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In an unprecedented move, the diminutive island nation of Palau in the Pacific, renowned for its scuba diving sites, has opened doors to the digital world. Offering one-year “digital residency” for a mere $248, the initiative doesn’t require physical presence in the nation. The project has piqued the interest of cryptocurrency traders seeking an alternative route to gain access to trading platforms, barred in countries such as the U.S., China, and Canada due to an ongoing crypto crackdown.

Changpeng Zhao (CZ), the founder of Binance, one of the leading crypto exchange platforms, initially advocated for the program. However, after conducting due diligence, Binance dissociated itself from the program. The exchange is not available to American users as it lacks an operational license in the U.S.

Established in January 2022, the digital residency program is operated by the Palau government’s tech platform, RNS. The program offers both a physical and digital identity card. Applicants must provide contact details, a form of identification, and go through anti-money laundering checks before approval, which typically takes up to 10 days. The digital residencies can be for one, five, or ten years, with the decade-long residency costing $2,039. They do not confer citizenship or passport privileges.

RNS, via the Palau digital residency website, asserts that the card can be utilized for identity verification in diverse businesses globally, ranging from bars to online banking, crypto exchanges, Costco, and T-Mobile. However, the majority of the Twitter posts related to the residency program discuss its implications for cryptocurrency trading.

On Twitter, RNS implies that traders can leverage the Palau identification to bypass crypto service restrictions, enabling individuals from the U.S and elsewhere to access unregistered exchanges and high-risk investment products. A secondary ID from outside their homeland enables traders to mask their actual residence.

The residency program, as promoted by several RNS tweets, offers a route to keep access to major crypto exchanges despite restrictions in Canada, Argentina, and the U.S., amongst others. This is possible as crypto exchanges often require traders to submit government-issued photo identification for platform access.

According to some traders on Twitter, they have successfully accessed banned digital asset exchanges in their countries using their Palau identification.

Jay Anson, who heads the digital residency program at Palau’s finance ministry, clarified that the government has no control over how the ID card is utilized or attempted to be used. Anson emphasized that the government does not endorse any efforts to falsify physical residence or sidestep laws.

Anson also revealed that the government has a working agreement with Cryptic Labs, a blockchain research institute based in Palo Alto, California, which operates and maintains RNS.

The Palau ID is accepted by 90% of crypto exchanges for identity checks, according to the program’s website. This includes renowned exchanges like Binance, Kraken, Crypto.com, and Huobi. Nevertheless, Huobi stated that the Palau identity is only accepted if the customer currently resides in Palau.

In contrast, CJ Rinaldi, Kraken’s chief compliance officer, stated that the exchange has stringent measures to identify and prevent any attempts to evade its verification procedures using identification documents. Also, Crypto.com clarified that it does not recognize Palau-issued IDs, and any insinuations to the contrary are misleading.

Binance Distances Itself From the Program

A Binance spokesman then stated that Binance “conducted thorough due diligence and decided not to invest in this program or officially partner with them after our initial assessment.”

Both the Securities and Exchange Commission and the Commodity Futures Trading Commission sued Binance and Zhao earlier this year, accusing them of illegally serving U.S. customers for years. They claim Binance deliberately left loopholes that allowed American users to bypass identity checks. Neither the SEC nor CFTC provided any comments.

Interestingly, a U.S-based trader claimed he could join Binance using the Palau residency card, even though Binance asserted that it does not accept U.S. customers. The trader used a VPN to sign up on the platform, which concealed his location.

Anyone caught circumventing these controls are violating our terms of use and are off-boarded.

The Binance spokesperson clarified that Binance has controls in place to prevent access from banned countries via a Palau ID card. “Anyone caught circumventing these controls are violating our terms of use and are off-boarded,” Binance stated.

Despite these controls, there are approximately 2,000 users registered on Binance with a Palau identification, which represents less than 0.002% of its total users. However, after several publications made inquiries about it, Binance has undertaken a manual review of every single user in Palau in its system.

According to a 2020 census, Palau’s total population is less than 18,000. The digital residencies do not lead to Palau citizenship or passports but allow digital residents to extend their tourist visas by 180 days post-expiry.

Revenue from the program has surpassed $1 million with over 7,336 digital residents as of mid-June, equivalent to over a third of the country’s 2020 population. For specific types of services, including futures trading, some exchanges necessitate proof of address.

RNS commented on Twitter that it will soon provide Palau addresses and phone numbers to users, enabling them to sign up for Binance futures. As of now, the ID can be used to set up a simpler trading account.

However, Anson clarified that the tweet from RNS “does not represent the views or position of the Palauan government,” and any address service under the program would support mailing service only. RNS urged users to report their actual residence accurately and abide by the regulations in their home countries.

Interestingly, the program’s technology is based on a blockchain network established with Binance’s assistance. Zhao was advertised as a Palau digital resident on Twitter by RNS. However, following inquiries, Zhao denied having Palau residency, and RNS subsequently deleted the tweet.

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