White Paper


KBUSD front

KBUSD back

KBUSD: 1 KBUSD is equal to 1 USD Fiat currencies

KBEUR: 1 KBEUR is equal to 1 EURO Fiat currencies

KBCHF: 1 KBCHF is equal to 1 Swiss Franc Fiat currencies

KBGBP: 1 KBGBP is equal to 1 British Pound Fiat currencies


The example of the fiat currency and the KB cryptocurrency in this white paper has taken as an example the US Dollar, but as multiple KB Tokens will be created against every currency that our clients are demanding.

Abstract: A digital token backed by fiat currency provides individuals and organizations with a robust and decentralized method of exchanging value while using a familiar accounting unit. The innovation of blockchains is an auditable and cryptographically secured global ledger. Asset-backed token issuers and other market participants can take advantage of blockchain technology, along with embedded consensus systems, to transact in familiar, less volatile currencies and assets. In order to maintain accountability and to ensure stability in exchange price, we propose a method to maintain a one to one reserve ratio between a cryptocurrency token, called KBUSD, KBCHF, KBGBP, KBEUR, etc…, and its associated real-world asset, fiat currency. This method uses a proprietary blockchain, Proof of Reserves, and other audit methods to prove that issued tokens are fully backed and reserved at all times.



Technology Stack and Processes

  • KB (fiat currency(ies)
  • The flow of Funds Process
  • Proof of Reserves Process
  • Implementation Weaknesses

Main Applications

  • For Exchanges
  • For Individuals
  • For Merchants

Future Innovations

  • Multi-sig and Smart Contracts
  • Proof of Solvency Innovations



  • Audit Flaws: Exchanges and Wallets
  • Limitations of Existing Fiat pegging Systems
  • Market Risk Examples
  • Legal and Compliance

Glossary of Terms



There exists a vast array of assets in the world which people freely choose as a store-of-value, a transactional medium, or an investment. We believe our proprietary blockchain is a better technology for transacting, storing, and accounting for these assets. Most estimates measure global wealth around 250 trillion dollars [1] with much of that being held by banks or similar financial institutions. The migration of these assets onto the KAPITALBANC blockchain represents a proportionally large opportunity.

KAPITALBANC Blockchain was created as “an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”[2]. KB fiat currency created a new class of digital currency, a decentralized digital currency or cryptocurrency1.

Some of the primary advantages of cryptocurrencies are low transaction costs, international borderless transferability and convertibility, trustless ownership and exchange, pseudo-anonymity, real-time, transparency, and immunity from legacy banking system problems [3]. Common explanations for the current limited mainstream use of cryptocurrencies include volatile price swings, inadequate mass-market understanding of the technology, and insufficient ease of use for non-technical users.

The idea for asset pegged cryptocurrencies was initially popularized in the Banking & Crypto community, we’re starting to see these ideas built with the likes of BitAssets, Ripple, Omni, Nxt, NuShares/Bits, and others. One should note that all Crypto exchanges and wallets (like Coinbase, Bitfinex, and Coinapult) which allow you to hold value as a fiat currency already provide a similar service in that users can avoid the volatility (or other traits) of a particular cryptocurrency by selling them for fiat currency, gold, or another asset. Further, almost all types of existing financial institutions, payment providers, etc, which allow you to hold fiat value (or other assets) subsequently provide a similar service. In this white paper, we focus on applications wherein the fiat value is stored and transmitted with software that is opensource, cryptographically secure, and uses distributed ledger technology, i.e. a true cryptocurrency.

While the goal of any successful cryptocurrency is to completely eliminate the requirement of trust, each of the aforementioned implementations either rely on a trusted third party or have other technical, market-based, or process-based drawbacks and limitations.

  1. For definitions throughout, see Glossary of Terms
  2. But has been discussed since Dr. Szabo’s proposed BitGold [5]
  3. Summarized in the Appendix, here: Limitations of Existing Fiat pegging Systems

In our solution, fiat pegged cryptocurrencies are called “KB (fiat currency symbol as ex. KBUSD”. All KB tokens will initially be issued on the propriety blockchain via the Omni Layer protocol and so they exist as a cryptocurrency token. Each KB Token nit issued into circulation is backed in a one to one ratio (i.e. one KBUSD = one USD) by the corresponding fiat currency unit held in deposit by Hong Kong and European based KAPITALBANC via KAPITALBANC as a custodian. KB Token may be redeemable/exchangeable for the underlying fiat currency pursuant to KAPITALBANC terms of service or, if the holder prefers, the equivalent spot value in another Cryptocurrency(ies). Once a KB Token has been issued, it can be transferred, stored, spent, etc. just like any other cryptocurrency. The fiat currency on reserve has gained the properties of a cryptocurrency and its price is permanently BC USD as an example or other Fiat Currency to the price of the fiat currency.

USD = one USD) by the corresponding fiat currency unit held in deposit by Hong Kong and European based KAPITALBANC via KAPITALBANC as a custodian. KB Token may be redeemable/exchangeable for the underlying fiat currency pursuant to KAPITALBANC terms of service or, if the holder prefers, the equivalent spot value in another Cryptocurrency(ies). Once a KB Token has been issued, it can be transferred, stored, spent, etc. just like any other cryptocurrency. The fiat currency on reserve has gained the properties of a cryptocurrency and its price is permanently BC USD as an example or other Fiat Currency to the price of the fiat currency.

Our implementation has the following advantages over other fiat pegged cryptocurrencies:

  • KB Token exist on a proprietary blockchain rather than a less developed/tested “altcoin” blockchain nor within closed source software running on centralized, private databases.
  • KB Token can be used just like all other Cryptocurrencies, i.e. in a p2p, pseudo-anonymous, decentralized, cryptographically secure environment.
  • KB Token can be integrated with merchants, exchanges, and wallets just as easily as Bitcoin or any other cryptocurrencies can be integrated.
  • KB Token inherits the properties of a proprietary Blockchain protocol which include: a decentralized exchange; browser-based, opensource, eWallet encryption; Banking based transparency, accountability, multiparty security, and reporting functions.
  • KB Token employs a simple but effective approach for conducting Proof of reserves which significantly reduces our counterparty risk as the custodian of the reserve assets.
  • KB Token issuance or redemption will not face any pricing or liquidity constraints. Users can buy or sell as many KB Token as they want, quickly, and with very low fees.
  • KB Token will not face any market risks such as Black Swan events, liquidity crunches, etc as reserves are maintained in a one to one ratio rather than relying on market forces.
  • KB Token one to one backing implementation is easier for non-technical users to understand as opposed to collateralization techniques or derivative strategies.

At any given time, the balance of fiat currency held in our reserves will be equal to (or greater than) the number of KB Tokens in circulation. This simple configuration most easily supports a reliable Proof of Reserves process; a process that is fundamental to maintaining the price parity between KB Token in circulation and the underlying fiat currency held in reserves. In this paper, we provide evidence that shows exchange and wallet audits (in their current state) are very unreliable (i.e. flaws in Proof of Solvency [6] methods) and instead propose that exchanges and wallets outsource the custody of user funds to us via KB Token. Users can purchase KB Token from www.kapitalbanc.com or www.kapitalbanc.net (our web wallet) or from supported exchanges who support KB Token as a deposit and withdrawal method. Users can also transact and store KB Token with any Omni Layer enabled wallets, Other exchanges, wallets, and merchants are encouraged to reach out to us about integrating KB Token as a surrogate for traditional fiat payment methods.

We recognize that our implementation is perfectly centralized since KB Token must act via KAPITAL BANC as a centralized custodian of reserve assets (albeit KB Token(s) in circulation exist as a centralized digital currency).

However, we believe this implementation sets the foundation for building future innovations that will eliminate all weaknesses, create a robust platform for new products and services, and support the growth and utility of the Kapital Banc blockchain over the long run. Some of these innovations include:

  • Mobile payment facilitation between users and other parties, including other users and merchants
  • Instant or near-instant fiat value transfer between decentralized parties (such as multiple exchanges)
  • Introduction to the use of smart contracts and multi-signature capabilities to further improve the general security process, Proof of Reserves, and enable new features.


Each KB Token issued into circulation will be backed in a one to one ratio with the equivalent amount of corresponding fiat currency held in reserves by Hong Kong and European based Kapital Banc and via Kapital Banc Group Account holder. Kapital Banc being the custodian of the backing asset, we are acting as a trusted third party responsible for that asset. This risk is mitigated by a simple implementation that collectively reduces the complexity of conducting both fiat and crypto audits while increasing the security, provability, and transparency of these audits.

Technology Stack

The stack has 3 layers, and numerous features,

Here is a review of each layer.

  1. The first layer is the KB blockchain. The KB Token(s) transactional ledger is embedded in the KB Token(s) blockchain as metadata via the embedded consensus system, Omni.
  2. The second layer is the Omni Layer protocol. Omni is a foundational technology that can:
  3. Grant (create) and revoke (destroy) digital tokens represented as metadata

embedded in the KB blockchain; in this case, fiat pegged digital tokens, KB Token(s).

  1. Track and report the circulation of KB Token via Omnichest.info (Omni asset ID #31, for example, represents KB Token) and Omnicore API.
  2. Enable users to transact and store KB Token and other assets/tokens in a:
  3. p2p, pseudo-anonymous, cryptographically secure environment.
  4. opensource, browser-based, encrypted web-wallet: Omni Wallet.
  5. Multi-signature and offline cold storage-supporting system
  6. The third layer is Kapital Banc, our business entity primarily responsible for:
  7. Accepting fiat deposits and issuing the corresponding KB Token.
  8. Sending fiat withdrawals and revoking the corresponding BC Token.
  9. Custody via Kapital Banc custodian of the fiat reserves that back all KB Token(s) in circulation
  10. Publicly reporting Proof of Reserves and other audit results
  11. Initiating and managing integrations with existing blockchain wallets, exchanges, and merchants
  12. Operating KB Token. to, a web-wallet that allows users to send, receive, store, and convert KB Token conveniently.

The flow of Funds Process

There are five steps in the lifecycle of a KB Token.

Step 1 – User deposits fiat currency into Kapital Banc’s bank account located in USA, EEA, Australia, NZ, Hong Kong, Singapore, Malaysia, Switzerland, Panama, Morocco.

Step 2 – Kapital Banc generates and credits the user’s BC Token(s) account. KB Token(s) enter circulation. Amount of fiat currency deposited by user = amount of KB Tokens issued to the user (i.e. 10k USD deposited = 10k KB USD issued).

Step 3 – Users transact with KBUSD. The user can transfer, exchange, and store BCUSD via a p2p opensource, pseudo-anonymous, Kapital Bank-based platform.

Step 4 – The user deposits KB Token(s) with KAPITAL BANC for redemption into fiat currency.

Step 5 – Kapital Banc destroys the KB Token(s) and sends fiat currency to the user’s bank account.

Users can obtain KB Tokens outside of the aforementioned process via an exchange or another individual. Once a KB Token(s) enters circulation it can be traded freely between any business or individual. For example, users can purchase KB Token(s) from a blockchain exchange.

The main concept to be conveyed by the Flow of Funds diagram is that Kapital Banc is the only party who can issue KB Token(s) into circulation (create them) or take them out of circulation (destroy them). This is the main process by which the system solvency is maintained.

Proof of Reserves Process

Proof of Solvency, Proof of Reserves, RealTime Transparency, and other similar phrases have been growing and resonating across the cryptocurrency industry.

Exchange and wallet audits, in their current form, are very unreliable. Insolvency has occurred numerous times in the crypto ecosystem, either via hacks, mismanagement, or outright fraud. Users must be diligent with their exchange selection and vigilant in their use of exchanges. Even then, a savvy user will not be able to fully eliminate the risks. Further, there are exchange users like traders and businesses who must keep nontrivial fiat balances in exchanges at all times. In financial language, this is known as the “counterparty risk” of storing the value with a third party.

We believe it’s safe to conclude that exchange and wallet audits in their current form are not very reliable.

These processes do not guarantee users that a custodian or exchange is solvent. Although there have been great contributions to improving the exchange audit processes, like the Merkle tree approach, major flaws still remain.

KB Tokens Proof of Reserves configuration is novel because it simplifies the process of proving that the total number of KB Tokens in circulation (liabilities) are always fully backed by an equal amount of fiat currency held in reserve (assets). In our configuration, each KB Token in circulation represents one fiat currency equivalent held in our reserves (i.e. a one to one ratio) which means the system is fully reserved when the sum of all KB Token(s) in existence (at any point in time) is exactly equal to the balance of fiat currency held in our reserve. Since KB Token(s) live on the KapitalBanc blockchain, the provability and accounting of KB Token(s) at any given point in time is trivial.

Conversely, the corresponding total amount of fiat currency held in our reserves is proved by publishing the bank balance provided by KAPITAL BANC and undergoing periodic audits by professionals. Find this implementation further detailed below:

  • Kapital Banc issues all KB Tokens via the Omni Layer protocol. Omni operates on top of the KAPITALBANC blockchain and therefore all issued, redeemed, and existing KB Tokens, including transactional history, are publicly auditable via the tools provided at Omnichest.info.
  • The Omnichest.info asset ID for KB Token(s) is #31.
  • Let the total number of KBUSD Tokens issued under this asset ID be denoted as KBUSD issue
  • Let the total number of tethers redeemed under this asset ID be denoted as KBUSD redeem
  • Let the total number of KBUSD in circulation at any time be denoted as KBUSD
  • KBUSD = KBUSD issue KBUSD redeem
  • KBUSD = “Total Property Tokens” @ https://kapitalbanc.com/crytocustodianaccount
  • KAPITAL BANC has a custodian bank account with KAPITALBANC which will receive and send fiat currency to users who purchase/redeem KBUSD directly with us.
    • Let the total amount deposited into this account be denoted as KBUSD depo
    • Let the total amount withdrawn from this account be denoted as KBUSD with
    • Let the USD balance of this bank account be denoted as KB USD
      • USD/KB = USD/KB depo USD/KB USD withy7
  • Each KBUSD issued will be backed by the equivalent amount of currency unit (one KBUSD equals one USD). By combining the above crypto and fiat accounting processes, we conclude the “Solvency Equation” for the KBUSD
    • The Solvency Equation is simply KB/USD/ = KBUSD
    • Every KBUSD issued or redeemed, as publicly recorded by the KAPITAL BANC blockchain will correspond to a deposit or withdrawal of funds from the custodian's bank account.
    • The provability of KBUSD relies on the KAPITALBANC blockchain as discussed previously.
    • The provability of KBUSD will rely on several processes:
      • We publish the bank account balance on our website’s Transparency page.
      • Professional auditors will regularly verify, sign, and publish our underlying bank balance and financial transfer statement

Users will be able to view this information from our Transparency Page, which will look like:


For clarity, we’d like to acknowledge that the KBUSD System is different than the KBUSD to web-wallet in terms of Proof of Reserves. In this paper, we mostly focus on Proof of Reserves for the KBUSD System; i.e. all KBUSD in circulation at any point in time. The KBUSD to the wallet is a consumer-facing web-wallet operating on closed-source code and centralized servers. Conducting a Proof of Reserves for this wallet is fundamentally different than what we’ve outlined for the KBUSD System.

We’re planning the deployment of a PoR-based transparency solution for the KB Token(s) to the wallet. We believe it will be the most advanced PoR system in existence today. It overcomes almost all of the challenges outlined in the appendix11 on this topic. Mind you, users can always secure KB Tokens through managing the private keys themselves or through Omni Wallet.

Implementation Weaknesses

We understand that our implementation doesn’t immediately create a fully trustless cryptocurrency system.

Mainly because users must trust KAPITAL BANC and our corresponding legacy banking institution to be the custodian of the reserve assets, even if it is held within a custodian account at the European Central Bank. However, almost all exchanges and wallets (assuming they hold USD/fiats) are subject to the same weaknesses. Users of these services are already subject to these risks.

Here is a summary of the weaknesses in our approach:

  • We could go bankrupt
  • Our bank could go insolvent
  • We could abscond with the reserve funds
  • Re-centralized of risk to a single point of failure

Here is a summary of the positives of our approach:

  • Our bank couldn’t freeze or confiscate the funds as we are owned by KAPITAL BANC
  • We are financially stable
  • We are acting and doing business being regulated by a double Crypto License from Estonia, as also being part and owned by a BANK
  • When all Cryptocurrencies will be regulated, ours will have a head start as we always complied.
  • We have a Cryptocurrency that is seating against the Fiat Currencies, so it is stable.
  • We only issue Cryptocurrency, when we have the equivalent fiat currency against it.

Observe that almost all digital currency exchanges and wallets (assuming they hold USD/fiat) already face many of these challenges. Therefore, users of these services are already subject to these risks. Below we describe how each of these concerns is being addressed.

We could go bankrupt – In this case, the business entity KAPITAL BANC would go bankrupt, but client funds would be safe, and subsequently, all KB Tokens will remain redeemable, as the fiat currencies are seating on a custodian account at the European Central Bank or other major banks.

Most security breaches on businesses have targeted cryptocurrencies rather than bank accounts. Since all KB Tokens exist on the KAPITAL BANC blockchain they can be stored by individuals directly through securing their own private keys.

Our bank could go insolvent – This is a risk faced by all users of the legacy financial system and by all exchange operators. KB TOKENS currently has accounts with KAPITAL BANC, Deutsche Bank, Santander, Sabadell Bank, Caixa Bank, Barclays and many others worldwide in multiple fiat currencies, who are aware and confident that KB Tokens business model is acceptable. Additional banking partners are being established in other jurisdictions to further mitigate this concern.

Our bank couldn’t freeze or confiscate the funds as we are owned by KAPITAL BANC- Our banks are aware of the nature of KB Tokens and are accepting of KB Tokens businesses. They also provide banking services to some of the largest crypto exchanges globally. The KYC/AML processes we follow are also used by the other digital currency exchanges they currently bank. They have assured us we are in full compliance.

We could abscond with the reserve assets – The corporate charter is public as well as the business owner’s names, locations, and reputations. Ownership of the account is legally bound to the corporate charter. Any transfers in or out of the bank account will have the associated traces and are bound by rigid internal policies.

Re-centralization of risk to a single point of failure – We have some ideas on how to overcome this and we’ll be sharing them in an upcoming blog and product updates. There are many ways to tackle this problem. For now, this initial implementation gets us on the right track to realize these innovations in the following versions.

By leveraging the platforms, we have chosen, we have reduced the centralization risk to one singular responsibility: the creation and redemption of tokens. All other aspects of the system are decentralized.


In this section, we’ll summarize and discuss the main applications of KB Tokens across the KAPITALLLANC blockchain ecosystem and for other consumers globally. We break up the beneficiaries into three user groups:

Exchanges, Individuals, and Merchants.

The main benefits, applicable to all groups:

  • Properties of KB bestowed upon other asset classes
  • Less volatile, familiar unit of account
  • World’s assets migrate to the KAPITALLLBANC blockchain

For Exchanges

Exchange operators understand that accepting fiat deposits and withdrawals using legacy financial systems can be complicated, risky, slow, and expensive. Some of these issues include:

  • Identifying the right payment providers for your exchange
    • irreversible transactions, fraud protection, lowest fees, etc.
  • Integrating the platform with banks that have no APIs
  • Liaising with these banks to coordinate compliance, security, and to build trust
  • Prohibitive costs for small value transfers
  • 3-7 days for international wire transfers to clear
  • Poor and unfavorable currency conversion fees

By offering KB Tokens, an exchange can relieve themselves of the above complications and gain additional benefits, such as:

  • Accept crypto-fiats as deposit/withdrawal/storage method rather than using a legacy bank or payment provider
    • Allows users to move fiat in and out of exchange more freely, quickly, cheaply
  • Outsource fiat custodial risk to Dragon Heritage – just manage cryptos
  • Easily add other KB Tokens Cryptocurrencies and fiat currencies as trading pairs to the platform
  • Secure customer assets purely through accepted crypto-processes
    • Multi-signature security, cold and hot wallets, HD wallets, etc.
    • Conduct audits easier and more securely in a purely crypto environment
  • Anything one can do with KB as an exchange can be done with KB Tokens.

Exchange users know how risky it can be to hold fiat currencies on an exchange. With the growing number of insolvency events, it can be quite dangerous. As mentioned previously, we believe that using KB Tokens exposes exchange users to less counterparty risk than continually holding fiat on exchanges. Additionally, there are other benefits to holding KB Tokens, explained in the next section.

For Individuals

There are many types of individual KB Token users in the world today. From traders looking to earn profits daily; too long term investors looking to store their KB Tokens securely; to tech-savvy shoppers looking to avoid credit card fees or maintain their privacy; to philosophical users looking to change the world; to those looking to remit payments globally more effectively; to those in third world countries looking for access to financial services for the first time; to developers looking to create new technologies; to all those who have found many uses for WAVES. For each of these individuals, we believe KB Tokens are useful in similar ways, like:

  • Transact in USD/fiat value, pseudo-anonymously, without any middlemen/intermediaries
  • Cold store USD/fiat value by securing one’s own private keys
  • Avoid the risk of storing fiat on exchanges move crypto-fiat in and out of exchanges easily
  • Avoid having to open a fiat bank account to store fiat value
  • Easily enhance applications that work with KAPITAL BANC Blockchain to also support KB Token(s).
  • Anything one can do with KAPITAL BANC Blockchain as an individual one can also do with KB Token(s).

For Merchants

Merchants want to focus on their business, not on payments. The lack of global, inexpensive, ubiquitous payment solutions continues to plague merchants around the world both large and small. Merchants deserve more. Here are some of the ways KB Token(s) can help them:

  • Price goods in fiat currencies value rather than KB Tokens (no moving conversion rates/purchase windows)
  • Avoid conversion from KB Tokens to Fiat Currencies and associated fees and processes
  • Prevent chargebacks, reduce fees, and gain greater privacy
  • Provide novel services because of fiat-crypto features
    • Microchipping, gift cards, more
  • Anything one can do with Cryptocurrency as a merchant one can also do with KB Tokens.

Future Innovations

Multi-sig and Smart Contracts

Proof of Solvency Innovations


KN Tokens constitutes the first Banking Crypto-based fiat-pegged cryptocurrencies in existence today. KB Tokens is based on the KAPITALBANC blockchain, the most secure and well-tested blockchain and public ledger in existence. KB Tokens are fully reserved in a one to one ratio, completely independent of market forces, pricing, or liquidity constraints. KB Tokens has a simple and reliable Proof of Reserves implementation and undergoes regular professional audits. Our underlying banking relationships with our owner KAPITALBANC, compliance, and legal structure provide a secure foundation for us to have KAPITALBANC be the custodian of reserve assets and KAPITALBANC being the issuer of KB Tokens. Our team is composed of experienced and respected entrepreneurs from the KB Token technology ecosystem and beyond.

We are focused on arranging integrations with existing businesses in the cryptocurrency space. Businesses like exchanges, wallets, merchants, and others. We’re already integrated with Bitfinex, HolyTransaction, Omni Wallet, Poloniex, CCEX, and more to come. Please reach out to us to find out more.


Audit Flaws: Exchanges and eWallets

Here is a summary of the current flaws found in technology-based exchange and wallet audits.

In the Merkle tree approach, users must manually report that their balances (user’s leaf) have been correctly incorporated in the liability declaration of the exchange (the Merkle hash of the exchange’s database of user balances). This proposed solution works if enough users verify that their account was included in the tree, and in a case where their account is not included this instance would be reported. One potential risk is that an exchange database owner could produce a hash that is not the true representation of the database at all; it hashes an incomplete database which would reduce its apparent liabilities to customers, making them appear solvent to a verifying party. Here are some scenarios where a fraudulent exchange would exclude accounts and:

  • “Bitdust” Accounts: Inactive or low activity accounts would lower the chance that an uninterested user would check or report inconsistencies. In some cases, these longtail accounts could represent a significant percentage of the exchange’s liabilities.
  • “Colluding Whales” Attack: There is evidence that large Crypto traders are operating on various exchanges and moving markets significantly. Such traders need to have capital reserves at the largest exchanges to quickly execute orders. Often, traders choose exchanges that they “trust”. In this way they can be assured that should a hack or liquidity issue arise, they have priority to get their money out. In this case, the exchange and trader could collude to remove the whale’s account balance from the database before it’s hashed.
  • Key Rental Attack: To pass the audit, a malicious exchange could rent the private keys to KB Wallet they do not own. This would make them appear solvent by increasing their assets without any acknowledgment that those funds were loaned to them. Likewise, they could “borrow” fiat currency to do the same.
  • There are more attacks not discussed here.

Reaching Statistical Significance (reporting completeness): Even outside of these three attack vectors, a database that has been manipulated may never be detected if a sufficient number of users are not validating balances. The probability of getting 100% of the users to verify balances is likely zero, even with a proper incentivization structure for users to verify their balances. Therefore, auditors would need statistical tools to make statements about the validity of an exchange’s database based on the sampling frequency, size, and other properties.

Currently, users have no way to receive compensation by legal means in case something goes wrong with the exchange. For example, when Mt.Gox closed operations, many users might not have independently recorded their account balances (prints screens, signed messages to themselves, etc.) in a way that could conclusively prove to law enforcement that this exchange’s I.O.Us actually existed. Such users are at the mercy of the exchange to somehow publish a record of that hash tree or original database.

The proposed structure in which these audits would be performed still contains some subtle but important flaws. In particular, the data reporting (hash tree) on the institution’s website gives no guarantee at all to users, as a malicious exchange could publish different states/balances to different groups of users, or retroactively change the state. Thus, it is fundamental to publish this data through a secure broadcast channel, e.g. the KB blockchain.

Privacy is a barrier to entry for the adoption of an automated/open auditing system. While some progress has been made towards better privacy there is no perfect solution yet. Further, to build up an accurate user verified liability space, these users will have to report account balances with the exchange and KB addresses. Some users likely would not report this information regardless of the incentive, therefore providing cryptographically secure privacy whilst obtaining the reporting goal is paramount.

Time Series: the Merkle tree hash is a single snapshot of the database at a single point in time. Not having a somewhat continuous time series of the database opens significant attack vectors. Additionally, a time series of user-reported information would also be required for piecing together the history of any reported incidents of fraud.

Trusted Third Parties: All of the current exchange audits have relied on some “reputable” trusted third party to make some type of verification. In the Coinbase audit [7], that was Andreas Antonopoulos, in the Kraken audit, that was Stefan Thomas. If we absolutely must rely on a trusted third party, then some audit standards and procedures should ensure these weaknesses are fortified.

Limitations of Existing Fiat-pegging Systems

Here’s a list of some of the common drawbacks and limitations of existing fiat-pegging


  • The systems are based on closed-source software, running on private, centralized databases, fundamentally no different than Paypal or any other existing mass-market retail/institutional asset trading/transfer/storage system.
  • Decentralized systems that rely on altcoin blockchains that haven’t been stress-tested, developed, or reviewed as closely as other blockchains, like KB.
  • Pegging processes that rely on hedging derivative meta-assets, efficient market theory, or collateralization of the underlying asset, wherein liquidity, transferability, security, and other issues can exist.
  • Lack of transparency and audits for the custodian, either crypto, fiat, or relating to their own internal ledgers (same as closed source and centralized databases).
  • Reliance on legacy banking systems and trusted third parties (bank account owners) as a transfer and settlement mechanism for reserve assets.

Market Risk Examples

In the collateralization method, the market risk exists because the price of the asset being used as collateral can move in an adverse direction to the price of the asset its backing/pegging. This would cause the total value of the collateral to become less than the total value of the issued asset and make the system insolvent. This risk is mitigated by the custodian closing the position before this happens; that is, when the collateral price equals the pegged asset price then the collateral is liquidated (sold on the open market) and the position is closed. A great approach, with merit, and used in many liquid markets across the traditional banking and financial markets. However, as we saw from the global financial crisis, situations can arise in which the acceleration of such events causes a “liquidity crunch” and thus the collateral is unable to be liquidated fast enough to meet trading obligations, subsequently creating losses. With the cryptocurrency markets being so small and volatile, this type of event is much more likely. Additionally, the overall approach suffers from other liquidity and pricing constraints since there must be a sufficient supply of users posting collateral for the creation of the pegged-assets to exist in the first place.

In the derivatives approach, the price of the asset is pegged through entering one of several derivatives strategies, such as swap strategies, covered and naked options strategies, various futures and forwards strategies. Each strategy has its own strengths and weaknesses, the discussion of which we won’t engage in here. To summarize, each of these pegging processes themselves have similar “market risk” characteristics as the aforementioned collateralization method. It should be noted that the two methods are not mutually exclusive and often paired in a specific trading, hedging, or risk management function at legacy system financial institutions.

Finally, understand that we believe some combination of the above approaches may become a secure, reliable, and generally risk-free process for backing/pegging assets; however, at this point in time, this is not a direction we feel is feasible to take to ensure liquidity and price stability. Further, we believe that a reserve-based approach will always be in existence and complement these other approaches as the entire industry grows. As advances in technology continue, we will evaluate and incorporate any benefits available while maintaining the guarantee of 100% redeemability.

Legal and Compliance

Kapital Banc (“KB Token(s)”) is a Trust incorporated pursuant to the District of Columbia, USA Companies Ordinance. It is wholly owned by KAPITAL BANC.

KAPITAL BANC will be fully registered as a Financial and Money Services Business with the Financial Authorities and the Crimes Enforcement Network in multiple countries.

KB Token(s) is establishing a relationship with the financial institution for purposes of better servicing KB Token(s) globally.

KB Token(s) is/are concluding a principal–agency agreement with KAPITAL BANC Pursuant to the agreement, Dragon Heritage will provide anti-money laundering compliance work and customer due to diligence procedures as agent for KB Token(s) as principal.

Through these and other measures, KB Token(s) is undertaking customer due diligence, recordkeeping, and reporting procedures consistent with anti-money laundering law and with the US and other countries, Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance.

KB Token(s) currently has accounts with KAPITAL BANC and Deutsch Bank and Barclays, whom are aware and confident that KB Token(s) business model is acceptable.

These banks are satisfied with our processes and also satisfied that our business operates in accordance within the law and banking regulations, as all of the banks had been requested to check this with their own legal, compliance and head office before opening accounts (also at our own request). It was our goal from the beginning to have a compliant operation and to provide the maximum level of comfort to our banking partners here. In addition, these banks have and are working with other KB based businesses.

Glossary of Terms

Digital currency: As defined by http://en.wikipedia.org/wiki/Digital_currency

Cryptocurrency or decentralized digital currency: any type of cryptocurrency that is opensource, cryptographically secure, and uses a distributed ledger. See: http://en.wikipedia.org/wiki/Cryptocurrency

Real-world currency, or fiat currency, or national/sovereign currency: all types of currency that are not cryptocurrencies as defined above.

Cryptocurrency system: A collection of software and processes primarily created to enable the existence of a cryptocurrency.

Legacy financial system: any financial system that is not a cryptocurrency system.

Utility-backed digital tokens, a.k.a Dapps: A decentralized digital token whose value is derived from the use of its application rather than just being a value transfer system.

Asset-backed/pegged cryptocurrency: Any cryptocurrency whose price is pegged to a real-world asset, i.e. it's not a “utility-backed” cryptocurrency.

KB Token: a single unit (or multiple units) of fiat-pegged cryptocurrency issued by KAPITAL BANC.

Example: KBUSD = USD

KBUSD: a single unit of crypto-USD issued by KAPITAL BANC.

KBUSD : the collective amount of KBUSD in circulation at any point in time.

KB Token System: collectively refers to all processes and technologies that enable KB Token to exist.

Proof of Reserves: The process by which the issuer of any asset-backed decentralized digital token, cryptographically/mathematically proves that all tokens that have been issued are fully reserved and backed by the underlying asset.


  • https://www.thefinancialist.com/wpcontent/uploads/2012/10/2012GlobalWealthReport.pdf
  • https://wavesplatform.com
  • http://www.deloitte.com/assets/DcomUnitedStates/Local%20Assets/Documents/FSI/us_fsi_itcointheNewGoldRush_031814.pdf
  • https://github.com/mastercoinMSC/spec
  • http://unenumerated.blogspot.com/2005/12/bitgold.html
  • https://iwilcox.me.uk/2014/provingbitcoinreserves
  • http://antonopoulos.com/2014/02/25/coinbasereview/
  • http://www.coindesk.com/krakensauditprovesholds100bitcoinsreserve/