registered Osprey Solana Trust with the SEC.

‘Ethereum killer’ or not, Solana is en route to gaining more interest from the booming crypto-market. Even turning so-called BTC maxis in the process.

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Europe Now World’s Biggest Crypto Economy: Boasts Over $1T Worth of Transactions



Central, Northern, and Western Europe (CNWE) has grown into the world’s largest cryptocurrency economy since July 2020. The region experienced a massive increase in trading activity since then– particularly in the DeFi space.

The European DeFi Boom

Data from Chainalysis shows that CNWE received over $1 trillion in cryptocurrency over the last year alone. This represents 25% of global trading activity. Furthermore, it is responsible for at least 25% of all crypto value received by other regions, including 34% of the value received in North America.

This makes the EU the most concentrated in the world in terms of cryptocurrency trading volume. This is partially due to increases in all forms of trading activity over the past year, coming mostly from institutional investors.

Large institutional transaction value grew from $1.4B in July 2020 to $46.3B in June 2021, coming to take up half of all CNWE trading activity. The most pronounced increases were seen on DeFi protocols, where over 80% of these large institutional transactions were sent in June.

The impact of DeFi is further established when ranking coins in terms of transaction activity in the region. Despite being the largest cryptocurrency by market cap, Bitcoin heavily trails Ethereum in transaction volume among large institutional investors. Additionally, DeFi protocols took up a majority share of funds received by cryptocurrency services in CNWE in June 2021.


The Decline in Eastern Asia

CNWE has seen significant absolute increases in its crypto trading volume. However, its new place as the world’s largest trading hub is partly due to a sharp decline in market share held by Eastern Asia– the previous world leader.

In early 2019 the region held over 30% of global transaction volume. This figure has since fallen sharply to about 15% – less than CNWE, North America, and even Central and Southern Asia.

This may be related to China’s continued push to prevent and discourage crypto trading within its borders. China re-announced their ban on crypto trading in the country days ago, and have been moving to prevent all access to exchanges within the country.


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Here’s why a multi-CBDC bridge is being tested on Ethereum



The race to launch the first CBDC is one the world is following intently. While most have their eyes fixed on China’s digital yuan pilot, a group of countries has come together to take CBDCs a step further.

Phase 3 of Project Inthanon-LionRock saw BIS Innovation Hub Hong Kong Centre, the Digital Currency Institute of the People’s Bank of China, and the Central Bank of the United Arab Emirates experiment with a multi-CBDC bridge or an mBridge.

What does this mean?

The mBridge initiative would ideally allow central banks in different countries to issue and redeem their own CBDCs across borders on a common platform – without having to depend on correspondent banks.

Meanwhile, commercial banks would be able to “submit peer-to-peer CBDC push payments.”

The BIS September 2021 report stated,

“If successful, an efficient, low cost, compliant and scalable multi-currency, multi-jurisdiction arrangement can provide a network of direct central bank collaboration, greatly increasing the potential for international trade flows and cross-border business at large.”

The report further clarified,

“The prototype demonstrates a substantial improvement in cross-border transfer speed from multiple days to seconds, as well as the potential to reduce several of the core cost components of correspondent banking.”

Here, it is also interesting to note that the project’s Phase 2 prototype was built on Ethereum. This was because the core layer of the prototype contained the blockchain ledger and smart contracts.

Notes on features

As a multiple CBDC project, regulation and compliance were functional requirements. Central banks would be able to monitor transactions in real-time, set balance limits, control the balance held by their commercial banks, and use data for surveillance.

Scalability was also part of the design to later onboard more participants and jurisdictions.

However, one complication was the wide difference in remittance charges across countries. While the global average was calculated to be 6.38% of the remitted sum, the report observed that even a percentage as low as 1% would be costly for payments in the millions of dollars.

An update from China

Alongside the mBridge project, China has also been steamrolling ahead with its CBDC program.

Changchun Mu, Director-General of the DCI of the People’s Bank of China. confirmed that e-CNY pilots have been taking place in 10 areas.

Mu added,

“Payment methods such as QR code and tap-and- go have been well-supported and innovative services such as dual-offline payment and wearable device payment have been tested for safety and efficiency.”

Meanwhile, Howard Lee, Deputy Chief Executive of the Hong Kong Monetary Authority, suggested that an e-HKD could also be in the works.

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