Regulatory Outlook for DeFi / Stanislav Šimek

Transcript

one two three can you hear me yes okay hello everybody and thank you a lot for being here my name is I'm a lawyer base here in Prague and blockchain is my main area of focus on internet and expertise and next to my legal practice I'm also running a blockchain advisory business in a company called drummy where we provide complex services to blockchain projects in this talk I would like to talk about what regulation actually apply on D5 I believe this is a hot topic now with SEC being frenzy uh is there do the application do the regulation actually

apply on defy then we will see what's going to be the future of the regulation of D5 and then we will find some conclusions based what's going to be said so D5 is increasing in popularity constantly over over the period of time we can see it in this chart is the share of the decks on the spot dexis on the spot trading volume so now it's about 15 of the overall uh trading volume share and now it's going to be much higher because since SEC sealed binance and coinbase the the trading volume index is actually skyrocketed and now it's like 50x so it's very interesting and what are the

reasons why people use D5 or dexes well is it mainly two trade low caps right to make millions on Pepes to lose Millions for me ladies another reason is anonymity because now it's being harder and harder to fly the centralized exchange a solid centralized exchange that you can uh that you don't have to comply with kyc and then it's bankruptcies I think many people learn their lessons during 2022 and unfortunately it's probably not over yet because FTX and Celsius will most likely claw back their users which means that the people who withdraw their crypto in the three months before the bankruptcy can be called back and they

will have to return the crypto back to the bankruptcy estate so like in using uh centralized providers there is a huge uncertainty if you if you do one swap on this on a centralized exchange and then you take your crypto back you don't know if in the three months uh I mean you have to wait for the three months uh and to see whether the the provider doesn't go bankrupt and to see whether you will you will not have to be forced to return the crypto back and this trend is most likely to continue because the centralized providers will be and the centralized exchanges will have stricter rules uh for admitting coins to trade now we can see that the US binance stop trading

more than 100 pairs after the SEC lawsuit uh decentralized providers will also probably Bank users from some uh states where it's going to be strict regulation because they will not be able to comply because it's going to be too harsh and obviously anonymity because soon especially in Europe there is going to be travel rule implemented which means that the centralized exchanges will send all the information they have about you straight to the state authorities so we can see that most likely D5 will grow in the future and as it will grow the stricter the regulation level must be what's the

current regulatory landscape so usually financial institutions exchanges and crypto providers service providers need to comply need to operate under a license need to comply with aml's law and consumer laws defy and decentralized protocols usually argue that they don't have to comply with this regulation mainly on the two grounds first of them is that they are decentralized that there are hundreds of people deciding about the future of the project so there is nobody who could force the protocol to do something the authorities want to and that there is no legal entity that could be regulated or licensed because the users interact directly with directly with the protocol

and there is no classical relationship service provider and the client so what does the USC uh what does the SEC and the U.S Regulators Regulators say about it they don't agree they think that the automation of certain functions through smart contracts doesn't have any effect on the legal obligations and decentralization is the same so it means that however whatever the project however is decentralized for a decentralized you still need to comply with all the regulation as the centralized providers moreover The Regulators kinda agree that uh practically all D5 projects need to

implement kyc I mean Implement ml loss and do kyc to its clients which almost no project no no D5 project does for now uh it's the it's the theory and was the was the reality well SEC during a history conducted 118 crypto related enforcement actions but only two of them aimed D5 the the cftc and the commodity Futures Trading commission uh Focus now more on crypto with over two or with over 20 percent of all their enforcement actions being created to crypto but only again two of them during their history aim on D5

so there are only four enforcement actions so far so even though they are saying that D5 have to comply they are not really enforcing it however Gary gants or the protector he says that actually every decks should comply with the security laws therefore there is a big chance that after he's done with the centralized exchanges he goes uh he goes after taxes so if we make a summary of the U.S regulatory landscape Define needs to comply with everything as a centralized providers but still we don't enforce it that much

how is it in the EU well the EU has a different stance rather than saying uh you know Define these two complied everything they are admitting that there are some regulatory uh that it's unclear who should actually comply with the regulation or it should be the dowel the the the interface the website the provider of it or the company that develops the protocol so they choose the way of implementing a new laws that should make it clear however so like recently the European Union approved Mika which which will become effective in one and a half year in all the European Union and what does Mika the regulation That was supposed to make everything clear

says about D5 it says that where crypto Asset Services are provided in a fully decentralized manner without any intermediary they shouldn't follow it in the scope of Mika so this Mika made it clear not at all because we have no idea there is no definition in the regulation of fully decentralization and what does intermediary mean so the the EU members the EU Parliament members say that now the authorities need to come up with guidelines and tell us what does it actually mean so for now we have no idea in what scope Mika applies to D5 and it would doesn't was about to

apply on D5 then all the projects the D5 projects will need to be we need to operate under license and meet a lot of obligations like experience as trustworthy personal uh Capital meet Capital obligations like Risk Management obligations IMR obligations and it would be very burdensome for the for the D5 projects uh so it is how it is now what's about the future well the SEC made clear that they really want to go after taxes and defy because they proposed this April to amend the The Exchange act the definition of exchanges that it was clear that uh dexes need to

comply with Securities laws then from again from this April we have U.S US Treasury report about the crypto assets saying that yes if I need to comply with all the rules and we should write awareness about this one and then also they suggest uh more tools like digital identity so they want a digital wallet to be connected to an identity of a person and then the smart contract smart contracts don't have to comply with kyc the MLS MLS then they suggest that there should be also a control on a smart contract level that because the smart contract will see who is the user and based on how experienced the user is he

will allow him do the protocol will allow him to use leverage to trade certain coins and also the report wants the U.S government to engage with developers to create ml tools for for D5 uh how is it in Europe so as I said at the beginning the the approach of Europe was quite quite reasonable but as soon as the Mika was approved the European Parliament assigned a committee uh to assess the regulatory challenges that stayed after Mika and you know they deal with defy a lot and unfortunately their findings and suggestions are very harsh for defy and practically they are also

saying that D5 should comply with everything as the normal normal centralized providers so for example they suggest that Dao should have an entities entity status status for licensing purposes regardless of whether they are incorporated or not so it means that if Dao operates a protocol it will need to get a license to be able to do that and also the Dallas should have a legal representative who will be like a connection between the authorities and the Dallas also the the entities and people uh developing the protocol and the intermediary providing the website should be registered to you then there should be bankrupt series about what happened when the protocol fails when

there is a hack like with Terra Luna for example it also suggests that all crypto should be considered a security unless there is a there unless they apply for an exception that also suggests that should be created an arrow wallet uh which should actually pave a way for cbdc there are like many interesting features uh suggested for example that there should be a metrics that will tell you how many uh how much energy uh consumptions uh you know how much your coins make in energy consumption how bad is this for the environment and then the bankruptcy administrators should be able to seize all your crypto when you go bankrupt

and the committee also suggests to implement Trevor rule which means that when you do a swep swap on uniswap the uniswap will ft send the information to the state authorities so we can see that uh the future will most likely be that all the D5 will be regulated uh in a way as the centralized providers are and everybody should prepare for that it's just the problem is that the laws

and the guidelines take time and and uh you know they need to get resources for enforcement which take times however this is the reality of course like the crypto Community is very uh very creative so they will they will come up with new ideas how to circumvent it but the trend is clear the regulation is going to increase and increase the same way as the the popularity of the device increasing of course you can try to be anonymous and we can see it now that the many projects many projects Now launch their projects anonymously and it can work for some time because to reach out Anonymous people and projects

it's much harder for the authorities but it's going to be more and more difficult in the future with the new regulations coming as travel rules and with softwares like chain analysis being better and better and so in the future it is probably going to be a defy completely regulated and next to it there is going to be something similar to dark web uh where like Anonymous projects and people without regulation will operate uh and uh you know it's not going to be accessible for general public the same way for example is uh as it is with the tornado cache that you can still connect to the smart contract but there is no website where normal people can interact

with it easily from Mika and some of the reports we can see that uh truly decentralized projects can have can be regulated uh uh like the regulation could be less strict however we still have no idea about true decentralization mean and to be honest as we can we see for example on the case of arbitrim uh where the the governance the you know the the holders token holders voted in a way and the developers and Founders did something completely opposite there are not that many truly decentralized uh projects for now so to conclude I just want this talk to be uh Food For Thought uh not some legal

advice this is this is where we are most likely heading heading and uh yeah I I bet that there's going to be many questions uh so and we are short of time I think so you can reach me out whenever you want and very wherever you want I will be here for the two days so thank you [Applause] [Music] foreign [Music]