Is The Decentralized Crypto Case In Trouble?

There is a new tug of war between centralized finance – government issued money (fiat) – versus decentralized finance – private issued cryptocurrencies that can be exchanged for fiat. Bitcoin is in the crosshairs. It is taking massive fire.

This battle is not new. But it is heating up and defi is losing, don’t let anybody kid you. Sentiment matters. Centralized finance can shut this down. Don’t think it cannot.

Please, convince me I am wrong.

Cryptocurrency was not being created to be some underground secret society. It was created to go mainstream. Blockchain projects with their own coins want investors in those coins, they want use cases for those coins. Having a centralized power shut it down for some reason – because the Dear Leader doesn’t like your metaverse – is destruction of that use case.

The government, and their friends in the tech world, are coming for your Bitcoin, I’m sorry to tell you.

Coinbase
COIN
just blocked more than 25,000 cryptocurrency wallets owned by Russians on Monday, a move that came as the company aimed to tackle concerns that cryptocurrencies could be used to evade sanctions imposed over the Ukraine invasion, the New York Post described.

Coinbase described it differently. They said they took action against accounts “we believe to be engaging in illicit activity, many of which we have identified through our own proactive investigations,” chief legal officer Paul Grewal said in a blog post. This suggests it has nothing to do with sanctions and government requests, even if not direct requests. Grewal adds in his blog post that Coinbase “fully supports” the international economic sanctions imposed on Russia following its invasion of Ukraine.

It is unknowable if Coinbase would have banned the 25,000 wallets owned by Russians if there was no war going on. My guess is no. This is a political move tied to sanctions.

Kraken, another exchange available for U.S. investors, said it would not follow Coinbase’s example.

“If we were going to voluntarily freeze financial accounts of residents of countries unjustly attacking and provoking violence around the world, step 1 would be to freeze all US accounts,” Kraken CEO Jesse Powell wrote on Twitter. “As a practical matter, that’s not really a viable business option for us.”

Now that’s a “boom”.

For the record, sanctions on Russian Bitcoin accounts do not exist. Treasury has only spoken about it, floating test balloons. But nothing has been done as of Tuesday afternoon.

Coinbase and Kraken are centralized exchanges, but the point is that cryptocurrency is equated with decentralization.

Canada also stopped access to Bitcoin. People who were donating to truckers who were taking weeks out of work in protest against the country’s draconian Covid policies were told the Bitcoin accounts of the key organizers were known and blocked by the Trudeau government. Some crypto wallets refused to comply.

This is good news. Team Bitcoin are the good guys.

“If there are bad actors — as opposed to activists – then all ecosystems, decentralized and centralized, should try to stop them,” says Beth Haddock, an advisor of Balancer Labs in New York.

That makes sense. You want to maintain the integrity of your currency, or your exchange. But that was not the case in Canada. A government was quick to deem an activist group bad news and stopped them from transacting not in Canadian dollars, but in Bitcoin which is not state legal tender.

If a centralized power can put a stop on a currency it does not own, does not print, then the use case for decentralized crypto is in trouble. If they are in trouble, then many of these coins are increasingly looking like a gambling chip tied to bubbly blockchain projects and video games few have even heard about.

“Bitcoin can be chained by the power of central banks or governments; but we have seen the second biggest economy in the world – China — try its best to ban Bitcoin and yet here we are,” says Naeem Aslam, chief market analyst at AvaTrade in the U.K. “Having said, the centralized role of the governments can certainly limit their institutions to have Bitcoin part of their portfolio or as an investment instrument. Under that scenario, we could see sentiment becoming more bearish.”

Governments can have influence over centralized exchanges and wallets but – says Yubo Ruan, Founder of Parallel Finance in San Francisco, they “will never have the capability to truly shutdown the Bitcoin network.”

Government influence on centralized exchanges like Coinbase can have a negative impact on sentiment, which is reflected in the price. Bitcoin fell after Canada went after cryptocurrency donations to truckers.

“This is likely because a portion of users may become concerned about their ability to cash out of their digital assets in the future and decides to prematurely exit the market,” says Ruan about recent sell-offs.

The U.S. has asked centralized exchanges to ban users in Russia. Bitcoin prices fell over 2.4% following Coinbase’s announcement about the 25,000 wallets being frozen.

Centralized exchanges are easier for governments to trip up. But they are also perceived to be the safest.

These centralized protocols will continue to be pressured to put safeguards in place in order to know their customers so they can do business in a traditional, compliant fashion. And can be easily shut down by centralized powers.

“The only path forward is to get CeFi and DeFi entities to align the best of both worlds, while maintaining self-sovereignty of digital identity at the core of their architecture,” says Brandon Dalmann, CMO at Unizen in America’s heartland.

DeFi 2.0 is picking up on the fact that DeFi 1.0 still lacks complete autonomy and privacy.

This might be why we are witnessing a rise in platforms that are fully managed by a decentralized autonomous organizations, or DAOs, that are adding privacy focused features to further cement user sovereignty, says Dalmann.

“Uniswap competitors like SushiSwap, Trader Joe, are growing their respective user-bases. Binance has recently invested in Automata Network, a privacy-focused middleware that can be added on top of existing decentralized exchanges,” Dalmann says.

Bitcoin is the world’s largest, private currency. Government’s have little control over it. They want more control over it. This will be especially true if there ever is a successful roll out of a digital dollar or euro. The calculation of a competing currency on investment, inflation, and as a means to impose sanctions would be MIT-level physics. One can only imagine the difficulties that lie ahead. It is unclear if markets appreciate this fight. On balance, it seems like the market believes it is a fight defi and Bitcoin will win.

Over the last few years, Bitcoin has become a currency in preferred over national fiat. See El Salvador for example.

“As economies move further up the adoption curve in using cryptocurrencies for payment, rather than just for investment, we will see the power of immutable peer-to-peer money,” thinks John Wu, president of Ava Labs.

Everyone has Ukraine on the brain. The country is a hot bed of cryptocurrency adoption because its currency is weak. Chainalysis, a blockchain data company, estimates that around $8 billion in cryptocurrency flowed through Ukraine last year, with a significant amount of activity being on-chain rather than through centralized venues.

“We’ve seen countless examples in recent days of how cryptocurrencies are helping ordinary families in Ukraine either flee or somehow better manage the tragic situation inside the country. We feel that ordinary Russians – also caught up in this nightmare – deserve borderless, permissionless, censorship-resistant and unconfiscatable monetary alternatives too,” says Nigel Green, CEO and Founder of the deVere Group, a global asset manager with offices in London and Singapore. “We’re against Putin’s war – and he should be punished – but not the Russian people.”

Bitcoin is a big market. Cryptocurrency is at least as big a market as artificial intelligence or electric cars. Now imagine countries like the U.S. allowing its citizens to buy all of those things in Bitcoins instead of the dollar. What would that mean for the currency?

That’s another discussion.

For now, we see governments are flexing their powers against Bitcoin. From Canada to China and the U.S., they are saying that centralized powers can shut down Bitcoin when they want. This is a another shot across the bow. They keep getting louder. The bangs keep getting bigger. Investors are hearing them more clearly.

“Canada was an overstep and reactionary,” says Ruan. “But I think regulation is inevitable for decentralized finance. Whether governments make the right choice and choose financial freedom over government control with those regulations remains to be seen.”

Such regulations might mean legal rights, investor protections from scammers and false promises, and transaction taxes, like a sales tax. But will it be a higher tax for not using the local currency, or the digital dollar? I think yes.

The Biden administration is said to be readying an Executive Order on Bitcoin this week.

Beth Haddock hopes the easy bans on Bitcoin accounts is not a growing trend.

“I’m hopeful any defi exchange bans, just like efforts to impede free speech and personal liberties, will not be successful,” she says. “There may be local impacts, but I think limiting access (to Bitcoin and cryptocurrency) globally will not be possible.”