7 Sentenced in South Korea for $1.7B Fraud

The biggest crypto news and ideas of the day

Feb. 11, 2022

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Welcome to The Node.

In today's newsletter: YouTube star Logan Paul filed Web 3 patents. Hungary politicians look to ban crypto mining. And seven in South Korea were sentenced after a $1.7 billion fraud.

Questions? Feedback? We'd love to hear from you – simply reply to this email.

–Daniel Kuhn

Today's must-reads

Top Shelf

CRIME DOESN'T PAY: Seven executives of South Korean crypto exchange V Global were sentenced to prison for a 2 trillion-won ($1.7 billion) Ponzi scheme that reportedly defrauded over 50,000 investors, some of whom lost their retirement funds. Authorities seized 10 billion won from V Global CEO Lee Byung-gul's account at the exchange and meted out a 22-year prison sentence; a further six executives were handed prison sentences and fines. Meanwhile, the couple charged with laundering $4.5 billion in bitcoin from the 2016 Bitfinex hack have been deemed flight risks, new documents show.

BANNING? The chief of Hungary's national bank said he supports banning crypto trading and mining in the EU on the grounds that it could "service illegal activities and tend to build up financial pyramids." This comes after Swedish regulators recently floated a ban on mining, Russia deciding to regulate rather than ban crypto and China's historic move to make all crypto activities illegal in September.

STABLECOIN SUGGESTION: Stablecoins should be treated like investment products, not banks, as many U.S. regulators and politicians have asserted, Jan van Eck, the CEO of the investment firm VanEck, wrote in a Barron's op-ed on Wednesday. "They don't lend money, so I don't understand why there is a push to regulate them like banks. Bank regulation may in fact imply some sort of government guarantee," he wrote.

TENNESSEE: A bill introduced by state Rep. Jason Powell, a Democrat from Nashville, would allow Tennessee and counties and municipalities in the state to invest in crypto and NFTs. The bill is meant to draw a local crypto industry, and capture upside from the crypto-tech boom. Earlier, Scott Conger, the mayor of Jackson, planned to mine bitcoin at city hall.

CULTURE MAKERS: YouTube star Logan Paul is launching his brand into Web 3, according to several trademark filings made on Feb. 4. His two patent filings are related to NFTs and something called the "Originals DAO," which might be both a "marketplace" and social club. Paul has reportedly spent over $2.6 million on digital collectibles in 2021 and promoted numerous projects. DAOs may still seem goofy, but they're pulling serious numbers. FlamingoDAO, a decentralized organization created to invest in NFTs and crypto-cultural artifacts, has amassed a 7,920 ETH treasury and is charging upwards of 3,000 ETH (about $8 million) to enter. Flamingo holds 215 CryptoPunks, 22 Bored Apes, 246 Chromie Squiggles, 371 CryptoBlots, five Autoglyphs and several other bespoke NFTs.

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Overheard on CoinDesk TV...

Sound Bites

"Part of it is to say we have skin in the game…and to say we've done it ourselves and we can help our clients."

–KPMG Canada's co-leader of crypto assets and blockchain services, Kareem Sadek, discussing the firm's acquisition of BTC and ETH, on CoinDesk TV's "First Mover."

What others are writing...

Off-Chain Signals

An incomplete history of Forbes.com as a platform for scams, grift, and bad journalism (Neiman Labs)
WWF Drops NFTs Following Environmental Criticism (Decrypt)
Uber CEO says rideshare company will accept crypto 'at some point,' cites transaction costs and environmental concerns (The Block)
PancakeSwap DEX reportedly set to block users from Iran (The Block)
Accused Bitfinex Launderer's Rap Album Cover NFTs Vanish from OpenSea (Decrypt)
Anti-Vax Truckers Have Raised $700K in Bitcoin—And Have Elon Musk's Support (Decrypt)
Internet guru Tim O'Reilly on Web3: "Get ready for the crash" (CBS)
Gas Prices Slam Buyers in Cool Pets NFT Drop as Transaction Fees Soar 7,000% (The Defiant)
Anchor Asks Luna Foundation Guard for $450M to Shore Up Dwindling Reserves (The Defiant)
The Cities Turning To Crypto For Grassroots Fundraising (Forbes)

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Putting the news in perspective

The Takeaway

Central Bank Digital Currencies Are Going to Disappoint

Today's is a guest essay from CoinDesk columnist and EY blockchain lead Paul Brody.

The world's first central bank digital currencies (CBDCs) outside mainland China will start arriving in 2022. Indeed, a couple, like the Bahamas sand dollar and the Nigerian eNaira, have already arrived. And people should have appropriate expectations, because these early CBDC pilots are going to disappoint central bankers, blockchain enthusiasts and, most likely, end users as well.

While CBDCs are pitched as a kind of safer, government-backed alternative to fiat currency stablecoins, they are not going to arrive in any form that looks remotely familiar to existing stablecoin users. To start with, they are unlikely to arrive on a public blockchain. That means you won't be able to exchange your eNaira for a CryptoPunk or park it in a deposit contract on-chain to earn interest.

Indeed, early CBDCs will not be programmable in any way. It will not be possible to use them in smart contracts as part of any decentralized finance (DeFi) ecosystem. Central bankers, wary of the big systemic technical risks that could come from a programming flaw in a national currency, are unlikely to enable Ethereum-style complex smart contracts.

Without programmability or access to a public blockchain, existing stablecoin users are unlikely to be won over or to see the value proposition at all. But CBDCs could still be attractive, if they manage to solve interoperability issues between countries' financial systems.

Non-blockchain-using consumers are also likely to be disappointed in many cases. In designing CBDCs, central banks are struggling to balance the convenience of cash, pledges to respect end-user privacy and a strong desire to limit money laundering and criminal activity. Central banks are already discovering how difficult balancing these requirements is likely to be. Nigeria's eNaira system, for example, requires you have an existing bank account in order to open an account.

Going through the existing banking system takes care of know-your-customer (KYC) rules enforced by global regulators.

Nigeria's solution is fast and elegant, but has limitations. Specifically, transactions can be tracked (though that's not necessarily the case), and because it requires an existing bank account, the currency does nothing to "bank the unbanked."

Similar limitations will likely affect all CBDC prototypes and will have to be addressed to scale these systems or make them attractive alternatives to stablecoins or other quasi-banking apparatuses.

At the consumer level, CBDC experiments in 2022 will offer functionality comparable with familiar consumer payment services – only run directly by the central bank. However, as central banks are not historically known for their consumer services, this may not produce the most compelling user experience. That's me being understated and diplomatic.

A lack of polished user interfaces or sophisticated KYC tools (necessary in consumer banking) would not be an issue at the wholesale level. But wholesale CBDCs face numerous competitors. There are already real-time payment systems in the world, and so if a CBDC isn't programmable, the functionality and value proposition is the same as established payment rails.

There is one final opportunity for CBDCs to make significant progress: tying together various national payment systems. While a very large number of countries have already deployed in-country real-time payments, there is no comparable cross-border system. The largest cross-border payment network is estimated to settle more than $400 billion in daily transfers between member banks.

So far, there is no one central bank that has a natural claim to facilitate transfers between countries. This market is up for grabs and could be completely transformed if CBDCs become widely deployed and interoperable. For that to happen, however, there has to be CBDCs deployed at scale in multiple countries.

–Paul Brody

The views reflected in this article are my own and do not necessarily reflect the views of the global EY organization or its member firms.