How Regulations Can Impact Different Use Cases in the DeFi Industry

Transcript

hello everyone so the fifth participant in this discussion will join us in real time and I'm happy to see you here and see so many people that are interested in what's going to happen with defy after regulation comes or what's gonna happen with regulation with Define the picture and I'm really happy to have this amazing panel here and my name is Viara and I'm part of the European crypto initiative we are an advocacy group based in Brussels working quite a lot on Crypt regulation on EU level including D5 unfortunately or not and I'd like to ask my panelists to

introduce themselves briefly and then we can start with the real discussion hello everyone I'm a senior legal counselor in Switzerland at a law firm I'm also co-chairing the AML compliance group working group of the crypto Valley Association a lot of things to say about DFI and AML I used to practice in Belgium so everything that's EU regulations and Mika are of a big interest to me not only because of the consequences on Switzerland and I advise mostly D5 projects so like even higher interest in the topics today hello everyone thank you for the invite I'm Mark there I'm the founder of the average Chinese yative we are the Main

Ave Tao delegates and relevant for the discussion today and the aid of the D5 Committee of atan the main uh crypto ecosystem Lobby in France and I guess my discussion today is to explain why the future in France may happen in France hi everyone my name is Mona um I have been in D5 for nearly seven years the founded um what was known as melon today is known as enzyme it's the first decentralized Asset Management protocol we also were the first to decentralize the D5 protocol in February 2019 and uh today I run a development company called avant-garde which provides development

services to the Dow relevant to this discussion I'm also involved with a multi-chain asset management association which has tried hard to shape defy regulation in Switzerland or at least be a representative to that voice give it a voice thank you all and your our fifth member will join us shortly hopefully he'll then introduce himself and so we are um we already mentioned the existing regulations AML Mika and Miko it's actually it's a special day for the marketing crypto assets regulation because today it was published in the official Journal of the European Union meaning that it will

become applicable in in either 12 or 18 months depending on which part we're talking about so with this intro I would like to ask you to basically share with us what do you think about the current regulatory landscape and how does it affect defy um in your opinion and particularly let's say let's focus more on Mika and especially because the part of maker that mentions okay Defy is excluded from the scope but also doesn't mention what is the defy exactly so if you can share your thoughts on that it would be very

interesting well maybe the lawyer will jump on it with that question um I mean I gave a talk about Mika and Tifa yesterday so I will not go in depth on that but uh if I summarize it as in the dimension D5 but a very particular type of D5 fully decentralized for the fully descent or victim mediated and no one really knows what it means because in practice and as it was pointed out by a report pointing out what is so like the remaining pain points after Mika it's clearly explained that we have a spectrum and everything that's on the Spectrum that's not fully decentralized and fully disintamentiated will have no answers for now and if we cherry pick the various Provisions from Mika and

check whether this is compatible with how D5 operates nowadays well some things don't make sense or at least are not compatible with the spirit of of D5 so I would say currently the framework is basically there is one we don't know whether it applies or to what extent we are trying to figure out what exactly Define is and what kind of definitions we should rely on to say this is defy and it's regulated as such this is C5 and is regulated as such can we keep the spectrum is unclear because obviously there's a lot of understanding and education um to be achieved for the authorities because the different protocols how they are intertwined how their structures is not an easy thing to understand in terms of risk as well like all the possible

exploits that's quite complex um so we are on in a gray Zone currently for D5 and some things will I mean for token issuances Mica is great and like there are exceptions that are perfect reasonable that could be used by defy in terms of authorization and registering as an asset crypto asset provider this may be way trick here so I'm quite looking forward to Future developments I would say I would like to add I completely agree with what has been said and I would like to add that Mika is actually a great start because when you give a framework even if it's not perfect if even if it doesn't cover everything you are giving

a framework and grounds where the ecosystem can start to grow and the direct effect of that when you are looking at the the main regulation that I burned from a French perspective we got the Ico AMF Visa very early in the ecosystem in 2017. hello we got the pack low that gave like some fiscal framework for the ecosystem we got the sunlo which was the basis for Mika and I defined what is a crypto asset service provider and the consequence of that is that Finance is in France circuit is in France and the ecosystem is coming to France and coming to Europe because there's a huge

opportunity happening because the USD like to basically kill themselves out of the industry which is okay for them and good for us I guess so obviously it's not perfect obviously it doesn't cover D5 but it's a good start and that's what I wanted to share yeah Mona if you can also share and some context for our newly arrived speaker so you can start by presenting the like sharing more about yourself and then the question is basically what do you think about the current regulation and we're focusing more on Mikko but you're definitely not obliged to do that hello hello everyone sorry for being

late hope something wasn't changed on defy on my flight came right from the airport my name is lior I'm a lawyer in the space I'm an OG started in crypto in 2010 basically wrote one of the first studies globally about theories of money then I was leading in for working in a lot of Enterprises in various directions I saw how D5 is developing like other Concepts in the field um and uh first of all I'm privileged to be here and privileged to to take part

in this phenomenon in this conference um now I'm the legal officer Council of state capital Group which includes a stake down in it which is a layer 2 of a curve LSD and um what I think about the different regulation I think it's a it's an evolution you know it's part I've seen it developing I see the progress in the in Europe I see the situation in in the U.S that I'm not sure it's blurry but this is the way to like you said is there a way to to do this um but I do see the Innovation growing and growing and growing and the

regulator is always is behind and the the distance is becoming greater and greater which is a problem but we can solve it from many directions and I would love to speak about it later thank you um and yeah for the introduction and for the answer and so my next question would be a bit more tricky and okay let's say that we need to regulate defy so what would be the challenges with doing that and basically can we reuse some of the pre-existing laws for example that regulate traditional Finance because you know you've heard of the same rules same

same risk same rules approach of regulators so what do you think about that what's what's your opinion yeah I can kick off on this because I feel pretty strongly about it um you know I'm when I look at this I look at it from Asset Management point of view which is probably one of the most heavy regulated spaces in traditional Finance and I have spent more hours than I care to admit to reading through uh Collective investment scheme law in lots of different jurisdictions it makes for really um like yeah bad time spent to be honest but it teaches you a lot and what it teaches you is that these laws are are

really not purpose built for D5 just to give like a really simple example when you look at setting up a fund pretty much anywhere in most places in the world this cons this is considered a collective investment scheme when you have more than two investors and automatically that means any product you build that has more than two investors falls under that law and by law in most countries you're required to have Financial intermediaries by law such as a custodian such as a fund administrator an independent auditor Etc now I think hopefully everybody in this room and certainly on this panel understands that blockchain technology was designed to

actually remove financial intermediaries and can automate their job potentially I would even argue in a much more accurate and real-time way so to go back to yara's question I absolutely don't think existing laws today are fit for purpose and when I kind of look at the way the SEC is is moving that's exactly what they're trying to do fitting kind of blockchain law uh sorry existing law onto blockchain which actually ignores all the Innovative parts of blockchain and so if we really want to embrace the Innovation and the benefits

that this technology brings I think we should take a step back and look at what are the what are the goals that a regulator is trying to achieve when they write law you know I think generally speaking like a kind of simplify a lot it's generally speaking to protect investors and if you're trying to protect investors there are different considerations that you have to bear in mind and just to give a few examples you know these are very high level examples you want to make sure that the code base is secure you want to make sure that um they understand the risks you want to make sure that they understand the pros and cons but you certainly don't want to

force unnecessary friction cost and time and lack of transparency just because that's what the law says in the past it was built for a paper-based system not for a technology enabled platform I completely agree with that and I think that's why Europe like took the right step like uh with Mika they they took a step back and say okay we do not have the capability or the current understanding to understand what D5 is well how do we Define defy so we're going to push something for the crypto asset service provider and we're gonna wait and ask Christine like I'll say we're gonna do a Mika 2 or Mika 3 for this kind of actors and I think that was

the right approach and why Europe is winning right now where the US is losing basically uh on the ecosystem and in terms of intermediary I will more talk about interaction and to me it's important to push the The Narrative and the understanding with the regulator that there's several layers of interaction with defy you for example you can interact directly with the smart contract of Avi and some people are able to do that but it's a bit less user-friendly to do that or you can can go to ave.com we and the protocol is completely controlled by the Dao and it's completely decentralized but you can also go to app.tive.com which is

operated by the other companies and that's an application it's a different way to interact with the protocol or you can go to Instagram or you can deposit in curve and you will end up with Avi as well but it's not the same thing so it should be treated differently or you can just add some usdc go to bians earn or go to Ledger live and deposit that and maybe part of that those asset will end up in Ave and it's a different interaction and right now we have clear regulation if you deposit usdc on binance that's a crypto asset service provider we have Nika so that's covered no I think the next steps will be to Define what is an application what are the rules regarding application and what

is a protocol and what are the rules regarding those protocols and it's very important that those rules are different because it's different kind of factors different kind of audience different kind of risk and obviously regulation should be different for all these actors and as part of Adan we are understanding and trying to push the message that regulation cannot have the same weight on a crypto serious provider than on a totally decentralized protocol so you have to balance regulation if you want the ecosystem to work maybe building on what you both said because this is exactly the case we have to balance this those traditional regulations that build on the role of an

intermediary that's quite straightforward that has control you know exactly what they are doing what they are in charge of versus all these interactions where it becomes less clear who has the multistick who is just the app who is promoting the service so all of this is all the contrary of what we can see in the traditional sector and there's not enough transparency currently who has a Clear Vision when they end up under the app of which entity does what what is that they are handling who has the multistig how is this structured usually this kind of information is not disclosed or you need to really dig further to figure it out so in terms of regulations it's it also makes sense to bring more clarity on that for users because this is how they

will be protected they will understand okay this is not controlled by anyone this is controlled by this entity so I can go against that entity if something happens but only if this happened a if something else happens because it was fully automated and there's no Clarity on that so people just keep targeting whoever whatever name whatever entity they they find in DFI just because they want to have a point of contact where something happens each time there was a hack when there were all the failures like the defects and so on when something happens you want to be able to reach out and in D5 even if it's not part of the spirit of it like oh it's decentralized there's a Dao so we are all responsible for that well human nature is such that you still want to address someone and maybe this is what

is missing currently and regulation could help with that by either providing Clarity or I'm not sure it's a good idea like forcing them to have a point of contact but how do you do that with dowels this will be a huge debate maybe to add one small Point all the things are true and right but there is a gap of knowledge between the industry and the regulators and the Gap is wide um this industry the knowledge in this in this industry is managed on Twitter and Discord and then it erased and then you know this is not how the regulator could learn and could develop

regulations so regulation is coming from somewhere better not from court because also Court needs some a some knowledge and some a profound knowledge um and unfortunately I don't see I don't see how this Gap is getting close so I just the French regulator was publishing the the paper about defy and when I read this paper I see a great gap of knowledge and as there's a person at work in the industry it's a consultation they ask you questions but I cannot cooperate I cannot cooperate I cannot discuss with them because the questions

are not first of all professional to my opinion second they are looking for someone to to give them something which I would not be the one to give it and so so to create the regulation there should be I think nowadays a different process and the industry should push the regulation as to you should push then push the knowledge and not only on Twitter so yeah I wanted to actually give you the world a word about uh I'm assuming that you are talking about the acpr a consultancy uh consultation paper so Mark if you can provide us with some context so that the audience also knows what we're talking about just a brief

overview so uh well uh the acpr and the AMF uh are like the regulatory part of the the French state that um handle like a financial asset in general and basically France as the legal let's start in the industry with all these previous law and you know Europe rock usually you have like one state nation that pushed some regulation and it acts as a template for the European regulation so basically this consultation are the basic at least in my opinion are the base work to produce reports that will uh like suggest regulation in France but also at

the European level and it's probably what we Christine lagatco nikatu uh probably not going to be the name but uh yeah it's a it's a funny nickname and well to be honest in my opinions I agree that the report is not perfect but we don't expect from a regulator I had to be perfect if we don't expect them to deploy the red carpet it's not going to happen but the thing is that if you don't reply if you don't interact with Regulators somebody else will talk on your behalf and I think it's important to recognize who are those other guys and what are the the motivation for them and what they want to push and what is their vision for the crypto ecosystem so

I agree it's not perfect but I think we should organize as an ecosystem to reply educate and push that dialogue in the direction that is more beneficial for ecosystem actor that should be believe in the ethos of decentralization that's why France have Aden that's why there's the European code seal blockchain for Europe Association in so many countries because we want to push the The Narrative forward for the ecosystem and obviously the questions are based but you don't have to reply to them you can give your own answer and that's basically what we did at that I don't need to say okay this is your questionnaire so we answer to the question but also this is a document

with our vision and our answer and this is how we work we have to keep dialoguing because otherwise you let other people talk on your behalf and I think that's a net negative yeah I agree with Mark and actually I had a question for Lee or like what is in your mind the downside of responding to a paper like that you know you said they want a direction and I'm not willing to give them that direction why not I mean no okay so not then I'm not waiting but first of all exposure exposure of people that's working the default if it's a Dao and you know the situation of Taos those are not totally decentralized so first of all it's exposure um and and then the power of your the

power of your negotiation it's not always the it's not always there um then um then um I guess it's uh it's also to to to give knowledge in a certain way so for example you can read some stuff in the academy maybe maybe some people wrote some things maybe you have some answers around you don't need to come to to me as the default as a default leader and to ask me directly expose me directly you can do one more step forward that was my feeling I think we are plenty on the radar of regulators so the timer video stands for

the ecosystem to say let's stay a small and they will not regulate it it's gone yeah we're gonna have regulation anyway so now it's time to try to push for the better size of Regulation at least it's my opinion and especially you mentioned Academia I mean it's practice that matters here like Academia has also like an external point of view on things sometimes they reach out to protocols and manage to get information but what really matters is how things operate in practice so they need to reach out to um to practitioners on that and like specific projects but what I think about is also are they ready to hear the answers because when I just think about the reaction when you present how things work uh even students told me once this is like a parallel universe and is the

regulator ready to have an open mind and just wonder okay how do we regulate this parallel universe that is so different from how we are used to conceive things and there's also the education of users because the less users I educated the more they push for protection because like oh I'm getting into something that's like a stormy water please protect us so there's also a big part about educating and being transparent to users so they stop pushing for protection against something that appears to be this big monster that could give you a lot of money or take a lot of money from you thank you yeah thank you for this great discussion and I think it's a question that is kind of formulating in my head right now is

okay what can we do as obviously as we we can form organization searches the UCI such as Adan in France but how do you consider your role like their lawyers here their people from the industry so have you have you thought about okay what what I can do and if you can elaborate as well if anyone wants to kind of well I would say by saying translation because since it's so different I would say lawyers maybe you agree we have this role of translating what the client says to us like the project explains that will sound extremely crazy if we presented to the regulator into

terminology and a way of phrasing that that is still correct but may seem a bit more acceptable and it also allows people to understand Clarity like a lot of things are so technical if you just put them out there we always say all the information is available but there's a lot of translation to do there because it's it's not plain language you know on my side it's educating and giving like opinion of uh and real world uh situation from ecosystem actor my first meeting with the IMF was in 2016 when I was uh working at consensus and since then I met multiple times like French regulators and the government

to basically share knowledge because I have the feeling that the more they know the more they understand the higher the chance that we end up with regulation that makes sense and so far in France I think it pays off because we got some regulation and we were the first country to do so like in Europe that makes some sense are things perfect obviously no things can be better for sure but with step by step it's a long journey uh I think we are getting there yeah maybe just to add to that from a perspective I think you know uh there's like these much larger protocols like Ave uniswap

compound Etc that have much more resources to throw at these kind of things but there's also a lot of uh I would say the majority of D5 projects are small to medium and it's probably hard to imagine how to find the time and the resources to spend on topics like these so I think really um thinking about um you know easier ways to to to be a part play a part in the industry voice like joining an association uh you know there's uh euci what is it I always forget the Adan uh I think it's Ada and as mama in Switzerland like joining your local Association uh usually they are tiered just to be favorable for smaller

sized companies um and and using that as as your representation you know um and and pooling your resources in some respect to get your representation through an association is is really key I think also making sure that we are putting the right people in defy representatives in front of regulators you know um that they are able to speak the same language able to translate but also reflect the benefits is key as well yeah I agree everything is the correct to me along the years it was several vectors that I took so sometimes it was um The Academy so I thought in the

academic courses about blockchain I pushed those courses it's not like the academy was waiting for me to teach it uh writing articles in the academy which is also complicated because then you need to be in the academy and those people you know still ask you like two two weeks ago some Professor asked me but tell me crypto is used to criminal only for criminal things and this is like the University of Jerusalem of Jerusalem High Professor anyway it's hard um and and translating and translating is a major thing I'm doing this for the last decade translating and the Gap is big like when for example when I see

terms again terms like Dao terms like this and realization it's it sounds simple it's not totally not and when you go to the industry it has many variations many many different kinds of of I don't know being there and and that's that's a major work to do and and of course speaking with the with the regulator wherever wherever and whenever you can I but I I saw those opportunities in 2016-17 now much less I don't know why yeah thank you for uh your answers they

really resonate with me and I while you were talking I I just remembered how I gave a talk in front of lawyers like from different countries and about Crypt regulation and at the end of the talk there was only one question and the question was okay uh why do we need crypto when we have money and I in this case I wasn't even sure where like to begin um which is also somewhat related to my next question which is okay we sometimes when we talk about Crypt regulation and defy regulation almost it seems like almost it's like a monolith term which isn't the case when it comes to regulation because we have

the European Union that is also not one thing it's 27 countries we have obviously the United States that is also not one thing so how do we harmonize this and what would be the issues and maybe what would be like the shortcuts of doing that or even if if it's even possible so maybe should I then start I feel like I'm the designated person to start it's a tough question because harmonizing that well there's not a lot of uh fields that are extremely harmonized in law you can try for the union you can try for some conventions treaties but not sure there'll be any uh crypto treaty anytime soon

um so harmonization I don't think we will reach it at any point everyone will have their own approach it will put a lot of pressure on any rules that are like the reverse solicitation and equivalent because it will all be about okay which markets are you actually addressing um I'm not sure it's risk answers completely the question but if it's like what's the approach to this International piece that has no borders well laws have borders it will just to be if the fine-tune where the borders are actually Crossing and de facto you'll have users everywhere but that's the case for most of the even traditional businesses nowadays I can go on any website and order something I can access any protocol and and use it as well so I'm

not sure this is a bigger problem because it's not specific to crypto we'll just need to find ways of tackling okay when something happens which regulations do we apply and for now there's not many protocols with terms of use defining which law is applicable to them so maybe this is the first step to at least have terms of views but then who publishes them if you have a dial so maybe these kind of questions which are very pragmatic or the answer rather than having those big discussions regarding uh which regulation and how do we harmonize that at least have some regulations in the different jurisdictions maybe I mean it will be impossible to force all the countries to have a regulation because if we need to make all the process of educating

translating to all the regular leaders in the world we're really not getting there so at least have enough jurisdiction so that these projects know they can Implement their project there thank you as I said before the good thing with Europe is that there's many country involved and what I want to share is that try to fact for local Victory because you increase the odds for a global Victory I have the feeling uh obviously I'm biased as a French that the sun low was a good template for the Miguel regulation and a local Victory led to something that pushed the needle forward globally for Europe so

if we manage to have a few good regulation each state within Europe that is not useless at all because it helps the the ball continent globally at least in my opinion yeah I fully agree with Mark and maybe just to take a second to make a side comment on on C5 for a second as well I think what's happening in the US Now is really really important to the future of crypto whether it's D5 or C5 um and even though it's not directly impacting D5 I think you know this this coinbase uh thing uh it's really important to get behind that I think and and and support

um what's happening there in any way um you can if you're based in the US or you have exposure to the US because it really sets the precedent I think of uh what's to come and I think the thing that concerns me the most about it is that uh it's killing the the idea for for Innovation um I would also um you know whether you agree with me or not it's kind of a fact that when when the U.S um you know imposed vatka um the rest of the world followed um and there is a there is a dangerous precedent here that you know if um you know coinbase doesn't come out on top that the rest of the world follows so I think it's really key to to to put

you know to kind of unify as an industry regardless of C5 or D5 at the at this point in time I also just want to share an anecdote which supports uh something Mark said earlier about if we don't speak Hub other people will in two I think it was 2017 I was invited to a meeting to kind of discuss blockchain with the heads of banks all the Swiss banks it was an interesting meeting at the end of the presentation they all understood the disruptive qualities of blockchain one of I'm not going to name which one but one of the Swiss bank CEOs in the room

said to me I said to everyone we're very aware of the disruptive qualities of blockchain and we're very aware of the friction and compliance aspects that old Finance has today that our business model we don't want that friction to go away because that's where we make all our margins and only large Banks can make those margins and afford all of those operational setup with blockchain automation that goes away that simple anecdote tells you why you should be speaking up why everybody should be having a voice in this industry because if you don't don't make any mistake big Banks and big asset managers they they know that they are um

there it's impossible to compete with them because they have the scale that required to have these operational and administrative processes which blockchain is there to disrupt they're very aware of it and they don't want that to happen thank you for this yes or if you have something to add yeah just first of all I see now I see people from the traditional Finance coming into the face space and I think it will contribute a lot of knowledge and fulfill the gaps uh practically what you do because Harmony is is hard to achieve globalization is happening here and it's it's I think one of the first times that the

globalization is very very important practically practically what you do today just to share my knowledge is is a game of Risk so everything is is a risk we just measure the risk so multi-jurisdiction is always always the risks every Enterprise seat and what we do is risk and and calculating the money and the cost of it so normally it will be few countries in Europe a bit of us and and that's that's how in practice you manage this risk until there will be Harmony and peace all over the world etc etc

sounds beautiful let's see what that's that's what's gonna end up with the world um but now we have a few minutes for questions from the audience so if you have any questions raise a hand otherwise I'll continue with my questions so you're warned okay I'll continue with my questions then so um to be a bit blunt oh there's one question okay maybe I was ignoring it sorry we can do one quick question then we'll unfortunately kind of running behind the schedule hi thanks for the panel um how much of

this whole regulatory argument you know I know some of it is we need to argue for specific Financial regulations and then I think there's the flip side of arguing that privacy is a right or the right to gamble away our money on coins is you know we should be allowed to do that should we be fighting on both fronts and I feel like a lot of the discussion is more you know the larger players arguing nuances over which you know Securities regulations we have to sort of apply it's a very very good question and it's definitely a balance between like uh more regulation and more right to privacy and there's definitely a

opposing force and I'm quite uh not happy about the fact that we are completely losing on the Privacy front like basically everything that happened in the crypto ecosystem for the past few years while uh defeat upon defeat on privacy front basically tornado cash is like a a huge issue in the ecosystem and ethereum itself in terms of Architecture is terrible for privacy and uh unfortunately there's not enough effort in the ecosystem on that side of things and that's something I regret deeply I'm just going to add something it also depends on the jurisdiction and how they are like pushing for Consumer Protection

it's like more like a philosophical question on the different jurisdictions if you want to gamble your money away well in some jurisdictions you could do it potentially with utility tokens so we need to solve the first question of is it a security or not and then for example in Switzerland if it's a utility token well you're free to do whatever you want and if you want to spend the millions and lose them potentially you're free to do it we will not push for like extreme regulations for something that's supposed to just give you access to a service I always give the example of if you buy 10 watches and you want to sell them for more than you bought them well they were not meant to be an investment so you're kind of free to do that and if you lose it's too bad for you well it's the same for utility

tokens so it really depends on the mindset of the jurisdiction and historically I would say like the EU and the US are more protective so this is maybe also why they're pushing forward all this debate about Securities it's like we need to protect the consumer we need to protect the investor it may be a bit less than other jurisdictions thank you yeah we're out of time thank you you can find us roaming around if you want to discuss continuing this discussion and thanks to the panelists for the great conversation and yeah thank you [Applause] thank you so much

thank you thank you [Music]