"CBDCs Appear Positive And Doubtful At The Same Time" - Sean Noga

Ishan Pandey: Hi Sean, welcome to our series “Behind the Startup.” Please tell us about yourself and the story behind Unizen?

Sean Noga: Unizen is a smart exchange ecosystem, where deep hybrid liquidity is enabled through an ecosystem consisting of centralized and decentralized exchange elements. The idea behind the platform is to combine the positive advantages of centralized exchanges, decentralized exchanges, and effective decision-making tools into a single concept. The CeDeFi functionality is represented by modules that adhere well to the KYC and regulatory requirements put forward by FATF.

Ishan Pandey: Can you please explain to us how the CeDeFi architecture operates, and what are some of its advantages over DeFi (if any)? (PLEASE PROVIDE A HIGH-LEVEL EXPLANATION)

Sean Noga: Conceptually, DeFi stands for entirely correct values - decentralized decision-making, full control of private keys and funds, accessibility, data control, and security due to DeFi having no single point of failure.

However, all these values can be exploited. Fully decentralized trading infrastructure bears a trade-off in high fees and low transaction speed, and while responsibility is good for experienced traders, beginners end up buying into scams or losing their funds due to poor familiarity with technology. Accessibility, in reality, ends up opening doors for money laundering and tax evasion, and as DeFi stands now, there’s no way to control this exploitation. Data control and security are guaranteed on paper - in reality, just in 2020, DeFi was a victim of thousands of security attacks that resulted in the loss of 100 million dollars. Even for a retail trader, these issues are simply too risky.

Now imagine elevating these concerts to the level of institutional adopters, where a single actor is an entity that handles millions of dollars on a daily basis and makes decisions in the stead of hundreds of people. Even small glitches become a big deal, and DeFi’s issues are no glitches.

So, the question here is, which of these flaws are temporary and what is inherent to DeFi? From my perspective, a lot of aspects that make DeFi risky for beginning traders and institutions are there on the conceptual level. If you just casually add KYC, off-chain features, and others to DeFi, many active adopters won’t welcome the change because these changes defy the initial guarantees - and they will be right.

This is why I don’t think we should directly change DeFi; rather, an option that could satisfy everyone would be complementation. Basically, you add new user flows to the interface adapted to different types of traders. If you want to be as close to the original DeFi as possible, you use one interface. If you are an institution, you switch to the functionality with centralized features - with verified assets, white-glove service, and fall-back switches. Some aspects, like KYC and AML, are inevitably going to enter DeFi -

Because it’s not good to leave open doors for money-laundering and tax evasion (a strong ethical motivator here), but also because regulators likely won’t let it be otherwise (as indicate recent statements from governments all over the world).

Ishan Pandey: The Enforcement Directorate has recently issued a show-cause notice to WazirX for allegedly violating the Foreign Exchange Management Act (FEMA) by conducting transactions worth over Rs 2,790 crore. This was discovered during an ongoing money-laundering investigation into “Chinese-owned” illegal online betting applications. From a regulatory standpoint, how do you think this will affect the crypto industry in India and China?

Sean Noga: I think incidents like WazirX notice remind us of the responsibilities of crypto infrastructures. We shouldn’t underestimate the challenges that come with decentralization and accessibility. As crypto infrastructure becomes widely accessible, the lack of AML measures will inevitably lead to suspicions of illegal activities. If crypto adopters want the market to grow, we should address this challenge and be prepared for future exploitation.

As for India and China’s crypto markets, I think their sceptical (or one could say, hostile) attitude towards crypto has some sensible grounds - not all of it is a political play. Cases like WazirX create precedents, and governments reasonably want to address them. The US has also been voicing concerns about money laundering and tax evasion. The trend is clearly global - so instead of dissecting the regulatory politics of particular countries, it’s up to crypto providers to take these concerns into account and make the technology better. Finding a way to implement stronger AML measures (regular reporting, cooperation with monitoring authorities, etc.) seems like a good place to start.

Ishan Pandey: Please tell us a little bit about the CEX module, and how does it operate technically?

Sean Noga: Some implementations of CeFi rules will be overarching for the entire ecosystem. All modules should be legally compliant, correspond to KYC and AML practices, and offer a degree of investor protection (particularly with social sentiment indicators provided by our partners, Lunar Crash). Once users enter the exchange, they can specify their trading persona, and this is where the functionality diverges. We have designed DeFi and CeFi modules, with robust functionality and standalone scalability (basically, think features, not wrapped APIs). When a user selects a trading type, the ecosystem customizes modules according to the trader’s needs.

In particular, the CEX module is primarily for institutions (one persona) and beginning traders (another persona). There, you have access to trade aggregation algorithms, verified listings, and a centralized trading experience where transactions can be reversed, and redundant modules - if one fails, the other kicks in to prevent the crash of the exchange.

Ishan Pandey: What are your views on Digital Yuan? Is it going to change the world order?

Sean Noga: From what we know so far, I’d think it’s unlikely that digital Yuan will go as far as changing the world order. When we try to think through the motivations behind the launch of the digital Yuan, we should consider both international and domestic reasons. On a global scale, people are reasonably wondering if the digital Yuan should replace the dollar. My take is that that’s unlikely, mainly because China is run by a highly centralized, controlling political entity. The low visibility of the country’s economy, monetary policy, and financial regulation is the main barrier for global adoption - and introducing a digital Yuan doesn’t change the situation. A likelier prediction is that the digital Yuan will help China avoid global payment restrictions and become even more proactive on the international market.

However, I think that domestic motivations shouldn’t be ignored. The Chinese Communist Party wants to have more financial control. The market of digital payment in China is primarily dominated by Alipay and WeChatPay, both of which belong to private companies. The influence of corporations on the economy has already been quite strong, and the idea of leaving the situation unattended, with more financial data (and power) for companies, doesn’t seem to fit communist values. Also, China loses tens of billions to illegal gambling and shadow banking, which alone is a credible reason for considering high-visibility digital alternatives to yuan.

Still, I think there’s an aspect that can influence, if not global order but governments’ relationships with financial data. Crypto adopters have been long talking about privacy issues in blockchain (although the names of participants are unknown, the dates and amounts are visible to everyone), and with advanced tracking tools available to governments, connecting a hash to an identity might not be a problem. With CBDCs, this problem is even more pressing. Unlike Bitcoin or Ethereum, CDBCs are controlled by a single entity - so digital coins could, in theory, provide central banks with information on every transaction. In privacy-conscious countries like the US, it’s unlikely that the situation will ever come this far, but it’s a very viable threat to China or Russia. In a sense, the digital Yuan is the first experiment that could push further governments’ ideas on financial control - and that’s another challenge that the crypto community needs to address.

Ishan Pandey: Elon Musk has been a driving force behind the emergence of cryptocurrencies such as Bitcoin and Dogecoin, yet his tweets have frequently had a detrimental impact on the market. What is your take on Elon Musk’s Twitter domination?

Sean Noga: I’d underline several reasons for Musk’s influence on the crypto market. To start with, his progress-oriented communication resonates well with those who have interests in the blockchain. Musk’s messages have always been future-oriented, and that’s the spirit that the crypto community embodies itself. Therefore, a lot of Musk followers have the mindset that is welcomed in crypto - and vice versa, Musk appeals to crypto adopters because they can relate to some of these messages. Also, he’s a tech billionaire; it’s natural that people will treat his take on money and technology very seriously.

Are the consequences of Musk’s activity beneficial to the market? I think it’s good that Musk’s tweets cause the market’s oscillation between the high and low extremes. In this way, we can clearly examine the community’s responses and understand the psychology behind crypto. Since crypto is so deeply rooted in economics and psychology, I think that public response to Musk’s Twitter is a highly valuable learning experience.

That said, I hope (leaning to the confident side) that the market will mature and eventually stop reacting to personal opinions. 10 years is a fraction of time for economics, so I think crypto is already going at a great pace. Institutional involvement, wider adoption, and better use cases will help us get over speculative trends, and market dynamics will then be reflecting actual socio-economic events.

Ishan Pandey: To ease fears of unregulated cryptocurrencies causing a worldwide financial meltdown, monetary authorities want to leverage blockchain technology while maintaining regulatory authority and stability via a new digital currency- ‘Central Bank Digital Currencies.’ Do you think this will be a major economic reform or will it put an end to the current crypto fandom?

Sean Noga: If I’m considering Central Bank Digital Currencies as the consequence of interest in crypto from governments, then, just from that point of view, I think it’s a big deal. Of course, there’s always a question: do governments really understand the core values of decentralization and want to adopt blockchain for its use cases - or are they coming for a buzz technology? If we are looking at the first case, then it’s a major change.

However, even though the concept of CBDCs is positive, the implementation is doubtful. Can a centralized digital currency even be considered a cryptocurrency? Blockchain, a decentralized technology, and central banks, even just by names, represent opposite concepts. If the currency is centralized, we have no knowledge of its chain’s consensus, no way to verify if transactions aren’t tampered with, and not many options for protecting our private financial data. Until these doubts are resolved, I don’t think that CBDCs will be a major reform.

That said, I think it’s absolutely necessary to get governments on board with what crypto is doing. However, it definitely has to be in line with blockchain values - to make it happen. Crypto experts should initiate the conversation and help banks find solutions that respect the fundamentals. If crypto keeps opposing the traditional system, banks will find their own way to adopt digital currencies, but the principles of decentralization will then end up twisted. We need a team of experts consisting of both DeFi and CeFi experts to negotiate the terms of the cooperation and, essentially, to do what blockchain has proven itself capable of doing time and time again - achieving consensus.

Ishan Pandey: Cryptocurrency is infamous for its volatility issues, and some analysts believe that crashes are more likely to occur on weekends. Why do you think weekends specifically lead to a decline in crypto prices?

Sean Noga: I think the Sunday effect is likely connected to the drop of liquidity. Trader providers are more active during business days, so even with a low trading volume, we can still clearly see fluctuations in the price. So, the low liquidity explains why we are able to see drastic shifts, but it doesn’t really justify why they point downward. The direction is likely influenced by global working and trading schedules: those who have to deposit fiat before buying crypto might not be able to do it, because banks are not working. There are also global aspects: the Asian market prefers to sell on Sunday, which also leads to a decrease in prices. Mining has some impact, too: miners run nodes 24/7, so even if the trading volume is low on both selling and buying sides, miners can introduce coins in circulation even on weekends.

Ishan Pandey: Bitcoin, which happens to be the world’s most popular cryptocurrency is down 45.7 percent from its peak in the month of April. One of the main reasons why cryptocurrencies are criticized around the world is their price volatility. How can these volatility issues be effectively curbed and addressed? Further, is volatility even a problem, according to you?

Sean Noga: Yes, I think volatility is a problem, and even more than that, it’s a reflection of several key issues with the cryptocurrency market. The liquidity of crypto assets is still not deep enough to cover price fluctuations. The lack of regulation promotes speculation and fear of missing out, spreading doubt and uncertainty among asset holders. Institutional adoption could become an answer to this one - as institutional participation has been proven to increase the liquidity of the asset in the case of a stock market. With larger trading volumes and better use cases, market participants will perceive the inherent value of crypto assets, not the speculative layer on top of it.

I think another thing to consider is that volatility is why many crypto adopters joined the market, to begin with. It’s not a secret that crypto offers an incredibly high interest rate, and volatility plays a central role in providing that. So, I’d say that not all crypto enthusiasts are interested in decreasing volatility: many hope for five- or tenfold growth of the value, which is inconsistent with market stability. If you appreciate Bitcoin’s role as a medium of exchange, store of value, and unit of account, that volatility is undoubtedly an issue. If you believe Bitcoin to be a potentially profitable investment, price swings are a part of the game.

Personally, I’d rather see cryptocurrencies as a driver of open, decentralized finance, and to make that happen, it’s necessary for money to perform its functions - and volatility is a barrier. We are acting in the direction of potentially reducing the volatility of cryptocurrencies by providing KYC- AML-compliant exchange infrastructure, opening gates for institutional adoption, and encouraging the utility uses of currencies.

Ishan Pandey: El Salvador has become the world’s first nation to accept Bitcoin as legal currency. In your opinion, will this aid in mainstream crypto adoption within the global economy?

Sean Noga: This question is very nicely tied to the previous query about volatility since it’s a perfect use case of where market swings can be a problem. I am sure that the El Salvador case interests governments and institutions, and I couldn’t welcome it more. That said, I’m also very interested in the practical aspects of this implementation - particularly how El Salvador will address the current volatility of Bitcoin. Generally, I think it’s a huge step towards global adoption and market maturity. Now it’s up to the crypto community to ride the wave and build solutions that help governments to adopt cryptocurrencies. Clearly, there’s interest, and it’s crucial that crypto-native teams help governments leverage it.

Ishan Pandey: 2021 has already witnessed a major crypto boom and its subsequent collapse, all within the first half of the year. What new developments in the crypto industry do you think is in store for the latter half of 2021?

Sean Noga: Regulation (particularly regarding KYC and AML), development of global use cases, and CeDeFi. The end of 2020 and 2021 had both market participants and observers on the edge of their seats, and even regardless of the price drop, crypto has generated a lot of momentum, which I’m sure will amount to global changes. CeDeFi is one of the biggest ones: the merge of decentralized finance and centralized actors on a single infrastructure would answer many questions regarding regulation, institutional adoption, volatility, and improving use cases.

For now, the centralized and decentralized players are observing each other, DeFi, while waiting for regulations and CBDC, CeFi looking for investment opportunities and adoption gateways. The popularity of indirect investment methods like the Microstrategy bond offering is proof that the crypto market has not been sufficiently opened to institutions - if they are compelled to use roundabout investment routes instead of directly trading on exchanges. In the latter half of 2021, this will likely change.

This and the next year really seems to be a payoff time for the crypto industry. If we are willing to respect other financial and regulatory players, it’ll be in the market’s favour. If not, regulations and misguided centralized adoption could stall the development of technology. Both crypto and institutional parties can’t afford to be indifferent because this and last years have shown very clearly the rising stakes of the market. We are on the verge of multiple new opportunities and new responsibilities that can potentially affect the lives of millions, if not billions of people.

Disclaimer: The purpose of this article is to remove informational asymmetry existing today in our digital markets by performing due diligence by asking the right questions and equipping readers with better opinions to make informed decisions. The material does not constitute any investment, financial, or legal advice. Please do your research before investing in any digital assets or tokens, etc. The writer does not have any vested interest in the company. Ishan Pandey.