Why bitcoin is very different from all other altcoin "cryptocurrencies" - Part 3 - Bitcoin vs CBDCs - a detailed side by side comparison

Part 1 of this 3 part series introduced the high level of cyber crime taking place in the world of altocoin "cryptocurrencies". Part 2 of this 3 part series comparied Bitcoin and all other altcoin "crytocurrencies" to emphasize how bitcoin is indeed truly unique. While CBDCs are still in their infancy, this post compares in detail, the similarities and differences between Bitcoin and CBDCs:

Criterion	Bitcoin	CBDCs
Architecture/Issuer	Bitcoin has no central issuer. A peer-to-peer blockchain based network regulates bitcoins, transactions and issuance according to consensus in the network.	Reserve currency CBDCs such as the digital dollar or digital euro, non-reserve currency CBDCs such as the digital Singapore Dollar as well CBDCs of restricted currencies such as the digital Yuan have a two-tier architecture, where the central bank (Federal Reserve, ECB, MAS or PBOC) issues digital CBDC tokens to commercial banks (tier 1). Commercial banks maintain the digital wallets for user authentication, transaction authentication, user interface and define the smart contract languages to support the innovation and customization (tier 2)
Regulatory classification	Bitcoin is not a security according to the SEC as it was started by an unknown person or persons going by the pseudonym Satoshi Nakamoto and does not exist as a way to raise money for a specific project for profit thereby failing the Howey test. SEC chairman Gary Gensler classifies bitcoin as a commodity to be regulated by the CFTC.	CBDCs are by their very nature a security and considered equivalent to cash as an asset class.
Purpose/ Use Cases	Originally intended as an electronic peer-to-peer payment system that is based on cryptographic proof, instead of trust that would operate free of central control. Now used more as store of value or digital gold.	Intended as an electronic peer-to-peer payment system substituting person to person or person to business cash payments.
Regulatory oversight and Compliance	Bitcoin’s decentralized Blockchain architecture is specifically designed not to be controlled by a state, a central bank or any other central authority for regulatory oversight and compliance.	The two-tier CBDC architecture aligns closely with existing banking system customer service delivery models, compliance mechanisms for anti-money-laundering, countering the funding of terrorism (AML/CFT) laws. CBDCs avoid disruptive disintermediation through enforcement of regulatory and compliance rules ensuring financial stability.
Account Management and Identity Checking	Bitcoin miners delegate this task implicitly to Bitcoin exchanges which maintain a traditional account and business relationship with each individual customer to address the gap between cryptographic keys in Bitcoin and human identity-checking tasks required to ensure compliance.	In CBDCs, Central banks delegate the task of account management and identity checking to commercial banks.
System Operators/Miners	In the Bitcoin architecture, system operators (miners) receive rewards to incentivize them to follow the Bitcoin protocol.	In the CBDC architecture, Central banks do not choose the system operators (miners) in the open system but determine the inflation rate.
Cross Border Payments	Cross-border payments with Bitcoin do not require currency conversions, as it takes place outside the Bitcoin system where counterparties convert from/into domestic currencies. The absence of intermediaries brings cost benefits and efficiency with no risks from operational or financial failures of intermediaries.	For Cross-border payments with CBDCs of reserve currencies such as the digital dollar or digital euro, participants from partnering jurisdictions are allowed access to the digital dollar or the digital euro which becomes available to counterparties inside and outside of that jurisdiction enabling cross-border payments.For Cross-border payments with CBDCs of non-reserve currencies, access and settlement arrangements aiming to facilitate cross-border interoperability are established among multiple CBDCs from different jurisdictions (mCBDC), built on strong technological, market structure and legal frameworks between central banks
Smart Contract capabilities	A Turing-incomplete script language allows the creation of custom smart contracts on top of Bitcoin like multisignature accounts, payment channels, escrows, timelocks, atomic cross-chain trading, oracles, or multiparty lottery with no operator	It is not necessary for a CBDC to provide smart contracts in order to fulfill its primary role as a digital currency, and some CBDCs such as the digital yuan are unlikely to do so.

Crypto friendly regulation from GCC Central Banks creates an oasis for fintech and crypto innovation from regulatory storms at home

The European Union’s Markets in Crypto-Assets Legislation is likely to effectively ban stablecoins USD Tether (USDT) and USDC by requesting stablecoins issuers to build up a sufficiently liquid reserve, with a 1/1 ratio and partly in the form of deposits which, USDT and USDC are unlikely to do. The legislations is also designed to make life tougher for crypto exchanges. In the US, regulators are trying to separate the bad actors in the crypto space — those actively committing fraud — from those who want to advance crypto and its market infrastructure, according to Dawn Stump, the former commissioner at the U.S. Commodity Futures Trading Commission (CFTC). The Central banks of GCC countries on the other hand have made huge strides in lightly regulating crypto assets.

The Central Bank of the tiny gulf emirate of Bahrain (CBB) enacted banking regulations for digital assets allowing cryptocurrencies as an official method of payment since 2019. The CBB regulation allows banks in Bahrain to work with exchanges so that customers can withdraw and deposit their money easily. CBB launched FinHub 973, a virtual platform to allow fintech companies to test their solutions through the regulatory Sandbox and connect with the hub’s global network for funding and business opportunities. FinHub 973 is all about supporting innovation in the sector and is a good example of the driving forces behind the region’s shifting fintech landscape. The Saudi Central Bank and Central Bank of the United Arab Emirates have been working together to learn how the two banks can adopt blockchain and digital payments. Saudi Arabia's Financial Sector Development Program (FSDP) launched the Fintech Strategy Implementation Plan in June 2022 to make Riyadh a global Fintech hub. In contrast to their Gulf neighbours, Qatar currently has a ban on cryptocurrency trade with the exception of security tokens in 2020. In most other countries, digital assets fall under the jurisdiction of securities regulators, not central banks.

In Saudi Arabia, the fintech sector generated approximately $157.2 million in venture capital (VC) investments in the first eight months of 2021, up staggeringly from $7.8 million in 2020 and $18 million in 2019. In 2022, the Saudi VC market witnessed a record funding of $584 million in the first half, a 244 percent increase in comparison to the same period in 2021. Saudi Aramco's Prosperity7 Ventures, a one-billion-dollar Venture Capital fund aims to build on this success by identifying ground-breaking companies with exceptional leadership in diverse industries deploying disruptive technologies with the ability to scale and transform.

Increased regulatory scrutiny of Fintech in Commodities Trading may impact Smart Contracts and Cryptocurrencies significantly

Back in October 2018, Brian Quintenz, the commissioner of CFTC, in a speech in Dubai, questioned the use of smart contracts in Commodities Futures Trading within the CFTC’s jurisdiction asking: "is the method by which it is being transacted on the blockchain compliant with CFTC regulations? If the contract is a swap, is it being offered to retail participants? Is it a product that must be traded on an exchange? Does the protocol itself perform exchange-like functions by facilitating trading, thereby potentially implicating registration requirements?". While the commissioner acknowledged that many smart contracts operate entirely outside of the CFTC’s jurisdiction, the open question was “if a smart contract is violative of CFTC regulation, then who is subject to an enforcement action?” The answer, implicitly holds the developers of the blockchain and the general users responsible, as they are typically unable to assess or police the legality of each application of the blockchain. In 2018, the CFTC had issued a primer on understanding smart contracts and their potential use cases.

Similarly, Congressional scrutiny of cryptocurrencies is increasing regulatory pressure on stablecoins and other cryptocurrencies and have the potential to destabilize the global monetary system In an interview with Bloomberg in August 2021, John Paulson predicted that “Cryptocurrencies, regardless of where they’re trading today, will eventually prove to be worthless. Once the exuberance wears off, or liquidity dries up, they will go to zero.”. The selloff in Bitcoin on January 5th, 2022 as the Fed and other central banks pare back on excess-liquidity measures and prime the markets for higher rates in 2022 points to a vindication of Mr. Paulson's pediction. Barron's highlighted the selloff as another sign that Bitcoin is acting more like a tech stock than an inflation-fighting store of value–or digital gold, as its proponents argue.

Detailed comparison between QNUPS and an offshore bond

Yesterday's post on QROPS vs. QNUPS vs. offshore bond generated huge amount of interest especially asking about the differences between QNUPS and an offshore bond. I have created a table below detailing the differences from information gathered from international adviser magazine.

	Offshore Bond	QNUPS
Legal structure	Insurance policy - but normally used in conjunction with a Discretionary Trust for IHT planning	Discretionary Pension Trust
Contribution limits	Gifts into a Discretionary Trust for IHT purposes are limited to the nil rate band every 7 years i.e. £325k	HMRC do not define any limits. HMRC may challenge any contribution made to a QNUPS where it considers that they are made for the purpose of avoiding IHT, rather than funding for pension provision. Where the individual's standard of living is unaffected by the contributions, this provides evidence that IHT avoidance is not the purpose.
IHT planning	The settler must survive 7 years for the "gift" to be fully IHT efficient	Any permitted contributions or transfers are outside of the member’s estate immediately
Tax relief	No tax relief on premiums made in respect of UK residents	Any permitted contributions or transfers are outside of the member’s estate immediately
Permitted investments	Subject to the fund list of the chosen bond provider	Subject to the investment list of the QNUPS provider but can include access to Platforms, DFM portfolios, directly quoted equities, commercial/residential property
Fund taxation	Gross roll up	Gross roll up
Withdrawals	5% per annum - tax deferred	Subject to local pension rules - normally 30% TFC and similar income limits to UK drawdown
Change of provider	Unable to transfer bonds from one provider to another without incurring a chargeable event	Free to change from one provider to another subject to any asset transfer charges if applicable
Adviser fees	Post RDR come out of the 5% annual withdrawal allowance	Can be taken from the fund in addition to any other pension income payments
Fund payable on death	100% of the fund value at the date of death (Provided a Discretionary Trust was used and the settler survives the 7 years)	100% of the fund value at the date of death paid to beneficiaries - no "insurable interest" issues
Member HMRC reporting	Chargeable events reportable on self assessment return	Any pension income taken is reportable under the foreign pension income section and as such 90% will be subject to tax at the member's marginal rate
Regulation	By the Financial Conduct Authority	Depends on the local regulator e.g. In Gibraltar the Trustee is regulated by the Gibraltar Financial Services Commission
Compensation scheme	Covered by the FSCS	Subject to any local compensation scheme - normally none. However, as QNUPS are normally Trust based the investments are protected within the Trust themselves