Enjoy the onset of Summer!

Han, Founder and CEO

PRODUCT UPDATE

OtoFunds: Dragging Investment Fund Formation into the Digital Age (Kicking and Screaming…).

We have used the month of May at Otonomos to diagnose why setting up an investment fund is still such a difficult delivery. Crypto funds in particular need forceps!

Lots has to do with the fact that a number of service providers have to be choreographed: outside counsel, fund admin, custodians, auditors (if required) and Otonomos who ultimate files for your fund’s incorporation and looks after it.

Managing this process is an ungrateful task as a result of the interdependencies of various tasks by various people.

However the key culprit is not people as such but their inertia to use tech tools: Service providers, with outside legal counsel being the worst offenders, keep using email threads and MS Word attachments, rather than project management tools and shared document folders.

Introducing the OtoFunds portal

We too at Otonomos have been complicit to this analog entropy, but for the last months have been speccing a digital solution which we firmly believe will save our fund clients time, money and aggravation.

The result is a first version of the OtoFunds portal: a full digital workflow tool that lets everybody involved with the setup of your fund, including you as our client, see the cascade of tasks, their corresponding timelines, and who is owner of each.

It comes with a shared document library for all documents related to your fund, accessible for real-time online editing, including by outside legal counsel. Users can double-click on each task, comment, mark its status and adjust its timeline, which OtoFunds aims to compress to 21 days from order of your fund to launch.

Our funds roadmap: A triptych of fund solutions

The OtoFunds portal is the first panel of what will ultimately become a triptych that brings fund incorporation, capital formation including by way of tokenization (1Q2025), and fund administration (3Q2025) all under one digital roof.

> Reach out to otofunds@otonomos.com to find out more about our fund offering or schedule a FREE initial call about your fund setup.

Explore full features

KNOWLEDGE SWAP

Possible Permutations for Your DeFi Entity Stack

Failure to get some basics right for your DeFi project can lead to hefty fines, project shutdowns, or even worse, jail time.

While the latter is uncommon (and won’t prevent you from running for U.S. President if you are a naturally born U.S. citizen and over 35 years of age), the regulatory gray zones of DeFi governance pose a significant risk.

In this post, we look at some possible permutations for your DeFi entity stack, starting by asking the most obvious question: what are you trying to build?

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REGULATORY CORNER

To KYC or Not to KYC: What it is, Why it is Important, and How to Get it Right for Your Web3 Project

Know Your Customer protocols have become essential to Web3 projects.

While never a delight, new tools at least have made KYCing less of an irritant.

In this post, we discuss what you need to know to get the right KYC tools in place for your business.

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Next month in The Otonomist: We plan a special June issue on how to fund your project and the fundamental trade-offs between equity or token funding, with plenty free templates including SAFEs, SAFTs, Token Warrants and Termsheets. We also share some thoughts on how we see capital formation evolve from how it is currently done. As always, in your inbox on the last day of June.

Project overview page

Immediately after you order your fund from Otonomos, your project overview page, hosted at a dedicated Otonomos subdomain (otofunds.otonomos.com), is pre-populated with all workflows, expected timelines, and owners for each task.

You can toggle between different views, including a List View (above), a Gantt view with adjustable timelines (below), and a Kanban-style board.

Double-click on each task

Double-clicking on a task opens a tab view with its Current Status, a Description, and Task Information.

Below the Task Information, you can find a menu with the following options:

• Comments: Allows you to add general or direct comment for this specific task. You can also add a task comment via email using a dedicated address.

• Subtask: Shows all subsidiary task under the main task.

• Documents: lets you access or upload documents related to this task.

• Forums: Access a growing library of knowledge base articles related to investment funds.

• Dependency: lists Predecessor and Successor Tasks.

• Status Timeline: Gives a an overview of the duration of the task from Open to Close.

• Activity Stream: Gives a full chronological overview of all activity related to the Project.

• Google Drive: A particularly helpful tool that allows users to access and co-edit all documents related to the project. We highlight this feature in more detail below.

No more MS Word documents!

Bye bye to revision balloons and offline versioning!

The Otonomos Funds staging portal stores all documents related to your fund in one place.

It uses Google Docs to allow for real-time, collaborative editing and versioning.

Simply use a profile email linked to a Google account to access, comment and edit all documents online:

A fully customizable homepage

Your Home page is fully customizable with the status panels you’d like to see.

You can even change font and background colors:

Disrupting the fund space

Our fund assembly solution aims to make investment fund formation faster, easier, and more streamlined.

A lot of the friction we identified working with fund lawyers and service providers such as fund admin and custodians comes from three sources:

1. Inertia: There is an inherent inertia in using new technology and legal counsel in particular is typically not very technology-versed. However the deeper reason why the use of tech meets resistance may be related to (2) below:

2. Billing structures: Service providers such as lawyers and accountants have a time-spent billing structure which gives them little or no incentive to work faster and more efficient.

3. Crypto clients may not be good enough: There is still a stigma around crypto fund setups who often start with smaller seed capital and hence have less money to spend. At the same time, they expect technology to guide then through the process and are often baffled by the analog nature of this industry.

For the above reasons, Otonomos feels its can radically disrupt the fund formation space by bringing the same technology prowess it brings to company formation generally to the fund space.

The first panel of a triptych: Our fund roadmap

Streamlining the assembly of investment funds is only the first of three areas Otonomos Funds is looking to digitize.

Automated subscriptions

Next is a portal that automates the subscription process and helps clients tokenize their fund. We have this in an advanced stage of development, with an expected launch in 1Q2025.

Fund admin

As real-world assets are increasingly brought onchain, fund administration will essentially consist of aggregating blockchain price oracles to calculate a fund’s NAV.

> Schedule a FREE 30-min call with our OtoFunds desk to explore the optimal setup for your investment fund.

Schedule FREE call today

Web3 presents a new domain for potential acts of fraud and money laundering, so governments have been keen to enforce the need for KYC requirements across the board. As it’s a mandatory part of many Web3 business operations now, consider this your guide to navigating the world of KYC.

What is Know Your Customer (KYC)?

Know Your Customer or ‘Know Your Client,’ as it’s sometimes referred to, is the protocol of verifying the identity of a customer as well as their financial profile. The process itself involves:

• Establishing the identity of a customer;

• Understanding the purpose and nature of the customer’s activities;

• Checking money laundering risks that may be associated with the customer’s financial profile;

• Qualifying the source of the money coming in as legitimate.

For non-individual customers, the process will involve authenticating the whereabouts and owners of the organisation, as well as its legal status. 

In most cases, you’ll find that customers pass with flying colours. It’s a bit of a hindrance to the onboarding process, but it’s become a necessary one for financial transactions in the digital world. 

Why is KYC important? 

The importance of KYC goes far beyond simply ticking a box for the regulators – even though, there is a lot of that going around for Web3 businesses globally right now. Instead, Know Your Customer protocols are actually very handy for projects to ensure their own financial safety as well. 

Above all else, the aim is for you to protect your Web3 project from unknowingly facilitating financial crime or working with otherwise untrustworthy actors. As a little additional bonus, running a stringent KYC process gives your business the shine of being a very trustworthy organisation. 

KYC’s role in AML

As a subset of anti-money laundering (AML), Know Your Customer plays a key role in identifying people who launder money. It plays into both AML regulations and attempts to combat the financing of terrorism. With all businesses deploying KYC procedures, regulators and legal authorities can more easily retrace bad actors. Importantly for your business, as part of the KYC process, you’ll receive a notification if you check on anyone whose information aligns with the lists of suspects kept by governments and law enforcement. 

KYC’s role in stopping fraud

The KYC process minimises the potential for someone to use another person’s identity and finances fraudulently. Checks to identity via a bank, which will require photo identification and other such ID materials, or with biometrics tools, make the prevention of fraud much more accessible online. 

Ensuring that you don’t get sued with KYC

If you implement a stringent KYC process that adheres to local AML and CTF (counter-terrorist financing) laws, your organisation will gain protection against losses that result from the finding of illegal transactions and funds from your customers. Otherwise, your organisation could be seen as assisting criminal behaviour and potentially involved in financial misconduct. KYC is as much about protecting your back as it is hindering criminals.

When Web3 businesses slip up with a lack of KYC protocols

In late 2023, decentralised cryptocurrency tumbler Tornado Cash drew the ire of the US government for its lacking KYC procedures. An indictment from US federal prosecutors states that Tornado Cash and its founders didn’t establish effective AML or KYC protocols, as required by money services businesses or the Financial Crimes Enforcement Network – entities that the company also failed to register with. In the end, a hacker was found to have laundered a large sum of money, developer Alexey Pertsev was sentenced to over five years in prison, and the platform was blocked from the US market. 

Top 10 KYC tools for Web3 projects

To be considered a strong KYC tool for a Web3 project, it needs to tick four boxes in its entirety to ensure compliance with the more stringent regulations. These four elements are:

• Utilising Customer Identification Program (CID);

• Assessing the identifications through Customer Due Diligence (CDD) procedures;

• Performing Enhanced Due Diligence (EDD) for extra protection;

• Ongoing monitoring to keep information current and report any potential red flags.

Identity.com

A very popular solution for Web3 projects, the open-source Identity.com upholds privacy by not trading any personal information that it acquires and has been specifically crafted to enable identity verification on a decentralised network. 

Ondato

Combining AI and biometric authentification, Ondato is a KYC platform that any business should consider. Its extensive suite allows you to have full vision and control over your KYC and AML risk management. 

Fractal ID

Specialising in Web3 users and chains, Fractal ID is all about letting users partake in the necessary KYC and AML procedures while upholding their privacy. The decentralised identity solutions meet your legal requirements and appeal to users wanting to rely on trustless systems. 

SolidProof

The KYC procedure run by SolidProof gives you a lot of options while also being comprehensive on a base level. Users need to verify themselves through video, documentation, and address. After this, you can get sent a report that assesses any risk and suggests ways that you can mediate these risks. 

iDenfy

iDenfy specialises in business identification. It draws from official credit bureaus in over 160 countries and registry reports from governments, giving its users a tremendous amount of coverage when running KYC procedures. 

ComplyAdvantage

ComplyAdvantage is all about offering you customisable tools to streamline your specific AML, CTF, and KYC needs. It’s available in over 200 territories and is proven to be compliant with financial crime regulations around the world. 

Chainanalysis

For crypto and NFT projects, many turn to Chainanalysis. The brand is well-known for its advanced crypto security services and even offers its own certification course to help you apply your own compliance measures. 

Trulioo

Through one API, Trulioo gives you access to all of the KYC tools that you could need while drawing from identity networks from across the globe. 

Elliptic

Enhanced due diligence, transaction monitoring, wallet screening, and AML risk assessments are all part of the package of the ever-up-to-date platform Elliptic. 

Refinitiv

Refinitiv is very much your complete suite of KYC tools that’ll help you to abide by AML regulations from the on-boarding process and thereafter. Best of all, the KYC process is automated!

> Do I need to KYC when I simply want to own governance tokens in a protocol? How does KYC work in a decentralized Foundation if I am Lead? These are just a sample of question we get all the time at Otonomos and which we’d be happy to answer for you. Schedule a call today if you have any questions about your project stack and related KYC.

Schedule a FREE call today

​Decentralized Finance (DeFi) continues to present opportunities for innovation across financial services and the Web3 landscape. While crypto still struggles with a stigma of volatility, DeFi has earned a more promising reputation as a financial alternative powered by blockchain-based protocols. 

Decentralization, transparency, and fewer permissions (in short, a completely open financial system) can promote innovation in everything from lending and borrowing to asset management. The result: an explosion of projects over the last few years that have embraced the inclusion, predictability and perhaps most underrated, the portability that DeFi brings. 

The total value locked (TVL) in DeFi projects was around $59.7 billion in the first quarter of 2024. More confidence has attracted more interest and led to further liquidity—as well as increased risk. 

Operation Shutdown

In 2023, the Commodity Futures Trading Commission fined three DeFi companies up to a quarter of a million dollars each over regulatory failures, signaling a federal crackdown in the broader industry and uncertainty for those operating in it. 

Challenges are also emerging in the European Union. According to Cointelegraph, new regulations under the Crypto-Assets Regulation (MiCA) could be trying to force DeFi protocols into a more hybrid position with licensing and Know Your Customer (KYC) requirements. 

Failure to establish a proper legal footing in your DeFi project can lead to hefty fines, project shutdowns, or even worse, jail time. The latter is uncommon, but the regulatory gray zones of DeFi governance pose a significant risk. So, it’s crucial to understand and mitigate the challenges by nailing the legal structuring. 

Defining your project

Getting the foundations right is the first step in achieving legal compliance and establishing resilience within your project. So, start by answering the most obvious question: what are you trying to build? 

Whether your project is a lending platform, prediction market, or decentralized exchange (DEX), understanding its scope, functionality, and audience lays the groundwork for navigating the legal landscape. 

Some DeFi projects have inherently more legal risks than others, particularly those that operate close to traditional securities. For example, a user-friendly, non-custodial platform enabling basic token swaps might face fewer regulatory hurdles than a complex exchange offering cross-chain functionality.

Some still overlook the fact that complex legal issues can arise in Decentralized Autonomous Organizations (DAOs), token offerings, and KYC/AML requirements. However, operating in the decentralized sphere doesn’t mean a free pass from regulation. The quicker you understand this, the better. 

Understanding token needs

In 2021, the US Securities and Exchange Commission (SEC) brought forward a case against Blockchain Credit Partners over the alleged sale of unregistered tokens worth $30 million. The case was eventually settled, and Blockchain Credit Partners didn’t have to admit guilt—but it cost them almost $13 million. 

Token issuance and token release can result in costly, complex litigation if you ignore the legal framework. It all depends on the legal status and characteristics of the tokens you choose to distribute (and the distribution process itself). 

There are many ways to categorize tokens, but practically speaking, they fall into three status categories: security tokens, utility tokens and stablecoins. Security tokens often face stricter scrutiny in a legal sense, as they’re most aligned with traditional securities. However, other types of tokens occasionally raise red flags at the SEC as well. 

One way to navigate the regulatory complexities is to create a legal entity that sits between tokens and assets. Token Special Purpose Vehicles (SPV) can add a degree of separation, but that’s not necessarily enough because they still need to comply with regulations. 

The legal standing of tokens and issuance also varies by jurisdiction, so it’s essential to choose wisely. Issuing and distributing tokens in jurisdictions with unclear regulations will add to further complexities. 

The bottom line is that tokens that aren’t structured correctly are high risk and run into various legal problems, which is simply off-putting for investors. In today’s regulatory climate, getting a legal opinion on your tokens is probably worth the investment. 

Understanding the scale of decentralization 

In 2022, MakerDAO members turned out in record numbers to vote against a proposal to centralize the platform’s governance. The degree of decentralization within your DeFi project will shape everything from its governance strategies (like permissionless vs. multisig voting) to token distribution processes. 

Decentralization would suggest fewer legal hurdles, and most members support it, but the complex nature of DeFi governance mechanisms can actually lead to operational challenges and SEC interest. 

Key to this context is The Howey Test, the US legal framework that determines whether a transaction should be regulated. It also applies to cryptocurrencies and DeFi tokens, defining whether they are classed as securities. 

The ongoing saga between the SEC and Uniswap serves a cautionary tale. Regulators have threatened the exchange with court and leveraged the Howey Test within their arguments. CoinDesk ominously warned that this was an “opening attack against DeFi,” suggesting this debate is far from over.  

Regulators will keep on coming, so you need to be adaptable and strike a balance that facilitates both decentralization and compliance. Remember, as MakerDAO demonstrated, decentralization could also evolve based on community decisions. 

Structuring your governance the right way

Governance is the cornerstone of DeFi, driving transparency and decision-making.  As an essential component of your legal framework, understanding and implementing effective governance is critical to navigating the legal challenges of your DeFi project. 

Decentralized Autonomous Organizations (DAOs) are the most common governance strategy in the DeFi world. They rely on token-holder votes within a blockchain to enable input from diverse investors in stark contrast to traditional decision-making. The fact that we’ve gone from 4,000 DAOs in 2022 to 12,000 this year (by DeepDAO’s records) shows that they’re doing something right. 

However, DAOs live in a gray zone as they don’t operate alongside a legal entity like a company or foundation. Consequently, you need to build a proper structure to protect members and enable decision-making. Otherwise, the DAO could be deemed a general partnership, making everyone involved legally responsible. What’s more, depending on the structure of your DAO and token distribution, it could be subject to securities regulation if it meets the SEC’s Howey Test criteria, meaning more red tape. 

Legal wrappers  – the practice of conducting all or some activities of a DAO through an incorporated or registered legal entity – have been touted as the solution as they provide a recognized legal framework to the DAO. They wrap a sort of legal blanket around your DAO, shielding its members from legal and financial challenges and ensuring limited liability. The most in-vogue types of wrappers appear to be DAO LLCs, which jurisdictions like the Marshall Islands have embraced because they add a corporate familiarity to an otherwise alien concept. 

Indeed, DAOs crucially require limited liability. However, legal wrappers are still a relatively novel concept that faces challenges. An LLC structure is also inherently flawed as it slaps a more rigid layer on top of your decentralized decision-making arm. This limits its abilities without addressing the key issue, prompting us to think a multi-pronged approach is better. 

Enter: the entity stack 

DAOs will continue challenging existing legal systems, and LLCs may not be a viable, long-term solution. Only a creative collaboration of entities, or an entity stack, can help navigate this minefield. 

An entity stack consists of two or three entities, such as a foundation, token issuer, and operational company, that work together to unlock the interplay of operational and governance abilities across your DeFi project. It’s another relatively new concept and not necessarily a silver bullet to DeFi's legal woes, but it's certainly more legally sound than the single legal wrapper. 

But how does this help with your DeFi project’s legal structuring? By separating the functionalities of your DAO, you create a more modular and atomized system that allows more clarity between sections and less collective risk. 

There are also particular jurisdictions where this model can reap more benefits. Jurisdictions like the Cayman Islands, Panama, and the British Virgin Islands offer favorable solutions for token distribution and other aspects of DAO operations, making them a solid option for starting a DeFi project. 

Leveraging an entity stack in these jurisdictions boosts regulatory compliance and, most importantly, reduces legal risks. It can protect the DAO and its members while championing the full potential of decentralized governance—and that’s something we should all be striving for. 

You don’t have to navigate Web3's jurisdictional complexities alone. At Otonomos, we specialize in helping you unlock multi-jurisdictional access while delivering the best decentralization.

Schedule a FREE call today

Keep the ethos alive!

Han, Founder and CEO Otonomos

UNBOUNDED THINKING

Real World Asset Tokenization and the Democratization of Wealth

In this Unbounded Thinking post, our James Kingston approaches Real World Asset Tokenization as a tool towards wider access of investment opportunities and hence wealth.

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GUEST POST

The Potted Past of Crypto Regulation

In this post, Egypt-based UK freelance journalist Tamara Davison reviews the meandering of crypto regs and makes the case for a fresh regulatory approach.

Read full post

DOUBLE CLICK

On-Ramping and Off-Ramping: What are the Best Payment Tools for My Web3 Project to Move Money Between Crypto and Fiat and Vice Versa?

In this post, we explore the on-ramping and off-ramping solutions that function as the bridges between fiat and crypto economies and the best tools for your Web3 project.

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NEXT MONTH: In next month’s issue of The Otonomist, we update our most-read ever article from our April 2020 Otonomist on “How to Become the Next Michael Burry” to share the latest on crypto investment fund formation and setup.

Web3 is rapidly on the ascent, earning the trust and time of users and businesses alike for a whole range of reasons.

However, it’s still in the earlier stages of adoption and can’t be considered mainstream just yet. So, particularly when it comes to matters of finance, Web3 projects have to find ways to increase accessibility for the uninitiated and those who have one foot in crypto and the other in fiat currencies. 

This bridge is referred to as ‘ramping’ but is simply just a matter of exchanging between the two formats of economy. It’s a process that can be made overly complex, and thus hinder a project seeking to appeal to as many users as possible, but there are now many tools that make for efficient, secure, and accessible ramping companions. 

Blockchain meets the real world – why has it been a struggle to transfer value?

The core struggle of the divide between blockchain economies and fiat economies has essentially been the exchange between formats. The two financial ecosystems are in stark contrast to one another and yet seek to achieve the same goal: exchange monetary value. So, a system had to be created that would allow for a true exchange of value between the many fiat currencies of the world and the various blockchain cryptocurrencies.

A major struggles has come in the form of the stigmatisation of cryptocurrencies – regardless of how inane such positions may be. Most mainstream audiences have little interaction with the Web3 world, instead predominantly knowing of Bitcoin and its volatile prices. The system is seen by many as an investment vehicle, something to be bet on, rather than a revolution in personal and business decentralisation that offers freedom from the restraints of major corporations and governments. 

Some governments even continue to refuse to call cryptocurrency a form of convertible currency or outright ban its use, as is the case in Qatar, China, Saudi Arabia, and Cameroon. Throw in the difficulties of crypto-friendly banks collapsing, as Silvergate Bank did, and major exchanges like Binance struggling to find new fiat banking partners in major markets, particularly France, and you’ve got a lot of friction between transferring value between the two.

Challenges faced by traders, DAOs, funds, and other projects

Dealing in and out of a blockchain, naturally, presents challenges to what’s become the accustomed state of play. For traders, the challenge and potential benefits lie in the volatility of coin prices, but there’s also the fact that some 15 per cent of bitcoin in circulation belongs to around 100 addresses, making the system more centralised and somewhat disadvantageous to your average investor. 

A decentralised autonomous organisation can be hindered both by the time and cost of transactions from fiat to crypto or between blockchains; then there’s the incredibly varied regulatory landscape around the world. The lack of one standardised portal for on-ramping and off-ramping can create challenges for all, but that’s also part of the appeal of the decentralised form of finance. 

The evolution of on-ramping and off-ramping platforms

On-ramping and off-ramping, or rather, allowing users to exchange fiat currencies for cryptocurrencies and vice versa, has long been a necessary part of the blockchain environment.

Without these tools, the blockchains would essentially be limited to those who could mine coins and acquire them through other means. To become accessible to the world, ramping platforms had to be established and refined. 

Where once there was a somewhat sprawling field of platforms that would either specialise in on-ramping or off-ramping, many of the more centralised platforms now cater to both. The major exchanges are a prime example of offering this duality of exchange nowadays. The need also opened the door to specialised third parties that would appeal to Web3 projects by offering an all-in-one service and other related perks. 

Projects can now integrate on-ramp and off-ramp features into their apps through third-party widgets and services that also cover other regulatory requirements like Know Your Customer and Anti-Money Laundering checks. It makes the process easier and more streamlined for Web3 developers and their intended users. 

Centralised and decentralised exchanges

Centralised exchanges (CEXs) are your more traditional vehicles for on-ramping and, usually, off-ramping. Platforms like Kraken*, Coinbase*, and Binance* facilitate the exchanges and have built efficient user-interfaces to let people deposit and order- the platform then executes the order.

Decentralised exchanges (DEXs) eliminate this kind of intermediary, allowing users to trade directly with one another to give full control over the transactions, however they often have limited or no on- or offramping functionality.

What are the best tools and protocols for my project to move money between the blockchain and fiat economy?

As a baseline for best practice, if your Web3 project caters to users on-ramping, it should also allow them to off-ramp. Having protocols in place for both sides will do wonders for, at the very least, the user’s perception of the brand as it means that their funds don’t appear to be “lost” to the blockchain or unattainable as fiat funds again.

To ease some burdens, it’s also worth finding a platform with licence-free integration to lessen the administrative and legal document work required. With this in mind, for many, third-party crypto ramps offer the most streamlined and efficient way to move money between the blockchain and fiat economy. 

You could look to the Ramp* for complete ramp solution, which is a free widget that handles user verification requirements, chargebacks where necessary, and, of course, exchanging fiat currencies for crypto.

MoonPay* is another major player in this space. Boasting over five million customers, users can easily on-ramp and off-ramp once the system is integrated into a Web3 project thanks to its support of major card providers, mobile wallets, and regular bank transfers.

Mt Pelerin* offers what many users may deem to be a near-idyllic solution. The total ramp tool offers a limited number of transactions without KYC verification requirements. 

The leading on-ramping and off-ramping solutions present the connective tissue that allows for fiat users (most of the world) to enter into and explore the ever-growing world of Web3. As a Web3 project, the key is to make the transition as seamless and accessible as possible.

> Reach out to our users via our official Telegram group to swap intel about the tools they use or schedule a call with Otonomos if you would like to explore crypto to fiat options for your company.

*Note: mention of this service is not an endorsement by Otonomos and we do not receive any form of compensation from these or any other providers we work with.

Since its inception, the cryptocurrency market has been branded the ‘Wild West’ of the financial world. Indeed, the moniker isn’t necessarily unfounded; price volatility, cryptocurrency exchange collapses, and characters like Sam Bankman-Fried haven’t helped ease concerns about the crypto landscape. 

Cryptocurrencies naturally challenge the status quo of traditional financial structures, and in some ways, that will never change. Yet many also view their decentralized and borderless nature as full of potential but needing regulation. 

Over the past 15 years, the ideology of crypto regulation has also evolved considerably. As the regulatory market matures, regulators and investors have developed mutual interests, such as establishing stability and safeguards. 

The crypto regulatory ecosystem looks more promising these days, but there’s still some way to go. Looking back at the history of crypto regulation can help shed light on the future direction of digital finance. 

What's on this page? 

1. The birth of crypto and early responses 

2. The evolution of regulatory frameworks in crypto

3. Crypto founders on regulatory scrutiny 

4. Future regulatory paradigms

1. The birth of crypto and early responses 

While cryptocurrency introduced us to the hugely beneficial worlds of blockchain and smart contracts, its formative years posed plenty of challenges. 

Unsurprisingly, the 2008 crash shook the structural foundations of fiat currency and paved the way for the birth of Bitcoin and others. Despite risk and volatility, early crypto investors made considerable gains through digital investments in the first few years, rattling traditional structures. At the time, this unbacked, decentralized, and largely anonymous cryptocurrency market garnered plenty of attention, not all of it positive. 

Crypto’s dubious links to activity on the Silk Road, the dark web marketplace where users bought illicit things like drugs, brought skepticism. The FBI shut down the market in 2013, painting an us vs. them image of the crypto landscape: those on the right side of the law and those who weren’t. 

The high-profile hacking of the Mt. Gox cryptocurrency exchange in 2014, which at its height facilitated more than 70% of Bitcoin transactions, also fuelled uncertainty about the viability of this market. The hack exposed vulnerabilities in the places where crypto is handled and resulted in Mt. Gox declaring bankruptcy, with crypto investors ultimately paying the price. 

This period marked a time of regulatory exploration, with early responses to the emerging crypto landscape remaining largely informal. Examples included the U.S. Financial Crimes Enforcement Network (FinCEN) Guidance that, as its name suggests, was essentially guidance for businesses using virtual currencies. In 2014, the Financial Action Task Force (FATF) released its first guidance on cryptocurrencies, which helped to define virtual currencies and raise awareness about the risks. 

Regulatory experimentation coincided with plenty of criticism, and the fact that it wasn’t taken seriously perhaps delayed the emergence of impactful regulation. Leading figures expressed skepticism about cryptocurrency then, including the CEO of JPMorgan, who said in 2017, “It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed.” Warren Buffet similarly called crypto “probably rat poison squared” in 2018. 

Ideological tension between libertarian ideals and government regulation was a defining characteristic at this time. The crypto pioneers were largely anti-regulation, with many feeling it would limit opportunity and ultimately undermine the fundamental core of crypto itself. Early regulatory guidance did little to impact the broader market, ease ideological concerns, or even keep pace with the rapid evolution of crypto. 

2. The evolution of regulatory frameworks 

Fast forward a few years, and the initial skepticism we saw during the birth of crypto had started to erode. The period around 2017 was a turning point and a transition toward acceptance. But why the change of heart? 

Having withstood the turbulence of the first few years, the cryptocurrency market began to mature and showcase resilience. Alongside Bitcoin, Ethereum entered the scene, as did smart contracts and decentralized apps (dAPPs). Tether (USDT), the most successful stablecoin to date, began to take off, and it started to look like cryptocurrencies weren’t going anywhere. In January 2017, 636 cryptocurrencies were listed on CoinMarketCap, and within a year, that had doubled to 1,359. 

It was also around the time that Bitcoin’s market value soared to $300bn. This growth attracted institutional investors, signaling crypto’s entry into the mainstream. The sheer scale of crypto value and the number of investors involved demanded more clarity on regulation, protections, and stability. 

More nuanced regulations started to emerge. For example, the SEC’s approval of Bitcoin Futures in 2017 paved the way for institutional investor crypto trading, a pivotal moment in accepting crypto. Around the same time, SEC regulators also moved to police initial coin offerings (ICOs) by identifying some as securities in an attempt to protect investors. These fractured attempts at regulation were piecemeal at best. 

The lack of unified regulation during this time resulted in regulatory arbitrage. Jurisdictions adopted widely different stances on how to work with crypto and it led to issues for investors, businesses, and regulators. Clearly, a more cohesive regulatory approach was needed. 

3. Crypto founders on regulatory scrutiny 

The shifting regulatory landscape required the cooperation of the crypto community. The ideological tension that positioned crypto leaders at odds with regulators had started to evolve. 

Notably, several prominent figures in the crypto community have expressed evolving views on regulation. Coinbase CEO Brian Armstrong, for instance, shared his take on the US regulatory landscape last year, highlighting the need for a proactive approach to avoid falling behind in the global crypto race. 

“As other countries implement regulations and guidelines for cryptocurrency, the U.S. risks falling behind both technologically and politically,” he wrote in an op-ed for CNBC. He added, “The U.S. government needs to take a more proactive approach to cryptocurrency and provide a clear regulatory framework for the industry, one with forward-looking policies that recognize the many unique and innovative aspects of blockchain technologies.”

This doesn’t necessarily mean crypto pioneers agree with all the goals of regulation, far from it. After all, regulation does pose challenges to costs and the speed of innovation, with developers forced to operate under more oversight. However, crypto founders were more open to finding common ground that could work to their advantage, which has to count for something. Over the last few years, we have seen crucial acceptance of the reality that the two sides must work together.  

4. Future regulatory paradigms

Last year’s Binance money laundering scandal reminds us of the ongoing risks of a largely unregulated crypto ecosystem. The regulators won’t back off after such a massive scandal. Yet, in early 2024, CoinDesk also revealed that only 30% of jurisdictions had attempted to regulate cryptocurrency. And this reveals discrepancies in the regulatory narrative. 

Perhaps past attempts at taming the market, like Bitcoin Futures, were down to cautious acceptance by established financial systems rather than genuinely effective regulation. 

Looking ahead, any significant regulation implemented will need to rely on international standards and collaboration between countries, helping to create a level playing field that promotes cross-border transactions. Despite having its issues, the 2023 introduction of Markets in Crypto-assets (MiCA) in the EU paints a picture of what cross-border regulation may look like. 

We also need to strike a balance between centralized and decentralized approaches, paving the way for an entirely new regulatory model. The emergence of hybrid models also offers a glimpse of a more collaborative regulatory future that relies on the input of businesses and investors. Regulatory sandboxes in FinTech, for example, encourage firms to experiment in a controlled environment and may help regulators better understand effective policies. 

Many crypto folks have hinted that a blend of artificial intelligence (AI) and cryptocurrency may help better define the regulatory landscape. While AI indeed needs regulation itself, it may also be a powerful tool in fraud detection, auditing, and tailoring regulatory frameworks to specific crypto prerequisites. Developments here are promising but will take some years to come to fruition fully. 

Some 15 years after Bitcoin burst onto the scene and revolutionized the financial world as we knew it, the dust is finally settling, and we’re beginning to see a clearer picture of how regulation may work. The imperative for developing a more regulated crypto future will hinge upon standardization, globalization, and collaboration.

by Tamara Davison

A problem of access

To understand the promise of real world asset tokenisation, consider the world around you. Everywhere you look, and everywhere you turn, there are companies. You likely work at a company – you may even own one. The car you use to get to the office has been made by a company, as too will have been the train, tram, or bicycle that might otherwise propel you there. Your company likely leases its physical space from another company; should you work from home you will rely on the product of Zoom, Google, or Microsoft to speak to your colleagues and customers. 

The food you eat, the lunch spot you eat it in, and the logistics organisations that supply that food are all procured and structured through companies. If it is at all modern, the house you live in was likely built by a property development company; The urban housing situation such as it is, you probably  rent that house from another company in turn. Returning home hungry and a little bored, you order food through one company’s app and peruse potential mates on another; an entire supply chain of tech companies, meanwhile, has conspired to design, make, and market the smartphone you use to do both.

Many of these businesses are public companies, their shares trading on the open market; most will be private, their shares held by only a few individuals and entities. Investing in these shares is one of the main ways individuals and institutions hope to accumulate wealth. That wealth, however, is poorly distributed, and the process of wealth accumulation is weighted in favour of those who already possess it. 

This difference arises in no small part due to the varying types of investment opportunity that the mass affluent, high (and ultra high) net worth individuals, and institutional investors have access to. Investing in equities – shares in public companies - is one of the main ways that ‘mass affluent’ retail investors may hope to accumulate wealth. Individual investors, possibly with the assistance of an advisor, invest their money in public companies such as Amazon, Shell, Tesco or Walmart. Many of the most interesting investment opportunities, however, are not to be found on the public markets. Take private equity funds and venture capital funds - they exist to invest in companies that are not publicly traded, and in doing so they find higher returns than that to be had on the open market. Consider the S&P 500 index of publicly listed US businesses - it had an average annual return of 5.91% between 2010 and 2020;  US private equity, by contrast, showed an average annual return of 10.48% in the same period.

Various factors conspire to mean retail and the bulk of high net worth investors are locked out of these private market investments. To the average investor, they are expensive, inaccessible, and illiquid. It can require millions of dollars to meet the minimum investment criteria of the largest funds – $10 million, $25 million - meaning only the very richest individuals can participate. Even for the lower priced funds, access and sourcing are difficult; markets are opaque, meaning such opportunities are difficult to find. At the same time, these investments are long term – the typical VC fund may require capital to be locked up for a decade. 

Investment in alternative assets is thus very correlated with wealth. Bain found that ultra-high-net-worth individuals - those with $30 million or more investable assets - allocated approximately 18% of their portfolio into alternative assets. Those with $5 to $30 million invested less than 5% on average, and those with $1 to $5 million, less than 2%. 

This problem of access is especially relevant when, like in the USA and UK, fewer and fewer successful businesses are choosing to have an IPO. In 1996, there were 8,090 companies listed on US stock markets. In April 2023, CNN reported this had fallen to a mere 3700. In the UK, meanwhile, there has been an approximately 75% drop in listed companies since the 1960s. Unable to easily access high-value alternative assets, retail investors are thus trapped with a diminishing supply of lower-return investment opportunities. 

The token solution

There is, however, a solution – tokenisation. Specifically, the tokenisation of real-world alternative investment assets such as investment funds, real estate, and art. Tokenisation means choosing to represent ownership of a thing via a programmable piece of code – a smart contract – recorded on the blockchain. Practically speaking, tokenising a PE fund or  other form of alternative asset means tokenising not ‘the fund’, but the corporate entity that owns the fund. The tokens represent ownership rights over the shares of the corporate entity. 

Tokens have a range of benefits. In particular, they are programmable, meaning they can be developed to provide a wide range of rules, rights, and obligations upon their owners, independently verifiable, meaning that anyone can inspect the token to understand what it is and who owns it, and liquid, meaning that they can be easily and widely traded. 

This offers a range of opportunities for fund managers, administrators, and investors. Tokenisation massively reduces the costs and coordination challenges involved in soliciting and managing fund investments. Tokens replace the need for centralised registers of membership, as that information is encoded into the tokens themselves. They also reduce the need for complex onboarding processes between different institutions and individuals, as each party must simply abide by the rules of their shared blockchain platform and set of smart contracts.  Lower costs, in turn, mean fund managers can afford to offer lower minimum thresholds for those seeking to invest. 

Unlike shares in private companies, tokens are highly liquid and tradeable. This means that fund tokens can be traded among a wider audience, and that they are not constrained by the physical and administrative limitations of buying and selling private shares. Their liquidity also offers the prospect of fractionalisation, meaning that a wider pool of individuals who will be able to benefit from the wealth generation opportunities that such investments province.

Alternative asset tokenisation: $400 billion dollar opportunity

This is a huge opportunity for both investors and fund managers alike. In the context of widespread alternative asset tokenisation, managers of tokenised funds will be able to market their fund to a far wider pool of potential investors, massively increasing their fundraising abilities and  potential earnings, and 

Estimating that alternative asset tokenisation could increase portfolio allocation from approximately 5% to as high as 20% across individuals in the high, very high, and ultra high net worth categories, Bain estimates that tokenisation represents a $400 billion opportunity. In truth it may be far more -  this figure does not include the potential opportunity among mass affluent investors. 

Blockchain and the democratisation of finance

The tokenisation of alternative assets illustrates how tokenisation will democratise finance, removing institutional barriers that prevent many investors from accessing high-yield assets. The opportunity goes far beyond fund assets alone. Personal homes, the revenue streams of private companies, art, royalty revenues – all are potentially subject to tokenisation. BCG estimates that by 2030 as much as $16 trillion in previously illiquid value could have been tokenised, a figure equivalent to 10% of global GDP. 

The change is already happening. Companies such as Tokeny, Blocsquare, and Addxare already helping financial institutions tokenise and market their assets, bringing them within reach of mass investors. Major asset manager such as Blackrock, meanwhile, have begun offering tokenised funds. 

by James Kingston, james.kingston@otonomos.com

How Otonomos can help

As specialists in Web3 incorporations, Otonomos has helped many projects tokenise real world assets. If you wish to learn more about our services and how we can help your token ambitions, schedule a call today.

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Happy Easter!

Han, Founder & CEO

UNBOUNDED THINKING

“Cripto o Muerte”: The Crypto Currency Revolution in Cuba and Beyond

Posting from Miami, we highlight the emancipatory forces of the use of crypto in Cuba and beyond, hoping for a new revolution to upend the blasé attitudes of the TradFin bourgeoisie.

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GUEST AUTHOR

In Hot Pursuit of Stolen Crypto Assets: Risks, Mitigation and Options

This month's first guest author is Jessica Lee, Partner at London firm Brown Rudnick, who contributes with an insightful article on the legal recourse in the case of theft of crypto assets.

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GUEST AUTHOR II

Navigating the Crypto Regulatory Landscape

The second guest author in our March Otonomist is Roshi Sharma, Partner at LawBEAM, the UK-based crypto regulatory experts.

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LONG READS

"founder vs investor": A Radically Candid Assessment of a Relationship Fraught with Friction

This book tells you what most won't: it is brutally candid about how the relationship between Founder and investor is inherently fraught with friction. A must read for any Founder courting VC money!

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Next month in The Otonomist: The Fundraise Special: An Issue fully dedicated to the options available to fund your - and our! - Web3 company or project.

Reading “founder vs investor”, it is difficult not to like Elizabeth Zalman for her plain outspokenness and radical candor.

She counterbalances what for too long has been a unilateral narrative of VC being “founder friendly”, i.a. calling Board Meetings a waste of (everybody’s) time, highlighting countless booby-traps in a term sheet and deal dox, and generally warning founders to not sleepwalk into becoming “VC worker bees” who hand over their company’s - and personal! - destiny to investor overlords.

There’s a certain fatalism in the book that concludes that for a company to grow fast, accepting the Faustian pact with VC is inevitable.

Whilst this may be true for Web2, we believe Web3 (which is not mentioned at all in the book) will ultimately find a way to disrupt the VC model and lessen the dependency on “centralized capital” by raising from the community at large - as long as securities laws don’t stand in the way!

However, also for Web3 founders, who we see increasingly courting Web2 style VC investors vs. raising purely by way of a token sale, this book should be a warning to go into the VC relationship with open eyes and be realistic about the best once can hope for and the worst one should try to avoid.

In this article, we'll dive into the global crypto regulatory landscape, explore the pain points faced by businesses, and reveal strategies for navigating this complex terrain with confidence.

1. Setting the Scene

The rapid growth and mainstream adoption of cryptocurrencies and digital assets has been met with equally swift regulatory responses worldwide. Governments and regulators are increasingly implementing crypto-specific legislation and regulatory frameworks to mitigate risks, protect consumers, and provide clarity to industry participants. 

Yet, the global regulatory landscape is seriously fragmented, uncertain, and constantly changing. This poses major challenges for crypto businesses looking to launch and expand internationally. 

Navigating this complex maze of obstacles is crucial not only for legal and compliance reasons but also for securing the long term viability and success of your enterprise. 

The Global Picture  

The global crypto regulatory landscape resembles a kaleidoscope, with myriad rules and regulations, creating an ever-shifting mosaic that is challenging for all crypto firms.

Country by country we are seeing diverse responses based on legal systems, political  priorities, and different stages of market maturity. This regulatory patchwork creates complexity and uncertainty for crypto firms and projects operating across borders.

EU

In the European Union, the landmark Markets in Crypto-Assets Regulation (MICA) will implement a harmonised regime for token issuers and crypto service providers. MICA is intended to replace national frameworks and provide passporting across the 27 EU member states. However, even MICA's attempt at harmonisation poses several transitional challenges that firms must navigate. For example, the application of grandfathering provisions and transitional periods, which vary across member states, creates problems for crypto businesses operating in multiple EU jurisdictions.

United Kingdom

Contrary to the EU’s “big bang” approach, in the United Kingdom, the Government is regulating crypto and digital assets in phases. The Government has outlined its policy positions for regulating fiat-backed stablecoins in Phase 1 and establishing a future regulatory regime for crypto assets in Phase 2. Further legislation is planned for 2024, with detailed FCA rules to follow, aiming to establish the UK as a “global crypto hub”. Once implemented, crypto firms will need to meet standards akin to TradFi firms, materially increasing regulatory expectations for crypto businesses.

It is worth highlighting that since implementing the new UK crypto marketing rules in October last year, the FCA has identified a massive number of potentially illegal crypto promotions. In the final three months of 2023 alone, the FCA flagged nearly 450 crypto adverts for further scrutiny and is taking action against unregistered overseas firms promoting crypto to UK consumers. 

United States

The United States has a particularly complex and fragmented regulatory environment, with multiple federal agencies asserting jurisdiction based on how a crypto asset is classified. Enforcement actions have been the primary tool in the absence of clear statutory authority. Several high-profile cases highlight the regulatory risks. The SEC's case against Ripple Labs, for example, centers on whether XRP, Ripple's token, is an unregistered security. Coinbase faces scrutiny for allegedly listing unregistered securities on its platform. Kraken reached a settlement with the SEC over offering unregistered staking services to US customers. Binance, the world's largest crypto exchange, is battling accusations of operating as an unregistered securities exchange and potentially mishandling customer funds. These ongoing legal cases illustrate the uncertainty surrounding crypto regulations and the potential consequences for firms that fail to comply with evolving interpretations of existing laws.

Around the World 

In the Middle East, the UAE has emerged as a crypto hub, with the Dubai Virtual Assets Regulatory Authority (VARA) overseeing a bespoke licensing framework. Bahrain and Abu Dhabi have also introduced crypto-specific regulations to attract firms. However, other countries in the region, such as Qatar and Kuwait, have taken a more restrictive stance, banning or limiting crypto activities.

In Asia, Hong Kong has introduced a new licensing regime for centralised virtual asset service providers, while prohibiting retail access to crypto-derivatives and other high-risk products. Singapore has taken a more cautious approach, focusing on reducing consumer harm and mitigating financial stability risks. South Korea has implemented strict registration requirements and anti-money laundering rules for crypto exchanges.

Latin American countries have shown divergent approaches, with El Salvador adopting Bitcoin as legal tender and encouraging crypto innovation, while Brazil and Mexico are developing comprehensive regulatory frameworks. In Africa, countries like Nigeria and Kenya have seen significant crypto adoption, but regulatory responses have ranged from warnings to outright bans.

This global regulatory fragmentation creates a complex and uncertain environment for crypto firms seeking to operate across borders. Navigating the patchwork of rules requires significant resources and expertise, as well as a proactive approach to managing regulatory risks.

2. The Crypto Regulatory Minefield 

Crypto enterprises face several regulatory bombs that can explode on their business operations, strategy, and ability to access international markets.

(a) Fragmented supervision and enforcement: The lack of a globally harmonised framework means that monitoring, supervision, and enforcement of crypto rules is disjointed and inconsistent. Crypto firms face multiple compliance burdens and conflicting requirements from different regulators. This increases costs, complexity, and legal uncertainty. The risk of enforcement actions and penalties for non-compliance also varies widely across jurisdictions. 

(b) Changing regulatory perimeter: Regulators are already grappling with how crypto assets fit within existing legal frameworks. As crypto asset uses expand into areas like decentralized finance (DeFi) and non-fungible tokens (NFTs), regulators are continually reassessing their perimeter and approach to capture these new use cases. This focus on the changing regulatory perimeter is particularly relevant for the latest crypto use cases such as Artificial Intelligence (AI), next-gen crypto gaming, real-world asset tokenization (RWA), and decentralised physical infrastructure networks (DePIN).

This shifting landscape requires crypto firms and projects to constantly adapt their compliance plans and engage with regulators to keep pace with new developments.

(c) Lack of standard definitions and classifications: Different jurisdictions define and categorise crypto and digital assets in various ways (e.g. utility tokens, payment tokens, security tokens, fan tokens, hybrid tokens etc.). This leads to ambiguity in understanding the applicable regulatory obligations and can result in inconsistent treatment for projects operating globally. For example, a token classified as a utility in one country may be considered a security in another, triggering different registration and disclosure requirements.

(d) Regulatory arbitrage: The uneven pace and scope of crypto regulation across jurisdictions creates opportunities for regulatory arbitrage. Projects may be drawn to looser regimes with less stringent rules and oversight, while stricter jurisdictions may drive businesses away. However, those jurisdiction with lighter rules now, may enforce more stringent requirements later. This requires ongoing monitoring of developments to stay ahead of the curve. 

Navigating the complex and dynamic regulatory terrain is a daunting task, especially for startups and smaller players with limited resources and compliance capabilities.

However, ignoring these regulatory challenges is not an option. Failure to comply can lead to fatal consequences. As the crypto industry matures, and regulatory scrutiny intensifies, firms must manage regulatory risks to operate across jurisdictions and seize market opportunities.

3. Navigating the Landscape with Confidence 

To thrive amid these challenges, crypto enterprises should adopt a proactive and informed approach to regulatory navigation:

(a) Invest in regulatory compliance capabilities: Firms should prioritise building robust compliance tools and processes aligned with applicable regulatory requirements, including anti-money laundering/countering the financing of terrorism (AML/CFT), consumer protection, and data privacy. 

(b) Leverage expert advisors: Given the complexity and rapidly changing nature of the regulatory landscape, projects should consider partnering with experienced legal and regulatory compliance advisors who specialise in the crypto space. Expert advice can provide invaluable guidance on navigating regulatory obligations, obtaining necessary opinions, licenses, and approvals, and developing best practices across multiple jurisdictions. 

(c) Use crypto-friendly service providers: Working with trusted service providers that have a track record of delivering compliant, cross-border solutions for crypto businesses can significantly ease the regulatory burden and reduce operational risks. This includes partnering with service company providers (such as Otonomos), payment processors, and technology vendors that understand the unique compliance challenges of crypto. 

(d) Engage with regulators proactively: Crypto projects should seek to establish open and constructive dialogue with relevant regulatory authorities, both in their home jurisdiction and in key markets where they plan to operate or expand. Proactive engagement can help build trust, demonstrate a commitment to compliance, and provide valuable insights into regulatory expectations, priorities, and concerns. Participating in regulatory sandboxes, innovation hubs, and pilot programs can also allow projects to test and refine their compliance approaches in a controlled environment.

(e) Collaborate with industry: Crypto firms should consider actively participating in industry associations, policy consultations, and working groups focused on crypto regulation and policy, and developing standards and best practices. Working with peers and participating in industry associations can help crypto firms stay informed about regulatory developments, share best practices, and contribute to shaping the future of crypto regulation. 

By adopting proactive measures and taking a collaborative approach to compliance, crypto firms can not only survive but thrive in the face of regulatory uncertainty. With the right tools, expertise, and partnerships in place, firms can confidently navigate the complex web of regulatory obligations and focus on driving innovation, growth, and success. 

4. Embracing the Future 

Much like the crypto industry itself, the global crypto regulatory landscape is in a constant state of flux. The pace of regulatory change is accelerating. As jurisdictions worldwide grapple with the challenges of regulating crypto, crypto business must be vigilant, nimble, and proactive in response.  

Investing in legal and professional infrastructure is essential in navigating rapidly evolving requirements. Collaborating with partners and expert advisors becomes essential to survival. 

As regulations evolve, crypto projects that can anticipate the changes and prioritise compliance will flourish. They will earn trust, pioneer innovation, and unlock lasting value. For those who prepare to face the challenges ahead, the future is full of promise and opportunity.

by Roshi Sharma

The Chainalysis Crypto Crime Report 2024 estimates that a total of $24.2 billion in crypto was received into wallet addresses associated with illicit activity in 2023, equating to roughly 0.34% of total on-chain transaction volume. While the figures are staggering, fraud and illicit activities are not unique to crypto; other traditional assets such as cash and art are just as (if not more) likely to be used in fraud and illicit activity, since their movements are patently less traceable and transparent, unlike assets moving on-chain. The frauds and scams that we see in the crypto industry are nothing new either; phishing and ransomware attacks have been around since computers and the internet; fake ICOs, investment schemes and token sales bear striking similarity to Ponzi schemes in nature; and social engineering and romance scams have forever been a feature of human interaction. Perhaps crypto has unfairly gained a bad reputation and is merely a new medium for bad actors to continue to manipulate and exploit individuals and organisations for illicit gain. 

In fact, the figures attributable to crypto scams and hacking fell significantly in 2023 compared to prior years. The decrease in crypto fraud may be attributable to the slower crypto market overall in 2022/2023, but could also be the result of better education, mitigation and increased regulation in the area. So how can crypto platforms and exchanges mitigate the risks of falling victim to a crypto fraud and what tools are available to recover assets following a fraud? 

Mitigation measures 

Crypto firms and platforms are likely to be the target of cyber-attacks including phishing, ransomware and software exploits designed to extract funds from the target, often in exchange for releasing funds or data compromised by the attack. In March 2023, DeFi lending platform, Euler Finance, suffered losses close to $200m when a hacker exploited a vulnerability within the platform’s underlying smart contract functionality. 

To mitigate against the risk of such attacks, crypto platforms should prioritise robust security measures, including multi-factor authentication, cold storage for funds, regular security and code audits, and real-time monitoring for suspicious activity. Ensuring there is a strategic response plan in place for when such attacks do occur can also help minimise damage and maximise chances of recovery. At a minimum, crypto firms should ensure their incident response plans include:

1. Identifying internal points of contact and the immediate IT/security response to contain and mitigate damage and isolate affected systems;

2. The preservation of evidence and logs;

3. An escalation process, including instructing potential external cybersecurity, forensic and legal experts whose specialised knowledge can help identify the scope of a breach, assist with mitigation steps, preserve evidence to support subsequent inquiries, investigations or legal action, and formulate appropriate recovery strategies;

4. Notification obligations: are there any legal or regulatory obligations to notify affected parties or relevant authorities? Data breaches in many jurisdictions will often trigger notification obligations to authorities (e.g., in the UK, to the ICO) and may also prompt public relations considerations.

The FTX saga has also demonstrated a propensity for individuals within crypto exchanges and organisations to committing fraud and misappropriating assets. Crypto organisations should therefore ensure that they maintain robust internal processes and procedures and staying true to the ethos of blockchain, ensure control is not improperly concentrated in any one individual who might be able and willing to exploit such control for their own personal gain. The consequences of a fraud being perpetrated by an officer or employee are not just financial or reputational; there may be serious criminal consequences. For example, the UK recently introduced a new corporate offence for failure to prevent fraud under the Economic Crime and Corporate Transparency Act 2023. Essentially large crypto platforms and firms (meeting certain employee, asset or turnover thresholds) could be held criminally liable if an associated person (including an agent, employee or subsidiary) commits a specified fraud offence including false statements, fraud by false representation and false accounting. Importantly, the offence has extraterritorial scope; if an employee commits fraud under UK law, or targets UK victims, their employer could be prosecuted, even if the organisation and the employee are based overseas. The place of incorporation is therefore irrelevant in terms of the scope of the offence, as it applies to large organisations wherever incorporated or formed.

Crypto platforms should also remain alive to new threats, which in the immediate future is likely to include the use of AI by bad actors to facilitate fraud. In a recent example in Hong Kong, a finance employee was duped by deepfake impersonations of senior executives of the company during a video call, and transferred $25 million to fraudsters, believing the transfer to be a legitimate instruction by her superiors.

In hot pursuit of stolen cryptoassets

Even with the best risk mitigation, crypto platforms may still find themselves the victim of a fraud, so what then? Arguably the outlook of recovering misappropriated cryptoassets is more promising in instances of crypto fraud compared with other assets because of the unique traceability and transparency of transactions on-chain. However, time is of the essence since cryptoassets can literally move at the click of a button. Crypto platforms should move swiftly to identify the movements of stolen cryptoassets, including instructing blockchain analytics firms to assess the whereabouts of the funds and viability of recovery. For example, while tracing cryptoassets through mixers or tumblers is not always impossible, it can make recovery efforts more complicated and challenging and having expert assistance in following the on-chain movement of funds is critical to obtaining any necessary legal recourse.

In many jurisdictions, it is possible to obtain court orders seeking the freezing of stolen cryptoassets in the hands of third party crypto exchanges whose platforms are used by fraudsters to move and obfuscate the trace of stolen funds. It is also possible to obtain disclosure orders against those platforms in many jurisdictions with a view to revealing the identity of walletholders and accountholders through which stolen funds have passed. The English courts in particular have demonstrated a willingness and flexibility to assisting victims of crypto fraud and have made a range of novel orders to facilitate the recovery of stolen cryptoassets. In a number of cases, the English court has permitted the service of court orders and claims via the airdrop of an NFT into an unnamed defendant’s crypto wallet. In a case in February 2023, the English court sanctioned an ethical hack of a crypto platform which was being used to move cryptoassets stolen from a DeFi hack the year before in order to facilitate the return of stolen funds by permitting the exploitation of an existing smart contract vulnerability on the crypto platform which had recently been identified by white hat hackers). 

Conclusion

The upshot is that it is possible to recover stolen cryptoassets following a fraud with the right expert assistance onboard who can make a quick assessment of the tools available and viable routes to recovery depending on the circumstances. 

by Jessica Lee

I am in Miami, only 90 nautical miles from Havana, Cuba.

I don’t have any romanticism about Cuba and no urge to visit.

It is a dirt poor country where a repressive authoritarian regime starves its people from the most basic necessities, a Soviet Caribbean with empty shelves in government stores and day-long queues for a piece of protein, which on most days of the week is not available.

A friend in London recently sent me a pic of his son entering Eton donned in a Che Guevara T-shirt. Why he (Guevara that is) still has a magic spell on teens and the united left shows how once people have built a narrative, few facts can shake them out of it.

The Dollar Store

The thing I most like about Cuba are its cigars but those you pay for in hard dollars when visiting.

Locals don’t have access to these dollars, they get paid in the Cuban Peso or “CUP”, the Cuban national currency, and can only spend in CUP. USD is beyond their reach and whilst the official exchange rate has recently been revised from 24 CUP to 120 CUP to the dollar, as of the time of writing you pay close to 300 CUP per greenback in the black market.

Here in Miami the average monthly salary is USD 5,075. In Cuba, it is USD 20 per month. A Hyundai Accent from 2011 costs around USD 51,500 in Havana, or 214.58 years on an average monthly salary in Cuba.

So you get a sense a sense of how most things can never be bought during an ordinary Cuban’s lifetime, unless of course you’re an Apparatchik in the Cuban Government or its military, for whom everything is available in dollar stores.

Tropical prison

Friends here in the Cuban community tell me the world refuses to see how the Cuban regime is one of Handmaid’s Tale-type grotesqueness, with everything at hand for a small elite recanting Castro-era revolutionary double-speak whilst ordinary Cubans live in fear of being overheard and lifted off their bed at home at night.

Cuba’s bureaucracy is as stultifying as its tropical heat: Everything is controlled, from wages to spending to who can open a food stall or cafe. What is arguably the most splendid of Caribbean islands is a tropical prison with a cynical regime guarding its own population.

Blasé about BTC

Here in Miami I can (still) more or less freely exchange some of my USD into crypto and vice versa (if my bank doesn’t close my account after receiving a transfer in from a crypto currency exchange).

We take this financial freedom for granted and a lot of people including in Tradfin (Jamie Dimon) and Government (Elizabeth Warren) are scathing about it, presuming anybody who uses cryptocurrency is a crook who wants to launder money (though since 2000, JP Morgan has paid close to 39 billion (!) in total fines imposed by US regulators and enforcement agencies, including for alleged money laundering offenses).1

But for Cubans, and citizens of other countries such as Venezuela and Argentina, crypto may be the true revolution overturning decades of financial repression.

Access to crypto gives them sovereign money that protects them from rampant inflation and eroding purchasing power.

Crypto is their way of saving what little they can save, a mathematically protected insurance policy against their government taking away their money.

It is also a way for family far away who made it out to help their relatives who didn’t.

But above all, crypto represents human dignity, a sense of one’s worth that comes from discovering self-reliance. It sets people free from the realm of dependency governments create to neuter their citizens. It is freedom and the pursuit of happiness in its purest, most permissionless form.

Cryptonization vs. Dollarization

Last November, I was in Buenos Aires the weekend before Milei got voted in.

I hoped for the country to leapfrog pegging their peso to the US dollar and instead go straight for a stablecoin or better still Ether, but as of today Argentina hasn’t dollarized yet, let stand cryptonized.

Between reserving my hotel in US dollar three weeks before my trip and paying in Argentine peso at checkout, my room had got almost 30% cheaper, and inflation for the whole of 2023 was 211.4%. How do you live in a country with 211.4% inflation?

Coralling savings

Ordinary Argentines tried to protect against such massive erosion of purchasing power by converting their surplus pesos into BTC.

On Calle Florida in central Bs. As., once home to the only Harrods outside the U.K., vendors scan your Bitcoin wallet and send you BTC whilst taking your physical peso bills, obviously at outrageous spreads.

But people prefer the vendor’ spreads over holding ever depreciating pesos or holding money in Argentine banks, who back in 2001 were made complicit to what Argentines refer to the “Corralito” (the way cattle is herded into a corral), a government-mandated confiscation of people’s pension savings held in national bank accounts.

Since, Argentines have stashed - literally under their mattresses - what is estimated to be the second largest holding of physical US dollar bills in the world, with Bitcoin, especially with the younger crowd, now fulfilling a similar role.

A store of hope

In Cuba, the situation is even more dire. Goods are not only beyond most people’s reach, they are often not even available.

The regime blames the decades-long boycott against exports to Cuba rather than looking its own central control fallacies in the eye, which in a country so rich in fertile land have lead to a collapse of basic food supply for its 11 million people.

A small beacon of hope is a little convenience store in Havana run by some diehard BTC evangelists. It lets people buy gourmet food but also basics such as soap and pay for them in BTC using an app they open their phone.

But the app is ultimately dependent on internet access to sync with the BTC blockchain, and internet access is restricted by the Government.2

Cuba also has island-wide electricity blackouts - sometimes for 8 hours at a stretch - which makes telecom infrastructure unreliable.

Despite all this, young Cubans find a way of accessing crypto using one of a number of apps, including peer-to-peer swapping of CUP into BTC by placing an order via a Telegram bot (@lnp2pBot).

Gravy train vs. blockchain

Instead of keeping the international development aid gravy train on the rails, Western governments should recognize and protect access to the internet and the use of permissionless tools as universal human rights and let human ingenuity do the rest.

Instead, they lock up coders who deploy anonymizing software, chisel away at the use of self-custodied wallets, and force debilitating Know-Your-Customer requirements on peer-to-peer transactions to feed their mass surveillance machines in the interest of National Security.

A crypto coup of Cuba

If I would not be a militant pacifist, I would raise an army for a crypto coup of Cuba!

Just imagine what could happen when Cuba finally comes out from under the yoke of their decades-long failed Marxist experiment.

Where else can one find a greenfield county where practically everything has to be built up from zero?

Cuba represents the chance for the crypto community worldwide to claim the first crypto country of a decent size: a Minimum Viable Nation showing how an economy can leapfrog from quasi-agrarian (there are measurably more donkeys than cars in Cuba) into a cryptonized (vs dollarized) economic system, in which not only BTC and other crypto currencies are legal tender but all financial transactions are onchain, without a central bank controlling the money supply.

Initial working capital for such Minimum Viable Nation could come from remittances from the expat Cubans here in Miami and the wider U.S..

Such capital would go straight in Cubans’ wallets on their phones, connected  peer-to-peer via DePIN. Stores would sell goods priced in crypto, wages would be paid in crypto, the economy would jumpstart from the jolt in pent-up demand for the basic necessities such as washing machine and cars. Taxes could be a smart-contractified multi-sig escrow arrangement between Cuban tax authorities, part of a small Central government in Havana, and its citizens. Cuban limited liability companies would be formed onchain with blockchains acting as their register, leading to a Cambrian explosion of entrepreneurship on the island.

Revolution of a different kind

A revolution of a different kind - a foundational reset by putting an entire economy on blockchain rails - would then become Cuba’s biggest export, rather than sugar and cigars.

Such revolution would engulf the commanding heights of Western economies and their governments, whose blasé attitude towards crypto would soon be exposed for what it is: an effort to tenaciously hold on to the centralized levers of power they’ve commanded for too long.

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Keep hodling, keep buidling!

Han, Founder & CEO

PRODUCT UPDATE

Do more from within your Otonomos dashboard

Our February development sprint at Otonomos focused mainly on the ongoing maintenance of your entities.

Our mission is to make the process of setting up companies easier and quicker, and to give you more direct control and visibility of the entities you are involved with, irrespective of where you - and they - are based!

This post summarizes the new functionality you will find when logging into your Otonomos dashboards, and the further changes on the horizon.

Read full post

JURISDICTION DOUBLE-CLICK

Revisit Malta

Soon, the European Union’s new MiCA crypto rules will require a local presence in the E.U. for crypto asset service providers.

Malta and Ireland come to mind as candidates to set up shop, each on their own merit.

Today we invite readers to revisit Malta which despite some negativity in the early crypto days remains an attractive basecamp from where you can scale the European digital asset markets.

Read full post

LONG READS

Long reads are one of our favorite pastimes. In this new section, we post what we’ve been reading recently and share our key takeaways.

1. Read Write Own

In Read Write Own, Chris Dixon, who heads A16Z’s crypto investments, gives an insightful narrative of how the open-source Web1 (thesis), which morphed into the corporate logic of Web2 networks (anthesis) finds its synthesis in Web3 thanks to blockchains.

Remarkably accessible also for non-tech readers, each chapter of this compact book distills deep insights from spending decades at the heart of tech as both entrepreneur and investor.

A useful framework to understand the evolution of tech and the inevitability of decentralized networks!

2. Tracers in the Dark

Tracers in the Dark is a mostly entertaining and occasionally disturbing narrative that puts the spotlight on a dark corner of blockchains.

In equal measure sensationalist and informative, the book documents efforts to de-anonymize a technology that was never designed to be fully anonymous in the first place.

However, by putting the focus solely on the statistically low use of crypto for crime, the book never really raises questions about the fundamental trade-offs around privacy and anonymity.

Next month in The Otonomist: A 10,000 ft survey of the world’s leading jurisdictions and two guests posts about building and investing in crypto.

Malta: the Crypto Core of the Mediterranean

Situated at the middle of the Mediterranean, guarding the passages between east and west, sits the island nation of Malta.

Long a country of traders and seafarers, Malta has adapted and thrived with the changing fortunes of the global economy.

Known for its financial services and leading position in the shipping industry, Malta is also a major center for digital services, especially e-gaming and crypto. Owners of crypto and blockchain projects should have it on their radar.

Mature, reliable, and durable: early hype has matured into long-term success

Malta’s crypto industry was born in the heady days of 2017. 

Challenged both by the industry’s boom and bust cycle and the inevitable growth pains of crypto regulation, initial hype around Malta’s future as ‘Blockchain Island’ has given way to a more durable and sustainable reality, one based upon the unique skill sets of Malta and its people.

Matured, Malta’s ambitions have now led to it becoming something far more attractive - the EU’s best place in which Web 3 entrepreneurs can base themselves, their teams, and their projects. 

With attractive tax rates, a flourishing tech ecosystem, experienced regulators, and an excellent standard of living, Malta should be a candidate base for any globally mobile Web3 or indeed Web2 business. 

A thriving tech cluster in which to grow your business

Anchored by the country’s leading role in e-gaming, Malta is possessed of a flourishing tech ecosystem. 

Many software engineers, development houses, design companies, and other specialised service providers are based on the island, providing fast growing Web3 projects with the all the specialised resources they need.

Flexible immigration and residency laws make it great base for tech talent

Without any natural resources to speak of, Malta’s government and people are well aware that its economy relies on the talent and ingenuity of the people who work there - and as such, it prides itself on attracting skilled foreign workers.

As a result, liberal immigration and residency laws make it an excellent place in which to base tech talent. Among other things, its welcoming attitude towards globally-mobile tech and entrepreneurial talent is shown by its digital nomad visa.

Highly competitive corporate and intellectual property taxes

With an effective corporate tax rate of 5%, Malta is an attractive prospect to many internationally-mobile entrepreneurs and businesses.

Malta’s tax rebate system means that while corporate tax stands at 35%, foreign shareholders of Maltese businesses can claim a 6/7ths reduction in the corporate tax paid by the business.

It also has a highly attractive tax regime for royalties and IP; passive royalties, for instance, can be taxed as low as 10%, and IP revenues generated under Malta’s IP box regime are the lowest in Europe - 1.75%. This makes it a great location for cost-conscious entrepreneurs. 

EU passporting

As an EU member state, financial products and services licensed in Malta can be passported elsewhere in the European Union.

Notably for the owners and facilitators of blockchain projects, this will include licensed gained under the EU’s new MiCA regime 

An experienced and well-resourced regulatory authority

Malta’s financial regulator, the MFSA, is highly experienced in Web3.

Boosted by its early success in the e-gaming industry, Malta’s regulatory authorities have led the way in regulatory rigour. The EU’s MiCa system very strongly resembles Malta current VASP regime, meaning that local regulators and advisors have a pre-existing familiarity with its rules

Great lifestyle

Drenched in the Mediterranean sun, Malta has a very attractive quality of life.

A major tourist destination in its own right, Malta offers everything from beautiful beaches to the stunning baroque architecture of Valletta, one of Europe’s most beautiful cities.

History geeks can feast upon the rich archeological legacy of Malta’s millennia long history, while those who prefer bars and restaurants have their pick of a thriving nightlife scene. 

English speaking

Worried about the linguistic hassle of basing you and your company abroad? Then Malta could be a good choice for you. 

As a former British colony, almost all Maltese are fluent in English as well as Malta’s own language, Maltese.

Indeed, the quality of English spoken here is so high that people from all over the world come to study English on Malta and its sister island, Gozo. 

CONCLUSION

New European crypto rules, the first chapter of which is set to kick in later this year, will require a local establishment in the E.U. if your activities fall under the new regime. Malta is a natural candidate for an E.U base to meet this requirement.

Burt even if you are not subject to MiCa, if you work on a project that needs access to the EU market, Malta can be your bridgehead.

Talk to us today if you want to learn more by booking a call.

Book a call

Some popular jurisdictions, such as the British Virgin Islands, impose yearly requirements for renewal of government licensing fees, economic substance form submissions, and ‘Know-Your-Customer’ (KYC) compliance. 

The exact requirements and due dates vary between jurisdictions but the idea is the same: some degree of annual maintenance will be required to keep your entity in good standing. 

Our dashboard aims to make entity maintenance frictionless and helps you avoid penalties for delayed filings.

Your entity overview will show what needs to be sent and by when for each entity and each jurisdiction. Reminders about outstanding items will be emailed to you and can be actioned by simply logging into the Otonomos platform.

If you own a number of entities registered in different jurisdictions, this feature should help to ensure that you submit all the required information by the correct dates, which are likely different for each jurisdiction.

Your entity overview will show a To Do list for each of your entities, explaining what is needed:

No more Post-its or notes: Otonomos keeps all in one place

Just click “Manage” to see full details of your companies such as registered address, company number, shareholders, directors, UBOs, and share allocations, plus all your key company documents:

Remote control your corporate actions

If some maintenance item is due, you can see the corresponding invoice either from within the “Billing Centre” or from the To-Do list on your dashboard. 

Payments e.g. annual Government dues and filing costs can be made directly from within the dashboard in both fiat and crypto.  

Annual reports

Think of Annual Reports as a snapshot of your company at a given moment in time, typically at year-end or its anniversary. It’s meant to document your company’s status.

Annual Reports are a near-universal yearly requirement for most jurisdictions, including LLCs in Wyoming (Delaware only requires an annual franchise duty to be paid but not the filing of an Annual Report), the BVI, Cayman, UK, and even the UAE

You can download a template from your dashboard for each, complete and sign it and we take care of the rest once you uploaded your signed copy.

Wait a Minute

Annual General Meeting minutes are another common requirement but their format is largely standardized.  

As for Annual Reports, we will inform you if minutes are required and provide a template for you to complete and upload.

Declare substance

Economic Substance Declarations are needed in Cayman, BVI, Bahamas, UAE and the Isle of Man, and the system will notify you if you need to submit one. 

The level of detail they require ranges from light touch in Cayman to more detailed representations such as those of the BVI. 

Their overall purpose is to understand what kind of presence you have within the jurisdiction. The process of renewing your declaration is similar to the one above: simply download the template for the relevant jurisdiction from your Otonomos dashboard, add the details and upload the completed form.

Nominees

Nominee Services are also renewed annually. Otonomos offers Corporate Nominee Directors/Managers and Nominee Shareholders/Members, depending on your chosen jurisdiction. 

These optional services are designed to offer you enhanced privacy and they are governed by a Nominee Agreement we will ask you to sign with Otonomos.

Here too, we have simplified the renewal process as much as possible using our platform by highlighting the renewal requirements when they fall due, and linking these directly to a convenient payment route.

All of the above functionality is live in the Otonomos dashboard and our development team is busy adding more features soon to help you manage your entities better, faster and cheaper.

What’s next?

We're further developing the dashboard to let you fully self-service your orders and manage your companies entirely digitally, without the need for outside assistance:

• Next month, we will be adding common corporate actions such as changing or adding Directors and Shareholders for your company, allowing you to submit the details of each online.

• Once submitted, leave it to Otonomos to make do the necessary to reflect your changes in the relevant corporate registries if so required. This “last mile” filing event may involve manual processing but we take this out of your hands and do this for you.

• In future we hope that more authorities will offer digital access to their systems which will speed up these maintenance tasks - either via APIs or by putting the registries themselves on blockchain! - and when they do, Otonomos will be the first to take full advantage of this.

Pro Tier and B2B reseller solutions

Further ahead, the Otonomos platform will be made available under a Pro Tier for any third party incl. other Corporate Service Providers (CSPs), legal firms, accountants, and tax advisors, that forms and maintains entities on its clients’ behalf:

• We already partner with CSPs who do not have the same broad offering as ours and use Otonomos to complement their in-house offering. They then use our Dashboard to manage each of the entities formed by Otonomos on behalf of their clients.

• In a future iteration of the platform, a Reseller solution would white-label our technology by offering a branded, “Otonomos Inside” portal for resellers to set up and manage their clients’ entities using Otonomos.

Machine learning and AI

Finally, we are gradually augmenting our online offering with machine learning and AI:

• Over the last months, Otonomos has been training an AI assistant on its internal knowledge base and is using its output to answer enquiries via its website’s web chat.

• For instance, a typical question from a visitor may ask to compare two jurisdictions, which relies on an understanding of the relative advantages of each. Historically this was knowledge held by specialists however, the same knowledge can be learned and applied using Machine Learning models which Otonomos lets crawl across its entire internal knowledge base, which it constantly refreshes and expands.

• This experimental feature is live now, but at any moment in time we can take over from the bot if questions become more personalized so you can chat with a human or submit a ticket.   

Computerized corporate secretaries

The next stage of our AI journey is to have AI perform the more structured and replicable corporate secretarial functions, such as completing company resolutions and preparing them for signing within our dashboard.

Our system has all data available and would simply pull the relevant reso from our template library, complete it with your company details, and serve it up for your digital signing, all without human involvement.

We believe this AI-driven automated fulfillment of basic corporate actions can ultimately be expanded to perform most if not all corporate secretarial work, in lockstep with the power law evolution of AI capabilities, and Otonomos wants to be at the forefront of this technology.

If you would like more information about any of the services described here please contact us on support@otonomos.com or book a call with us.

Book a call

Hope you had a good January and that February is even better!

Han, Founder and CEO, Otonomos

WAYPOINTS

A Beginner's Guide to Crypto: Trials and Tribulations of a Web3 Newbie

Wallets, keys, chains, coins, block confirmations, mining, staking, validators, etc. are all novel terms that may intimidate new users of crypto.

So we thought it would be useful to share an anecdotical post by Simon, a member of our UK team who - by his own admission - is a total Web3 newbie.

Read all about Simon’s brave first step in Cryptolandia, showing that though crypto can still be quite bewildering, learning about how to become financially self-sovereign is fun and the best investment you’ll ever make.

Read Full Post

UNBOUNDED THINKING

CBDCs stands for Citizens’ Bondage via Dystopian Controls

In this month’s Unbounded Thinking section, James Kingston of our London desk dissects the main possible implementations of Central Bank Digital Currencies (CBDCs) and concludes that CBDCs are in equal part dangerous and dispensable.

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GUEST POST

The Investor Dilemma: Rely on Gut or Data to Select the Most Promising Ideas to Invest In

This guest post by a member of Cambridge University’s Blockchain Society brings an intriguing perspective to the art of startup-investing by highlighting the role AI and LLMs could play in the selection of the best ideas and teams.

Read Full Post

ANNOUCEMENT

February Fund Fest

The early part of the year is a good time to set up your own crypto investment fund and raise outside money, in time for the expected run-up in BTC followed by ETH in 2H2024 and altcoins in 2025 (a widely-shared prediction we repeat here so it becomes self-fulfilling!).

Early last year, we blogged extensively about the ease of launching your fund in the British Virgin Islands if your launch size is less than US$20MM.

To meet demand, we have since doubled up on our fund formation bench with dedicated experts ready to answer any questions you may have and we also have a special offer during February:

• Book a FREE fund setup call during February (instead of the usual US$200).

• Get 10% off your first BVI fund setup invoice if your order is paid before the end of the month February.

Book FREE call now

Next month in The Otonomist: “Where to Be or Not to Be”: An overview of the latest developments in the world’s leading crypto jurisdictions. Plus an update on Otonomos’ growth and roadmap. As always in your inbox and online on the last day of the month.

Introduction

The rise of Central Bank Digital Currencies (CBDCs) potentially represents a profound threat to economic freedoms and civil liberties around the world.

Designed to provide a ‘cash-like’ digital currency issued by central banks, their implementation risks handing sweeping powers to state actors, eradicating financial privacy and giving governments the capacity to control the ability of individual citizens to share, spend, and save their hard-earned money.

Though answering a legitimate need to adapt national currencies to a digital age, CBDC proposals must be treated with the utmost caution. 

What is a CBDC, and why do they exist

Cash use is in free fall across the world. From 2017 to 2022, cash use collapsed across major economies. In the US, it fell from 31% to 18% of transactions; in the UK it went from 34% to 14% of transactions. In China the transition was even more rapid - cash point of sale transactions fell from 21% to just 8% in the same period. By 2022, two in five Americans reported using no cash for their weekly needs. Such trends can be expected to deepen as 2024 progresses.

Central to the collapse of cash is the rise of the digital economy. An ever higher proportion of transactions are now conducted online, either in the form of digital cash - digitized versions of fiat currency - or cryptocurrencies. In the eyes of government policy makers, both create risk.

Controlled by private actors, digital cash is held and managed by banks and other financial institutions, meaning that governments increasingly rely on these third parties to ensure money circulates around the economy.

Cryptocurrencies, meanwhile, represent forms of value that lie outside of both direct state control and that of 3rd party intermediary institutions. Borderless, decentralised, and highly volatile, cryptocurrencies highlight both the promise of the digital economy and - for some regulators - a set of long term policy problems. Used by millions around the world, their adoption especially prevalent in emerging economies possessed of unstable currencies, some regulators see cryptocurrencies as promoting financial crime, tax evasion, and a worrying ‘cryptoization’ of the economy - a scenario in which cryptocurrencies come to be the primary medium of exchange within local economies, eroding the ability of central banks to enact monetary policy.

CBDCs represent state-led responses to these changes. Although often discussed alongside cryptocurrencies, CBDCs generally represent an explicitly centralized response to the development of digital commerce. The clue is in the name - in Central Bank Digital Currencies, central banks have responsibility for issuing digital currency, fixing its value so that it is equal to their fiat equivalent. CBDCs fundamentally alter the relationship between central banks, private financial institutions, and ordinary consumers. Depending on the design of a CBDC system, central banks can use this to exercise sweeping powers over the money supply.

The devil is in the detail: primary forms of CBDC

Retail vs wholesale

A key operational distinction between CBDCs is whether they are wholesale or retail. 

Wholesale: Wholesale CBDCs are intended to work alongside the current banking system. Their primary use case lies in facilitating interbank settlements and cross-border payments. Indeed, some argue that wholesale CBDCs have effectively existed for decades; while not previously based on blockchain-related systems, central banks have been issuing digital currency to banks for many years. 

Retail: Traditionally speaking, all physical money that circulates in an economy has been issued by a central bank. Retail CBDC projects are intended to provide a digital equivalent - central bank issued money that can be used by everyone. It is these retail CBDC projects that have the greatest potential to alter the financial system, disintermediating the role of private-sector banks in distributing or holding money, and creating a direct relationship between central banks and individual citizens.

Retail: four archetypes

Controversy mainly centers on proposals for retail CBDCs. BIS has identified 4 primary models within CBDC debates:

1. Direct CDBCs: In this model, individuals hold personal accounts with the central bank. Access to these accounts is contingent on identification of the account holder. Here, the central bank records all transactions, and has complete knowledge of retail balances.

2. Hybrid CBDC: The central bank provides the CBDC, but relies on private sector institutions like banks to maintain the accounts and wallets used by individuals for their CHDC holdings. The central bank would rely on private sector actors to identify and manage retail customers. In this model the central bank would periodically record all retail balances.

3. Intermediate CBDCs: The central bank provides the CBDC, but relies on private sector institutions like banks to maintain the accounts and wallets used by individuals for their CHDC holdings. The central bank would rely on private sector actors to identify and manage retail customers, and to execute retail payments. In this model, the central bank only processes wholesale payments made to the retail banks.

4. Indirect/ synthetic architectures: Here the CBDC is provided wholesale to private financial institutions like banks. In turn these handle retail transactions. It is these intermediaries, not individual members of the public, who hold claims on the central bank.

   1. Centralised: Banks distribute digital money based on that provided to them wholesale by the central bank, and manage this money themselves. 

   2. DLT version: a blockchain-based CBDC-like coin issued by stablecoin institutions, backed by reserves held in the central bank. While not technically ‘CBDCs’, these DLT-based and government backed stablecoins offer many of the potential benefits of CBDCs without the accompanying risks that they pose to privacy. 

Further considerations

Account vs token based: this is very important decision, and is central to how individuals access CBDCs and the risks CBDCs pose to privacy.

• In account-based CBDCs, users must identify themselves to CBDC accounts and make transactions.

• In token based CBDCs, access is via public keys. This allows more anonymity, but also greater risk of loss and crime. 

CLT vs DLT: A CBDC could operate on a centralized database. If using decentralised ledger technology (DLT) based systems, considerations include whether to utilize a public or a private ledger. 

• DLT based systems are generally seen as more privacy-centric and flexible for online use. However, this may be an incorrect assumption; In 2021 the Rikjsbank concluded that DLT systems have no more ability to offer cash-like anonymity and offline functionality than do centralised models.

• Despite this, token and DLT based CBDC systems have been identified as offering the most privacy.

Perceived Benefits

Cash 2.0: The basic operational justification for CBDCs is to provide a digital equivalent of cash - a universal and fungible means to exchange value, issued and controlled by the central bank.

Enhancing digitisation: By providing a reliable, government-backed form of digital cash, supporters of CBDCs believe that their implementation will further promote digitisation and digital efficiencies in the wider economy. 

Streamlining payment systems: Some proponents of CBDCs argue that their implementation could reduce costs and increase speed within the banking system.

Financial inclusion: CBDCs potentially remove the need for individuals to have bank accounts. In any given society, a certain proportion of residents do not have access to banking facilities. This happens for a variety of reasons, but in a digitalised economy the net effect is the same - financial exclusion. By providing people with digital wallets managed by the central bank, some forms of proposed CBDC remove the need for individuals to have bank accounts in order to make digital payments; proponents of CBDCs argue that this will work to increase financial inclusion among marginalized or otherwise excluded groups. 

Local conditions: the attractions of CBDCs naturally vary with social and geographic conditions. Caribbean jurisdictions are notable pioneers of CBDCs, with the rise of the Bahamian Sand Dollar and the Eastern Caribbean Bank’s DCash project. Rollout of CBDCs in the Caribbean addresses issues of financial access contingent upon island conditions, and reduces the logistical costs of transporting cash between islands. It also addresses the phenomenon of financial de-risking, a process that has seen many international banks withdrawn from Caribbean nations, affecting local financial access.

Monetary, Fiscal, and Criminal Policy: The greatest attraction of CBDCs lies in their ability to enhance the monetary and fiscal powers of central banks.

Issues with CBDCs

Privacy, inefficiency, and security

Privacy: This is the central risk of CBDC implementation. 

• Physical cash is anonymous and largely untraceable; exchanging cash for a product of service does not inherently create a record of the transaction. Most forms of CBDC, however, propose to record all transactions that an individual makes. This could give central banks and government complete visibility on the financial life of individual citizens, destroying an important part of their privacy and with it their liberty.

• Digital money is traceable money. Traceable money is both taxable, and controllable. While this may have various uses to policymakers - hindering crime, for instance, or extending the reach of monetary policy - it reduces the freedom of individuals to use their money as they wish.

Security: CBDCs have many potential vulnerabilities, and would represent a highly attractive target for cyber attacks. These could have devastating consequences.

A poor business case: The purported benefits of CBDCs in relation to speed and financial inclusion may be highly overstated. Many non-CBDC national finance systems now already offer near-instant transactions, obviating the need for a CBDC to improve this. Despite the much-touted benefits of CBDCs in improving financial inclusion, many of the unbanked may prefer the anonymity of cash, or be otherwise unable to use the new system.

A tool of tyranny: the role of state control

Central control: CBDCs give central bank policy makers more ways in which to reach and influence individual citizens. Although an avowed benefit of many CBDC programs, this risks providing central banks and governments with direct financial control over individuals. A developer found that Brazil’s proposed CBDC gave the central bank the ability to freeze and even alter the account balances of individual CBDC holders. Such functionality could be a major threat to the liberty and freedoms of citizens 

Negative interest rates: The ability of central banks to control and manipulate the CBDC holdings of individual citizens means that they could choose to reduce these holdings in pursuit of wider policy goals. This could include the implementation of negative interest rates, a scenario which would destroy individual savings. 

Programmable spending: This is a primary attraction of CBDCs to policymakers, and one of the greatest risks to liberty. CBDCs are potentially capable of being encoded with ‘rules’ governing what they can be spent on, whom they can be spent by, and how long they can be spent. Certain classes of people could be stopped from buying certain goods, or from buying them in certain areas. 

• Geofencing: Citizens could be ‘geofenced’ into only spending their money in specific regions. 

• Forbidden purchases: Benefits claimants could have their CBDC allocations programmed so that it can only be spent on approved items or in approved stores. 

• Spending limits: Spending limits could be placed on certain accounts

• Capital controls: Controls could be placed on the ability of individuals and businesses to transfer or use money abroad

Conclusion: Cash is cash and digital payments do not need CBDCs

The concept of a CBDC has arisen as a result of declining use of physical cash, an increased use of electronic transactions, and the rise of cryptocurrencies. Although CBDCs may hope to replace physical cash as tools for daily transactions, they cannot replace the universality or anonymity of physical money. Replacing cash with CDBCs further isolates marginal & non-digitised members of society, ties society into a new set of technological vulnerabilities and dependencies, and are a critical long-term threat to individual liberty. 

Above all, CBDCs are simply unnecessary to most societies; developed economies are functioning perfectly well with their current usage of digitised fiat currency

Insofar as CBDCs are legitimate and useful for certain contexts, we can only recommend the most decentralised models - tools that essentially function as government-backed stablecoins.

By James Kingston (©2024. All rights reserved). James is based London and helps Otonomos’ technology team, including its use of AI. He has a background in Growth and Strategy, Data and AI gained at i.a. Proton, Dataswift and CognitionX. James is on james.kingston@otonomos.com.

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Introduction

This article expands on the concepts introduced in the September 2023 Otonomist Funding special issue, which presented a transformative approach to equity fundraising.

The approach focused on an online platform that was fully automated, legally binding, transparent, and secure, with blockchain-enabled features and a crypto-first approach.

This article dives into the step preceding equity fundraising and explores how online platforms can be utilized to identify the best projects for investment as an example of finding the best agents in the given ecosystem.

It proposes an approach that combines network theory to analyze the ecosystem dynamics and modern portfolio theory to optimize resource allocation among the most suitable agents.

While the use case for this discussion revolves around a portfolio of early-stage projects seeking venture capital, the concepts presented can be applied to other ecosystems where data is predominantly available online, such as gaming guilds, decentralized autonomous organizations (DAOs), and even traditional corporations.

Conventional agent selection

Throughout history, the key to business success has been delegating the work to the right people. However, finding the best individuals within large ecosystems has always been a challenge. Which ventures will become the next unicorns? Which workers generate the most value?

Traditionally, identifying the top agents in a specific ecosystem has been based on sentiment, intuition, and trust, often relying on personal acquaintances. Over time, decision-making leads to gaining experience, which can then be translated into policies or other types of guidelines.

Venture capitalists still heavily rely on sentiment when selecting projects to invest in. This often leads, as Otonomist reported, to numerous rejections for founders, particularly those without personal connections. Consequently, founders are compelled to dedicate a significant amount of time and energy to networking in order to raise funding for product development, rather than focusing on developing the product itself. To secure funding, simply doing a good job is not enough. But can it be?

An increasing number of activities and interactions are moving to online platforms such as social media (e.g. LinkedIn, Twitter), forums (e.g. Reddit), repositories (e.g. GitHub, Medium), business communication tools (e.g. Google Workspace, Microsoft Office, Zoom, Slack, Telegram, Discord), transactions (e.g. FinTech or Web3), etc.

Having all of the activity and interaction data documented and available online is an opportunity for data-driven analysis to learn about the agents, what they do, how they are perceived, as well as predict the likelihood of them achieving your goals - such as that early-stage venture you invested in becoming a unicorn.

Emerging agent selection

Data from online platforms is diverse and exists in complex structures and relationships. In the past, it has been challenging to comprehensively handle this complexity.

However, recent technological advancements, such as high-quality sentiment analysis using Language Models (LLMs), and cutting-edge discoveries in Machine Learning (ML) on relational databases, as well as network theory, particularly graph neural networks, provide powerful tools for analyzing online content and community dynamics.

These technologies allow us to analyze ecosystems in ways that were previously impossible. Now, we can not only understand the characteristics of the members, but also their reputation, significance, influence, and perception in relation to others.

Additionally, we can measure performance and, in the end, combine all of this information to identify the most qualified or promising agents to achieve our objectives.

However, to accomplish this, we need to understand the ecosystem thoroughly, as well as determine what we want to achieve in the first place. This requires a few paradigm shifts.

1. Considering ecosystems as dynamic networks. In this representation, each agent represents a node, and their connections and interactions form the links. By adopting this perspective, we can utilize various centrality measures and ML algorithms to identify community dynamics. This analysis helps to understand the importance of projects within the ecosystem, their connections to other projects, and the impact of changes in one project on the overall ecosystem. Similarly, it can be used to evaluate the team members involved in the projects.

2. Determining the objectives either quantitatively (e.g., market size, acquisition, traction, revenue growth, etc.) or in natural language (e.g., unique selling point, technology used, team potential).

3. Using the objectives as metrics to identify the best agents, and determine optimal allocation among them. For venture capitalists, this involves identifying the most promising projects and determining the appropriate level of investment for each. With this information, the investor could then proceed with the online equity fundraising process outlined in the September issue of Otonomist.

In broader terms, this approach helps to identify the most suitable agents for the task the principal wants to delegate and determine how to allocate resources among them.

By combining this agent selection approach with performance measurement, a feedback loop can be created to train the ML model and improve its predictions in the future.

Where to start

While this article primarily focuses on identifying the most promising ventures, there are also other use cases to consider.

Efficient agent selection is especially important in decentralized marketplaces that, due to global participation, face the biggest challenges in selecting the best people to carry on tasks and drive business growth.

In fact, Web3 communities that operate primarily or exclusively online are particularly well-positioned to integrate diverse data sources of their members’ activities and employ data-driven approaches to analyze the behaviors and connections within their ecosystem.

This concept is also applicable to traditional large organizations that face challenges in finding or selecting the most suitable teams or workers for specific tasks from their diverse pool of employees.

The non-human agents to choose from, in addition to early-stage projects, include companies (e.g., in portfolio management), information (e.g., in knowledge management), algorithms (e.g., in technology management), or any other context where ML-powered insights can provide data-driven guidance to decision-makers, enabling them to make more informed choices.

Why starting

While the benefits of identifying the best early-stage projects are straightforward, finding the most suitable people to delegate work to brings multiple layers of advantages.

From a top-down perspective, it ensures a more effective and timely completion of tasks, leading to increased productivity, reduced waste from underutilized talent and, in turn, maximized impact of available resources. Consider a PM in a multinational firm who can simply define the required skills for the project and find the most suitable individuals to involve from the entire organization based on their skills, experience, network and influence.

From a bottom-up perspective, agents are motivated to actively engage and continuously showcase their strengths to become visible for the leadership. By sharing skills and expertise, they can be assigned tasks they excel at and thus unlock their full potential. This approach is particularly significant for decentralized and trustless organizations in Web3.

Ultimately, delegating tasks based on data rather than sentiment, in an objective, transparent, and auditable manner, may lead to a more democratic yet productive ecosystem, resulting in more prosperous outcomes. It will be interesting to observe how this evolution unfolds.

By Zarja Hude (©2024. All rights reserved.) Zarja works in Ernst & Young’s LegalTech and Innovation group in London after graduating from Cambridge University in Corporate Law. She is an active member of the Cambridge Blockchain Society and organizes its Weekly Brunches, a Saturday workgroup co-hosted with King's College Entrepreneurship Lab aimed at helping students bring their innovative ideas to life.

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Here is my admission: I am a Crypto newbie in an office filled with Crypto Natives.  I don’t even have a wallet yet, and that is all going to change right now.  I am going to set myself up in Crypto from a standing start, I am going to buy some Cryptocurrencies, try some different exchanges, try to buy real goods, and this article is my shared experience.

My mission is more driven by curiosity and, if I’m completely honest, some embarrassment that I’m not already fluent in Crypto.  I have no illusions about making my fortune here and, having read the many, many doom-laden predictions about crypto I am very aware of the many hazards facing my hard-earned funds. If Crypto really is the future then this ought to be straightforward and consumer-friendly. Traditional currencies and their underlying systems have the advantage of hundreds of years of refinement, whereas Crypto’s zero-hour was only 15 years back.  If it is going to have a chance, this had better be good. Let’s see.

The first thing to get right: “centralized” vs. “decentralized” crypto

I’m going to need a wallet to put my Crypto in. Wallets are one of the first things I had to figure out: I could leave my crypto scattered around different accounts at several digital exchanges. However, digital exchanges are “centralized”, where users hold “accounts” and their funds are held in custody by the exchange. This is a crucial difference with decentralized wallets, which let users custody their funds themselves and which are more aligned with the “not my keys, not my money” ethos of the crypto crowd.  So the first question any noob to crypto will need to work out is: what kind of wallet do I need?  

Hardware wallets

At the top end of the scale are hardware or “cold” wallets such as Ledger or Trezor. These are physical devices you plug in to your computer and remove when not in use. They manage the secure access to your digital assets. The big plus with these is that when it’s not online it cannot be hacked. The downside is that you have to buy them, and if you lose your hardware wallet your assets are all lost unless you wrote down the mnemonic words (also called a “seed phrase” even though they consist of 12 randomly generated words) when initializing the wallet.

These words will allow you to regain access to your wallets via a new device if your previous one is lost of stolen, however storing the mnemonic phrases on your computer is not a good idea.  That’s why Legder and Trezor comes with a card for you to write down the words for you to keep in a safe place - for instance a good old bank vault!

Software wallets within your browser

Hardware wallets is what you want to use when you hold substantial funds due to their higher level of security. I don’t feel I need the additional complexity or expense of cold wallet yet. I am only learning to use a few hundred dollars, so on to the other option: software wallets. These are (supposedly) secure online tools and many are free. They are convenient, easy to get set up and many include a process to help you recover lost keys. I am told it is good practice to spread your digital assets across more than one wallet for increased safety. Common wallets include Coinbase wallet , Trust wallet, Uphold, Brave, Gemini, to name just a few.  I chose none of those, I chose the biggest one of all: Metamask.

This system has around a third of all software wallet installations, it has an extension for Google Chrome browsers, an app for mobile devices and it offers the ability to buy, sell and swap currency. 

Setting up a new account is quite painless requiring a download and a few basic settings. Metamask too requires you to set up what it calls your “secret recovery phrase”, basically your “seed phrase” of .  This is a set of 12 words generated automatically for you. As with hardware wallets, this becomes your ‘Get out of jail free card’, however the key difference is that your secret words are not stored in hardware device but in the browser, making browser wallets less secure.  As with hardware wallets, if you ever forget or lose your password, this phrase is used to help restore your access to your wallet, so it needs to be stored very safely. I stored mine as files on two different computers and I also wrote it down in a notebook.   

After I write down my 12 words, Metamask asks me to create a password, so I don’t have to enter the seed phase each time I want to access my Metamask wallets. Accessing your Metamask account is particularly convenient if you set up the Chrome Extension where you’ll be prompted for your password each time you want to use it.  

Have wallet, will buy

Great, now I have my wallet, but it’s empty, so I need to buy some Crypto to put in there.  

Creating an empty wallet does not trigger any security issues, but moving cash around does. For the next steps I will have to present some ID details in order to comply with ‘Know your Customer’ (KYC) regulations, part of the Anti Money Laundering (AML) laws that exist in most countries. Metamask accepts payments using a payment partner called Ramp and it is here that ID is needed.

Based as I am in the United Kingdom I can choose to ID using my drivers licence or my passport. ID options vary by region but the document you use must be in-date for at least 3 more months. I took a photo of my licence and submitted that. The system took around 10 minutes to process my document and I conveniently received emails confirming my progress. Both Metamask and Ramp are very user-friendly with great help areas and support available. This process is clearly built with newbies like me in mind.

Now I have both a wallet and also a means of paying. I had imagined I would pick up a range of different currencies like I was shopping for groceries. Maybe some Bitcoin as the defacto Crypto, some USDC as the universal stablecoin and some Solana.  Not so fast though: these coins live on different chains and Metamask is an Ethereum-based service. This means some coins are not directly available to me from here.  I can’t easily buy Bitcoin or Solana from within my Metamask. There are some techniques to work around this but essentially I am on the wrong network for some coins. On the upside, anything I buy here is going to land in my wallet automatically, buying elsewhere requires an additional step to bring it in.

I chose to buy some USDC, a stablecoin which is as unadventurous as Crypto gets.  1 USDC=$1.  It once had a wobble in March 2023 when Silicon Valley Bank collapsed but it recovered itself and now, aside from some daily fluctuations of fractions of a cent, it sticks to the dollar like it was welded to it. Buying is really very easy indeed.  In Metamask I clicked on the Buy icon, chose a Cryptocurrency to buy, the currency I wanted to pay in, and how much I wanted to spend. I chose to spend 200GBP and that translates to 244.5 USDC after fees.  

I could have paid using a credit card, or an ‘Easy Payment’ from my bank (the transaction is set up for me and authorised from where I am), or a Manual Payment which requires me to log into my online banking and make a transfer to Metamask’s account. 

I paid from my UK bank using the manual route, it was simple and uneventful. I had made my first Crypto purchase, it was reasonably straightforward. And expensive.  

It’s simple to buy coins, the skill lies in buying coins well. Buying crypto incurs fees which are based on some clear factors and many invisible, unfathomable magical fees such as Gas fees, payment fees, network fees and more. How you pay matters; you can buy Crypto using your credit card, but you pay nearly 3% in fees to cover that. Fees for the exchange you use are volume-dependent.

There are ways to minimise the fees you pay by watching the way that you pay and the exchange that you use. This is a skill level above me for now, I just watched the quotes that Metamask was offering me and adjusted some choices until the fees went down a little. I need to improve my game on fees. 

Yay! I am now a proud crypto owner

Ramp notified me by email that the trade had been completed and my Metamask wallet now showed $245 of USDC in it.

Unfortunately this is of little use alone, I can’t transfer or swap it just yet. In order to make a transaction I must be able to pay the network fees on Ethereum (known as Gas fees) and that requires Ether, the ‘native’ coin of the network.  Ij simple terms, the Gas fees are what helps incentivise participants in the Ethereum network to help validate transactions. If you want your transaction to confirm, you need to fuel up your wallet with some Gas. So I added some Ether to my wallet as well.

Adding Ether was the same as adding the USDC, but this time everything was already set up and the transaction was fluid, quick and simple.

Let’s talk about CEX baby

Feeling satisfied that I had moved past the level 0 beginner status I aimed higher. 

One way of swapping my stable coin into other tokens is via a Centralized Exchange (aka CEX). A CEX is like a centralized stock exchange which holds your funds in custody, and it requires an account with the CEX.

Even though it’s by many who typically swap and trade straight from their wallet on DEXs (or Decentralized Exchanges, you guessed it!) and who consider CEXs no go, I was told that the convenience of a CEX trumps whatever self-custody considerations.

So I chose one of the world’s most trusted Cryptocurrency exchange with a daily trading of nearly $3Tn: Coinbase. It didn’t go well.

For a short while I set about establishing a new account, and it did feel like I had moved up a level, until I had this screen which persisted for the rest of the day: 

So I gave up on Coinbase and tried the third largest CEX called Kraken. This however meant opening another account with a new service provider, hence completing the ID process over again. 

Access to Kraken uses a combination of password and 2-factor authentication, including Google authenticator. Just like with legacy exchanges (or brokerage accounts), you must first deposit funds into your account, and once they are showing in your Kraken account you can use those to buy Crypto.  

In principle the process of adding funds is the same as for payments using Ramp in Metamask. However when I chose the manual bank transfer method and tried to wire to Kraken’s account details, my UK bank wouldn’t recognise these and refused the payment…

Instead, I used the other option, to pay using ‘Plaid’, a tool similar to Ramp which sets up the bank transaction on my behalf, ready to be authenticated by me. This worked very well and the funds showed in my Kraken account after just a few minutes.  

To buy Crypto in Kraken I used the link at their Cryptocurrency Prices tab. I had expected that clicking the Buy/Sell button for the chosen currency would take me straight into a trade for that currency, it doesn’t, but it does open up a selector.

The other way to do this is to find the “Market’ button and select the pair of currencies you wish to trade, for example GBP and Solana. 

Choose how much to spend in one currency, in my case GBP, and how much Solana that will buy at current prices. Once all that is done you can press the green ‘Buy’ button to execute the trade, and it may or may not happen. That’s because of a final choice about how your trade should happen, there are two options here:  “Market” or “Limit”.  

If you choose “Market” then your trade happens right away based on whatever price the currency happens to be at that moment. If instead you choose “Limit” this allows you to set the lowest price at which you would be happy to buy/highest price you’d be hope to sell. I chose the Limit option and my trade didn’t happen at first because the price had risen while I was procrastinating. Shortly after the price dropped to just below my chosen limit and my trade went ahead.

My Kraken account has traded the small amount of GBP I had loaded for Bitcoin and Solana, and my dashboard now looks like this:

New vistas

Now I have some Crypto in Metamask: USDC and Ether, and in Kraken I have Bitcoin and Solana. Good, now what?  In fact this is where the options really begin to open up.  

Crypto is a universal type of currency without borders, so one thing I could do is send money to someone else directly, if they tell me their wallet address (in fact its public key).

Keys are the unique identifiers each wallet has similar to a bank account number. If I have someone’s bank account number I can send money into it but I can’t move it out, so the same trapdoor mechanism applies here but the trapdoor is enforced via cryptography rather than a SysAdmin in a financial institution’s central server silo. 

Metamask has a very simple tool to move Crypto from your wallet to another. Moving money to anywhere is significant because my other options would be to use banks to send and convert the cash to local currency, or to use a service like Western Union, both of which are subject to fees, often hidden exchange mark-ups and delays and restrictions.

I understand Crypto is already being used for remittances, saving people significant money and speed when sending earnings back home.

Have crypto, can’t spend

I can go shopping with my digital assets, but choice issues till very limited. Crypto is a long way off being universally accepted payment yet, but I could order a Dominos pizza, or a Subway sandwich (both via their gift cards, not on the spot payments).

I could order a new Apple Macbook for 0.053496 Eth at a ‘buy things in crypto specialist website’, which at today’s prices is a mark-up of 110% against paying in local currency at a leading UK retailer… 

Some retailers have taken the logical step of accepting Crypto at the payment stage of their websites, which offer regular prices without the exploitative markup. I could buy insurance from Axa for a 1.75% fee, but only using Bitcoin. A small independent car sales company near me will accept Crypto to buy a used car. It feels like retailers are beginning to experiment with payments in digital currencies because getting paid is still getting paid. And of course Otonomos itself was one of the very first ones to accept crypto for payments on its website and for its invoices.

Let’s order something.  I want to buy a computer monitor from UK retailer Scan Computers so I selected the model and placed it into my checkout basket. With delivery and tax the price is GBP 154.78.  When I go to checkout, there is an option to pay in Crypto. It defaults to Bitcoin but it will accept a wide range of cryptocurrencies. I will use some of my USDC to pay for this and we are ready to specify which wallet I want to use:

Here there is also a wide choice of compatible wallets including Metamask and Kraken, I will use my Metamask wallet. The price in the final summary converts to GBP155.39 so there is 0.4% fee being taken somewhere, but I can live with that. I hit Pay and I have bought my monitor.

Swap at your heart’s content

I could also swap the coins I have for other coins. If I have Bitcoin and I think that Solana or Ether is more likely to appreciate in value I can convert one directly into the other (at least on a Centralized Exchange). Fees for doing this are no clearer than anywhere else in Cryptocurrency but seem be around 0.2% per transaction, reducing to 0 if you trade sufficiently large volumes during any one month.

The experience of doing this on Kraken was really straightforward using this minimal screen pop-up:

The fees I paid are more significant because I am investing very small values and some fees have a fixed minimum. With knowledge it is possible to minimise transaction and network fees.

Ride the wave

I could also invest to profit from Crypto. There are endless strategies for profiting from Crypto including:

• Trading: forecasting which tokens will increase in value and buying or selling accordingly.

• Staking: locking away your assets for an agreed duration, during which time it is used for other purposes, typically to support a blockchain platform, and for which you will be paid a reward. This is similar to a high-interest bond in traditional banks and is a relatively low-risk strategy with longer-term timelines.

• Yield Farming: shorter term investments along the lines of staking but with more risk and higher rewards.  

Investing and profiting is another aspect of Crypto where I don’t yet have the knowledge (or courage) to go just yet, it’s a complex skill set and I am just starting.

Beyond transfers and payments

What did I learn from my Crypto journey?  That this is not the Wild West the media would have us believe.  I have progressed from outright newbie to owning a clutch of Cryptocurrencies, making swaps and purchases in just a day. 

In the main my journey has been entirely user-friendly and suitable for regular consumers. In fact the most difficult parts have been when having to satisfy laws or deal with traditional banks. Once in the on-chain realm things have generally been simpler. I am quietly relieved that some of the worst of the crypto excesses seem to have passed and some scammers have been prosecuted, which should help making Crypto more respectable. 

However beyond buying and selling and transfers and payments, there’s a world that I will explore further which is the world of Decentralized Finance also referred to as DeFi. DeFi holds the real promise of crypto: the secure and guaranteed execution of programmable transactions.

“Blockchain not crypto” is in a way an ignorant slogan but there is some truth to it: it is the portability of your funds, permissionlessly-owned in your self-custodied wallet, which you can connect to any DeFi “dApp” without the need to open an account for each and every service you wish the access, which lets you back builders or start building yourself, invest in use cases across crypto, hold NFTs that represent title in real property, your university degree, art, music, etc. which will bring the next billion users to Crypto.

The next billion users

As a technology, it is in the use of blockchains as a record of ownership and rails of transfer of underlying value where the true use case of Crypto lies and which is leading to a Cambrian explosion of entrepreneurial activity well beyond the dot com of the late nineties.

I may be biased already but it would be a shame to let dusty legislators and old-world industries set the narrative about Crypto being a subversive, dangerous technology that deserves to die. So will I keep my Crypto?  Yes, I will and I will learn how to use it properly, in the spirit of self-reliance and autarky in which it was born. 

This is a journey and I have only just set off so expect a next post on my trials and travails in DeFi!

By Simon Lang (TG @SLang109). These are my own opinions and not necessarily those of Otonomos or The Otonomist.

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