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Business News/ Technology / A Crypto Side Door: Buying a ‘Digital Residency’ in Palau for $248
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A Crypto Side Door: Buying a ‘Digital Residency’ in Palau for $248

wsj

The island nation’s program advertising suggests residency could circumvent bans on services such as Binance

The SEC sued Binance and its founder this month, alleging the company illegally served U.S. customers for years. Binance acknowledged past missteps but said it had changed.Premium
The SEC sued Binance and its founder this month, alleging the company illegally served U.S. customers for years. Binance acknowledged past missteps but said it had changed.

The tiny Pacific island nation of Palau, best known for its diving spots, has been trying to make waves in the virtual world. For $248, a person can get a “digital residency" there for one year—without ever visiting.

The residency has caught the attention of crypto traders searching for side doors to access platforms banned in their countries of residence as a crackdown on digital assets continues in places such as the U.S., China and Canada.

Changpeng Zhao, the founder of crypto exchange giant Binance, was an initial promoter of the program, although Binance told The Wall Street Journal it dropped further association after conducting due diligence. Americans aren’t allowed to use Binance because the exchange doesn’t have a U.S. license to operate.

The Palau government’s digital residency technology platform, RNS, launched in January 2022 and provides a digital and physical identity card. Before getting approval, residency applicants need to go through anti money-laundering checks, share contact information and give a form of ID. Approval typically takes up to 10 days, according to the program’s website. The residencies are for one, five or 10 years, with the latter costing $2,039. They don’t include citizenship or a passport.

The Palau digital residency website says the card can be used for identity verification in a variety of businesses across the world, from bars to crypto exchanges, online banking, Costco and T-Mobile.

But on Twitter, most of the posts focus on crypto.

On the social platform, RNS suggests traders could use the Palau identification to circumvent country bans on crypto services that prohibit Americans and others from accessing certain unregistered exchanges and risky investment products. By having an ID from outside their home country, traders can try to obscure where they are residents.

“Don’t lose access to crypto. In 2023, crypto was restricted by Canada, Argentina, and the U.S. Get a second ID. From the Republic of Palau. Access any major exchange," RNS said in one of several tweets promoting side doors to crypto exchanges.

Crypto exchanges often require traders to provide government-issued photo identification to access their platforms.

Traders on Twittersaid they were able to access digital asset exchanges banned in their countries with their Palau identification. One trader urged the Journal not to report on the program to avoid shutting it down.

Jay Anson, the digital residency program’s director at Palau’s finance ministry, said as with any ID card, the government can’t control how a person uses or attempts to use the document. “We are not encouraging people to falsify their physical residence or circumvent laws," Anson said.

The government has an operating agreement with Cryptic Labs, a Palo Alto, Calif., blockchain research institute, which maintains and operates RNS, Anson said.

RNS said the accusation that the platform encourages using a secondary ID to evade crypto bans “is a gross and irresponsible distortion," adding it stresses the importance of adhering to the law. It said it is in the process of curtailing applications “for behavior that may be seen as circumventing existing laws in restricted countries such as the USA."

Ninety percent of crypto exchanges allow the use of the Palau ID on their platforms for identity checks, according to the program’s website, which cited the world’s largest crypto exchange, Binance, as well as platforms such as Kraken, Crypto.com and Huobi.

Huobi said it accepted the Palau identity in a November 2022 tweet. A spokesman said the exchange only accepts Palau ID if the customer is currently residing in Palau.

CJ Rinaldi, Kraken’s chief compliance officer, said the exchange has measures in place to uncover and prevent identification documents being used in an attempt to circumvent its verification processes.

A spokeswoman for Crypto.com said it doesn’t have any users from Palau and it doesn’t accept the Palau-issued IDs. “Any advertising or claims that insinuate otherwise are false," she added.

RNS deleted the names of all exchanges after the Journal inquired.

Binance founder Zhao went to Palau in June last year for the launch of the identity cards in the form of nonfungible tokens, Zhao tweeted. He instagrammed his dive with the country’s president, he met with local authorities to discuss the residency program and other investments and he praised the residency in a taped press conference.

“I believe the digital ID/digital residency program is a very innovative one, is a very symbolic and meaningful one," Zhao said in the press conference.

A Binance spokesman said after Zhao’s June 2022 trip to Palau that Binance “conducted thorough due diligence and decided not to invest in this program or officially partner with them after our initial assessment."

After the Journal’s inquiries, RNS also deleted tweets that referenced the exchange and its founder.

“RNS is not supported by Binance. We have removed outdated tweets and replies," RNS said.

The Securities and Exchange Commission and the Commodity Futures Trading Commission sued Binance and Zhao this year, alleging they illegally served U.S. customers for years. The authorities say that Binance intentionally maintained loopholes that allowed American users to bypass identity checks. The SEC and CFTC declined to comment.

The company has acknowledged compliance missteps in the past, but said it is a reformed company committed to compliance.

A trader based in the U.S. said he was able to join Binance with the Palau residency card, even though the exchange said it doesn’t accept U.S. customers. The trader said he was under the impression Binance backed the program given Zhao’s Palau visit and references to Binance on the RNS website. Besides using the Palau identity, the trader said he used a VPN—a program masking a user’s location—to sign up on the platform.

The Journal also spoke with traders who used their acquired Palau IDs but were denied access to Binance.

The Binance spokesman said the exchange has controls in place to prevent people in banned countries from gaining access via a Palau ID card.

“Anyone caught circumventing these controls are violating our terms of use and are off-boarded," Binance said.

The spokesman said that Binance has around 2,000 users registered with a Palau identification, representing less than 0.002% of its total users. Since the Journal started inquiring about the IDs, users on Twitter said Binance stopped accepting the Palau IDs. Binance’s spokesman said, “We have taken the opportunity to manually review every single user in Palau to once again verify our system."

Palau’s total population is lower than 18,000, according to a 2020 census. The Palau program website says digital residencies aren’t pathways to Palau citizenship or passports, but digital residents may extend the length of their tourist visas by 180 days after their visa expires.

According to the government, Palau had 7,336 digital residents as of mid-June, the equivalent to more than a third of the country’s 2020 population. Revenue from the program was a bit over $1 million, it said.

For some types of services, including futures trading, some exchanges require a proof of address.

When a Twitter user asked RNS whether he could use a Palau ID card to sign up for Binance futures or whether Binance would “be onto it," RNS responded that it would be possible to sign up once the program started offering users Palau addresses and phone numbers. For now, RNS said, the ID can be used to create a simpler trading account. RNS deleted the tweet after the Journal asked about it.

Anson, the program’s director at Palau’s finance ministry, said the tweet from RNS “does not represent the views or position of the Palauan government." An address service envisioned under the program would support mailing service only, he added.

RNS said “users should accurately report where they live and always comply with regulations in their home countries."

The program’s technology runs on a blockchain network that Binance helped establish. RNS advertised on Twitter months ago that Zhao was a Palau digital resident. Zhao said on Monday that he didn’t have Palau residency after the Journal asked about it, and RNS deleted the tweet.

A Twitter account that tracks activity of key crypto players on the platform said Zhao unfollowed RNS on Twitter on Monday.

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