When Help Hurts: Why a Friendly Government is a Threat to Crypto

Hey folks, can you hear me? Cool. So let's wake you all up with a very simple, I hope, for this audience question. What was the full title of the original Bitcoin whitepaper? Shout it.

Can't hear you. Yes, exactly. And I'd like to emphasize one point here. It says peer-to-peer. It doesn't say large regulated institution to little obedient citizen, right?

That's the key point. The idea is a peer-to-peer system where all equal and build one giant cloud of, you know, in this case, coin transmissions together, but on a peer-to-peer basis. And right now, I think we are at the crossroads because a few weeks ago, I was at a different conference, a much more stable coin and fintech-related conference, and I asked the same question. Believe it or not, but in an audience of about 100 people, no one knew the answer, right? So I think truly, right now, it's a crossroads where we need to think very carefully where we want to be.

So for today, I'll start off with some very brief anecdotes and then we'll go into a parallel, I think, that is really important to evaluate the crossroads that we are currently in about the open internet, a bit of internet history, and then how we can apply the learnings from that to crypto. Then we'll go very briefly again of simple cross-country comparison and comparison of different regulatory regimes in the USA, China, and Nigeria. And then finally, I'll share a little bit of perspective what kind of dilemmas we face as builders in the payment space, in this case. So I think in all of crypto, the space that is most exposed to these kind of regulatory requirements and certain red capture that's currently happening. So imagine my humble self 10 years ago, much more acne, long hair, very rebellious, walking in to a philosophy department reading group full of post-docs, PhD students, very, very smart people.

The reading group was called Smart Contracts. It was in a philosophy department. We were discussing the future of decentralized institutions and I thought, wow, what an amazing thing, having a future where we can collaborate without the constant threat of violence, where we can coordinate in scale without pepper spray, without the threat of pepper spray and handcuffs. But I also thought it was very dreamy and I think I had good reasons for believing that it was very, very, very dreamy and maybe somewhat utopian at the time. So I knew the history of certain attempts to remove power from centralized money issuers, the Fed essentially, and I looked at the history of e-gold, e-bullion, and most interestingly, the liberty dollar.

Has anyone here heard about the liberty dollar before? Yeah? Awesome. That's really cool. So short story, they did essentially what Tez and Circle do.

They buy up some assets and then they issue certificates. Of course, back then it wasn't on chain. A guy got, all of these people were, by the way, arrested for unlicensed money transmitting and the guy from liberty dollar was actually also accused of terrorism, charges that were later dropped, but very dramatic nonetheless. And I think as we look at that very heavy regulation early on, I think we can learn from the parallels to the internet. So in the early 90s, the internet was kind of like Ethereum was until recently or maybe is like now very decentralized.

You would surf the web, you would go to thousands of websites. Right now probably when you surf, you only go to a select number of maybe out of five or six websites that you visit regularly, right? And right now, as I mentioned, we're on this crossroads where we need to decide where do we want to go. So as I was preparing for this, I did a huge deep dive into the history of the internet. I'm not going to talk about this, but essentially today we see an internet that could have looked very, very differently.

There were many, many wins for regulation and censorship, but there were also many wins where openness prevailed and many legal cases and many legal battles that were won by people who wanted a more open internet. And as I was mapping out all those historical cases in all these various jurisdictions, I realized, well, we can categorize them by modes of failure and things that actually worked. So on the side of stuff that certainly does not work, we've got anything where you have an easy button that you can push and shut something off. So when you have a large company with one single headquarter, ideally in your own jurisdiction, it's very easy to just say, hey guys, please change this or that or influence it in any other way. Same goes for ISPs, obviously.

And then finally, one recurring theme that I saw, especially with political dissent and political protests, was bad OPSEC. So people who protest essentially using very open channels that were easy to infiltrate or that were simply not properly secure to coordinate, and then they were very easily caught, imprisoned, and so on. But what does work, right? So broad coalition works for sure. Having everyone together on the same course, that we know works.

We know that funding one specific case that's like a landmark case and funding that really, really, really well. So there are numerous cases where that works. And then obviously what we're here for and what we all build, which is the tech and building the tech in a robust fashion from day one. So this is a short lesson from what worked, what didn't, and what we can apply today. I think right now we have a huge centralizing force, especially in the stablecoin industry, but I'll come to that in a few minutes.

So let's look at three countries and three completely different approaches. So note that in the United States, with which I will start, we recently had a 180, right? But we'll look at China and Nigeria as well. So China had this parallel thing where like they banned... Well, I'll talk about it in a sec.

So let's start with the U.S. Very recently, you don't need all the requirements that were, like all the pre-approvals and requirements that were necessary for a bank to interact with crypto so that lowers the risk tremendously. Like you could think that's a good thing. That's something that actually pumped the markets a lot and there was a lot of price action because of that.

But also any kind of regulation does create some barriers to entry, right? So now you face complex licensing. This raises the fixed costs for companies to even enter the space, which extinguishes smaller teams. Now higher barriers means larger firms. Larger firms, on the other hand, are more centralized and more easily surveillable.

Case study on Circle. Who here holds or has any kind of exposure to USDC? Yeah. Cool. Me too.

Well, essentially, you would think it's crypto. So like, oh, it's yours? Well, no. By the press of a button, your balance can be frozen or even removed. One conceptual example of this is their bridging, their native bridge, which works on a burn and mint mechanism.

So super, super, super centralized. So I think Circle we need to watch out for, especially with the Coinbase crowd. So then we have another case study, which is China, right? So in China, what they did was they just flat out banned everything, but in parallel tried to build up their own ecosystem. So what happens there is you have this underworld that uses VPNs and very secretive underworld, shady, of folks who still do it on the open systems, like Ethereum or Bitcoin.

But in parallel, you have this huge, hugely censorable, vertical, yeah, like state-funded blockchain ecosystem in which, by the way, your national ID is fully tied to your wallet, right? So like you get all of the advantages of instant settlement, fast speeds, transactions, all the anonymity doesn't exist. Everything is reversible and so on. And now the surprise, the really big surprise to me is Nigeria, right, which had a full-out ban for many years. This got lifted about one and a half or two years ago.

Fun fact, Peanut, the company I work at, also was banned in Nigeria until 23. Like the website was just banned, like DNS-level banned. And yeah, despite all of these bans, which were like hardcore bans, like flat-out bans that essentially eradicated the whole startup ecosystem in the space, the Nigerian ecosystem thrived. And right now, we live in a world in which, despite all of these bans, about 50% of adult This is despite, again, this hardcore ban that was imposed. Why is that?

Well, first of all, there was a real need, right? So when you have a bad currency, when you have inflation, when you have very weak fintech and banking solutions, when people are underbanked and there are no like mobile apps to easily transact, then stablecoins become like an obvious choice. When it comes to investments, people in Nigeria generally had very poor access to any kind of investment. So suddenly, any kind of token stuff became an interesting alternative to what maybe in Europe or in the US, people would consider, you know, gambling or like pure speculation. But here, we have, you know, like actually people doing savings.

At the same time, we had a lot of builders who tried to focus on that market despite it being banned. And the tools they were building were built in such a way that they would withstand all these bans. So you have peer-to-peer on and off-ramping. So with peer-to-peer on and off-ramping, it's essentially untraceable because if I send crypto to someone and someone sends me off-chain like through a bank account money, it's very hard to find out who's behind that, who's doing the on and off-ramping, which we can't say about a company such as Bridge, right, in the US where everything is fully visible through regulators. So despite these heavy bans, the ecosystem flourished because there was a real need.

And now, I'd like to turn because I talked very briefly about stablecoins and the cash aspect in Nigeria where it was important. I'd like to briefly touch upon the idea of, you know, the peer-to-peer electronic cash system where for about, well, since 2008, it was this idea that we could just transact and have digital cash that's fully in line, fully secure, decentralized, permissionless, all this stuff, all the good stuff. But for some reason, we haven't seen a fully decentralized approach take off yet. So even if you think about Nigeria, you think like they use Binance, which is a centralized exchange and a custodian to transact. And there are many, many reasons for this, right?

Centralized exchanges simply do have better UX in many ways. It is, you feel much safer as a user if someone can just, you can hop on support and they can just tell you what to do. You don't have to worry about gas on everything. You don't have to worry about seed phrases. And there's been many, many kind of on-chain Venmo-like projects that tries to bring back a fully self-custodial idea and fully decentralized idea of, you know, simple cash-like payments.

And usually they fail, I think, because complete lack of intervals. You have stratified rails, so really bad on- and off-ramping. Then you have huge token fragmentation on the stablecoin side. People just want to think, hey, I need a digital dollar. I don't want to think of it as USDT, USDC, DAI.

When you send money to a bank, you don't think who the issuer is. Like you don't think about it as Goldman Sachs dollars. You think about it as simply dollars. And then obviously the chain fragmentation is also a huge UX issue that prevents casual users from using this kind of stuff. On top of that, for a long time, Ethereum transactions were very expensive.

So that's why projects like Tron were able to take over large parts of the market, because back then they were cheaper. Right now Tron is actually 10 to 100 times more expensive than Ethereum, even L1. And of course, then account setup, I already mentioned the pain of seed prices. And yeah, I mean, we as builders, and also what I'm trying to solve at Peanut, which is the company I work at, is how do we bring back this peer-to-peer cash element to the space and make it as smooth and easy as possible. And it's a really hard dilemma.

And we've seen many, many approaches from various different companies. Some companies decide to go on the full regulated route and just essentially treat stable coins in your wallet just the way you would treat a FinTech. So there's a project on Solana that is currently built that even on sign-up requires KYC. They spin up a self-custodial wallet, weirdly. So in theory, you wouldn't need KYC for this, but they just want to make sure.

So they KYC you, spin up self-custodial wallet, and then you can interact quite nicely and quite smoothly with Trashfy. You can on-ramp, off-ramp, and so on. But that's like one extreme where you go all the way on the, hey, it's just a FinTech. We're just using stable coins as a settlement layer. Versus the other side where maybe it's really smooth, peer-to-peer, but only within one chain, within the happy path.

What we thought about was a good compromise, I think, is this. Essentially, keep a fully decentralized and self-custodial core, and then use third-party providers for all the stuff that would normally require licensing and maybe KYC and so on. So if you think about the problems I described with peer-to-peer cash and on-chain Venmo not working very well, you get chain fragmentation. So that can be solved with just cross-chain interrupts. You can deposit and withdraw to and from Tron, obviously from centralized exchanges.

And then for all the Trashfy stuff, which is in the lower section of this graph, you need KYC licensing and all this stuff. So going back to this idea of centralized, of the danger of regulation currently stepping in and the people who are building these regulations being the large companies in the space, like Circle or Coinbase, who are at the table building these, is that very soon we might even require certain things for the top bit. So we already require stuff for the bottom bit, so Google Pay or connection to payment networks, but we might even very soon require to do all sorts of compliance stuff on the stablecoin-to-stablecoin on-chain payments angle. And that obviously raises the barrier to entry. It reduces competition, makes it much harder for innovation and interesting things to happen.

So yeah, right now we are at this crossroad, and it's happening much, much faster than I think we here, as people who have been in the space for a long time and have been building very much on the tech side and not on the fintech side, the regulated banking kind of style stuff. The bankers are coming in right now and regulating a bunch of these things with the sole thinking about stablecoins as being something that's cheap and fast and not something that brings permissionless, censorship-resistant, and so on and so on properties with it. So yeah, if you are in Berlin this week and you just want to jam on how to build more robust payment networks without going to jail, I'd love to chat. And yeah, I hope one day we can also come up with more robust and decentralized systems for a stablecoin, or maybe a stablecoin that is not dollar-backed, but a stablecoin that is backed by something like the stuff you consume, or maybe your time. A very cool experiment by Circles now.

And yeah, hit me up. DM's always open. And yeah, thank you. We have some spicy questions from the audience. So did you just say just cost chain interoperability?

Sorry? Did you just say just cross-chain interoperability? Yeah, I mean, you know, it's like, oh, easy. It's just a feature, right? Just one of the, yeah, I'm aware that cross-chain interoperability is extremely hard.

We've been, yeah, it's been giving us a lot of headaches. In the same direction, how do you achieve trustless interoperability? Trustless what? How do you achieve trustless interop? Interop, ooh, yeah, good one.

We'll see what happens in the space. I mean, there are so many approaches. Right now, my main worry is that because of friendly regulation, there's no need to make it trustless. Because of friendly regulation, it's very easy to just spin up a CSV on a server and settle it that way, right? And at that point, like, why are we doing this, even?

Are we really reinventing anything? And yeah, I mean, we are seeing more and more adoption of these very, very centralized bridging solutions and interop solutions, yeah. And can we have safe P2P without a main custodian like Binance? Yeah, I think so. I think the tech is ready.

So in one of the last slides, I brought up a list with, like, scalability, right? Solved. Or, like, getting solved. Good UX for account setup. Now you have these smart wallets with biometrics, instant, like, PASC login.

You have a pretty decent chain abstraction or some other ways of doing interchain, like cross-chain interop. We have, what else do we have? We have a variety of tables. Like, yeah, I think you can set up most of these systems relatively trustlessly. Obviously, it's a spectrum, but I don't think we're too far away.

And that's a recent change, right? Two years ago, that would have been impossible. Do you think P2P value is getting lost because digital natives barely have been exposed to it? Peer-to-peer value is being lost because of? Digital natives have barely been exposed to it.

I don't know. I don't understand the question. We have to ask. Yeah. What makes tables cheaper for Treadify, if not a regulatory arbitrage?

Oh, okay. This is a fun one. I can write a book about this, okay? So, the way you transact between two banks, if they're in different countries, is through correspondent banking. So, you need a web of trust.

You need to find, like, banks form a web of trust, and they will, like, they're friends, and they have their little club. And then you have to find a path of trust between two banks. Usually, that role is taken by correspondent banks. So, if you do anything that's cross-border, you're, like, especially in banking, it's called an exotic corridor. So, like, I don't know, Armenia to Bolivia, right?

Like, two long-tail kind of countries. You're, like, absolutely screwed. Like, you'll do, like, five hops, several correspondent banks. Like, there's a lot of complexity involved in this. So, that's on this part.

Then, just in terms of building the tech, coding the tech, you have all of this stuff was built pre-internet. So, you have COBOL as one of the languages for banking. And then you have companies like PLAT, multi-billion dollar companies that abstract away this stuff so that normal devs can use it with normal languages. And then on top of that, you have more and more and more providers that, like, kind of it's, like, worse than JavaScript at this point, right? Like, just the levels of frameworks and complexity that are built on top of each other.

So, there is efficiency to be gained in terms of... Oh, one more fun fact on this one. I recently talked to a CEO of a remittance company, and he was like, I don't get stablecoins. It doesn't make any sense. And then I asked him, what's your headcount?

And he said, 1,500. And then I asked him, how many devs? And he said, 500. And I said, well, you can build a very similar thing to what you're building with stablecoins with, like, 10 devs. So, it shows the reduced complexity because all the complicated stuff in payments, which is the canceled payments, refunds, all this kind of stuff is being handled by a system that was inherently designed for transactions, right?

So, it's just much simpler and cheaper to build. And then in terms of cross-border, as I mentioned, you don't need all this corresponding banking stuff. You can just do one hop, right? You sell it for stables, zoom it over to the other side of the world, and then sell the stables. And that's called a stablecoin sandwich.

So, on some corridors, that can be more efficient. And already was, by the way, like 10 years ago with Bitcoin. I know a story of one lady who bought her Louboutins from secondhand markets in France with Bitcoin, which was sold by her friends for euros. And she got the package in the US. So, I mean, the stablecoin sandwich is not a new concept, but yeah.

I know I'm over time.