#23 Crypto and sanctions, Cronje, Biden, Binance and a little self-promotion
Why is Russia not using crypto to evade sanctions? Also, US takes crypto regulation seriously, Binance wants to rule the world and we want you to know us better
(cheap influencer trick coming…)
Many people have asked us about sponsorship opportunities in this newsletter. So far we hadn’t considered any opportunity seriously - Carbono Insights was our way of reaching out and building a network for Carbono. But we want to open the door now and see what it looks like outside. So if you have a project that you want to put in front of the eyes of an international audience of crypto amateurs and enthusiasts, let us know! We will read you at team@carbono.com
No, crypto doesn’t help Russia avoid sanctions
Some media outlets have dubbed the Ukraine invasion as the first crypto war. Probably an overstatement, given that crypto, has played a marginal role so far. It has been used to channel donations to the Ukrainian government, and it is likely being used by the Russian and Ukrainian population alike to safeguard some of their savings. But the most critical use claimed by some media is probably inaccurate: crypto is not being used massively by Russian authorities and oligarchs to evade sanctions.
The Ukrainian war might end a narrative that has traditionally described crypto as an opaque underworld for evildoers. But the reality is that law enforcement and public institutions have an increasing number of tools at hand to increase overwatch and compliance.
If anything, this first crypto war has become more of a crypto crash course. It is an opportunity to view crypto in context and understand how it works and what it stands for. These days, you might have read how crypto is uncensorable, borderless, traceable, transparent. With the backdrop of Russian sanctions as a use case, let’s look at how this is possible and what it means.
A basic understanding of the technology behind crypto is helpful to understand its value proposition. Crypto is based on the blockchain technology put together by the anonymous developer Satoshi Nakamoto in late 2009. A blockchain is a distributed public ledger: a database containing a list of inalterable and secure transactions. You can think of it as an Excel sheet in the cloud, updated constantly with new operations, but that instead of being saved opaquely in the server farm of a bank, is distributed across thousands of computers worldwide, managed by peers, and visible to anyone. This configuration is responsible for some of the critical traits of crypto:
Inalterable: hacking thousands of computers is so costly it’s simply silly to try
permissionless: there’s nobody, no person, no entity, controlling these computers: just collaboration around a piece of software.
Transparent: all transactions can be viewed by everyone at any time. But the information is pseudonymous: even though every “penny” can be traced on a blockchain, there is no way transactions can be linked to a person by looking at blockchain data.
A user only needs an internet connection and a wallet to interact with a blockchain. Wallets are the software that works as some equivalent of both a bank account and an ID card. Wallets store and manage a user’s private and public keys. The public key is the public identity of a user on the blockchain. So, for example, when Alice sends 10.96809457 BTC to Bob, it looks like this:
bc1q7(...) and 1CfQ8(...) are Alice’s and Bob’s addresses, and they act simultaneously as their pseudonyms and bank accounts. And any user, through a block explorer (a website that gathers the information from every block of a blockchain), can trace all of Alice and Bob’s activity and assets.
We outlined the purest, most disintermediated experience of crypto possible—just wallets interacting with decentralized software for the digital transmission of value. But crypto has developed many layers of services on top of that, making crypto accessible. These layers are what connect crypto with the real world.
The following two other ingredients are part of that extra layers, and they are what makes the enforcement of sanctions possible:
Control over fiat on and off-ramps. If the money needs to make it outside of crypto (say, to pay at a gas station), it will need to leave the blockchain and turn into fiat currency, which would require the participation of centralized exchanges or banks. Once the money surfaces through these platforms, pseudonymity ends, and funds are linked to an identity.
Wallet identification technologies. Analytics companies such as Chainalysis offer software that allows specialists to identify and bundle related wallets to help trace operations more clearly. As soon as a wallet is linked to the owner's identity, all transactions can be easily tracked and monitored.
Compare it to this:
By transacting through shell companies, incorporating in known tax havens, and leveraging opaque ownership structures, bad actors continue to use fiat currency to obscure the movement of funds. In this way, they leave complex financial trails that are difficult to trace, requiring investigators to separately request information from many different financial institutions, and follow a trail across multiple countries (some of which refuse to cooperate or take years to produce records). Using Crypto Tech to Promote Sanctions Compliance
It seems evident that crypto can be superior in law enforcement and compliance.
⬡ Six Angles
We select six topics to illustrate the very different angles crypto can be approached from. We could choose dozens, but six is the atomic number of carbon… and otherwise we'd be writing for ages.
1. Carbono | A little bit of self-promotion
Dear readers of Carbono Insights,
We are confident that all of you know what “insights” means, but we doubt you have a clear idea of what Carbono is. We have occasionally used this platform to shamelessly promote some of our projects (and we will likely do it again in the future), but we have never introduced ourselves properly.
Hello. My name is Carbono.
We have recently updated our site. It’s not something to brag too much about: we have deliberately minimalistic style and contents because we don’t want our site to be heavy luggage. But we did recently make an effort to condense what we know and what we do in a few lines. So if you were ever curious about what Carbono exactly is, you could now check it out.
Training and onboarding of companies into Web 3 ecosystem.
Analysis. Project analysis, token analysis, and forensics.
Digital asset management. Management and custody of digital assets, project evaluation.
Venture Building. If you’ve followed us for long, you might have heard of Botto and Pepe.wtf, for example.
If you want to know a little more, go ahead and click.
2. Celebrities | Andre Cronje as a single point of failure
$4 billion of TVL got pulled from Fantom on the week of March 6th. Yearn’s YFI token fell 9.3%, and Keep3r’s KP3R token also went down 31.3% in that single day, and the reason this time was not the war in Ukraine. It was the shockwaves sent by Andre Cronje slamming the door behind him.
Andre Cronje is one of DeFi’s superstar developers. The shadowy super-coder behind Yearn Finance, Keep3r Network, Multichain.xyz, smart contract protocol exchange Solidly, Chainlist, and Bribe Crv Finance. Apart from his skills with code, proven by the sheer amount of projects with his signature, Cronje is an accomplished writer and educator.
On March 6th, he disappeared from Twitter.
Sometime later, his longtime collaborator made a more official announcement.
This is not the first time Cronje leaves the space. He had done it before and has repeatedly complained about the toxic environment of DeFi. He had also introduced the possibility of disappearing in the way he conducted his development: Cronje always felt strongly about decentralization and made sure he didn’t become one of his dreaded single points of failure.
Importantly, the reaction to Cronje’s exit shows that crypto participants still hold tokens based on the personalities associated with them. Andre Cronje’s Sudden Exit Leaves DeFi Agog But It’s Right in Character
3. Regulation | Biden’s Executive Order
President Biden signed an Executive Order last Wednesday that will set in motion coordinated interagency regulatory efforts in the US. The EO didn’t announce much regarding the contents, but it confirms a new spirit. Regulation that moves away from mere enforcement of past rules to new phenomena and starts searching for solutions specific to crypto.
Biden activated efforts aimed at “addressing the risks and harnessing the potential benefits of digital assets.” The introduction acknowledges the potential benefits alongside the risks is a good sign. However, after recent regulatory moves, this couldn’t be taken for granted.
Besides that, the two main pieces of information in the announcement are:
that the measure will focus on six areas of protection: consumer protection, financial stability, illicit activity, US competitiveness, financial inclusion, and responsible innovation.
that it contains the will to start looking into the possibility of a US Central Bank Digital Currency
4. M&A | Binance’s spree
n a recent interview with Financial Times, Changpeng Zhao, Binance’s CEO, announced the company’s intention to go on an M&A spree across non-crypto sectors.
“We want to identify and invest in one or two targets in every economic sector and try to bring them into crypto,” he said.
Binance recently made a $200M investment in Forbes, a magazine the crypto exchange had sued for defamation in 2020. Many saw here a reputational move, more than an actual investment in a new sector, information, that can potentially be transformed by web 3 technology.
If Zhao means it, it will be exciting to see where Binance puts its money. Since the early days of Bitcoin, there has been a lot of speculation around which industries were on the verge of being radically disrupted by crypto. Insurance, supply chain, law... So far, we have already seen crypto send ripples in the financial industry, art, collectibles, and gaming. What will be next?
5. Macroeconomics | Crypto’s narratives
Rising prices are a worldwide concern. With the United Stated breaking a 40-year-old record and Europe with a 5% increase across the Eurozone, the loss of purchase power due to inflation is a threat to economic stability. So far, politicians have been careful not to sound the alarm on inflation: the rise in prices could be explained by exceptional events, namely the pandemic. But we seem to be hopping from exceptional event to exceptional event, and one wonders if exceptional is the new normal.
Together with the geopolitical situation, this context is bringing an identity crisis on Bitcoin. In the past, it has been considered by macro investors as a hedge against inflation, due to its predictable supply. More recently, especially since the beginning of the year, it has behaved as a risk asset, like a tech stock. An asset investors might move away from in times of uncertainty. Today the most important narrative for Bitcoin and crypto is that of a censorship-resistant asset.
Each of these different ways of framing crypto involves a different behavior from investors.
6. Crypto glossary | What is Tokenomics
Read this because you are very likely to come across this term a lot in the future. Companies in the Web 3 ecosystem differ from their predecessors mainly in how they reward their users. Consumers become stakeholders as they are rewarded for creating value for a platform. This is the logic behind play-to-earn games, one of the first manifestations of the Web 3 concept: if a user makes the game more attractive by making the experience more fun and challenging for others, why shouldn’t they be rewarded?
Rewards in Web 3 come in the form of tokens. That’s why companies need to be experts in their industry (game designers, social media, marketplaces...) and then financial experts too. They need to deal with tokenomics.
Tokenomics is the discipline that includes all mechanisms that determine the present and future valuation of a token. For example, tokenomics include supply and demand mechanics, go-to-market strategies like distribution plans, airdrops, marketing initiatives, or centralized or decentralized exchange presence. All those measures are involved in a token price's current or future control.
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