Regulation in France and Europe: From Cryptoassets to DeFi

Transcript

um so hi everybody um thanks for coming to my presentation about the regulation of crypto assets and defy in france and europe my name is victor sharpia i'm a french lawyer at a firm called the kramer living in paris i mostly specialize in crypto assets and fintech but most of all i'm a long term fan of bitcoin and crypto uh i've been somehow in this community for a long time and i even uh invested in the dao in 2016 because i had met the french guy who was

the the spokespers spoke person of the project stephan chuala and it was i think the first very first d5 project on ethereum and also the very first terrible failure and more recently i've been uh focusing at the personal level on defy and also working with some clients about it um so i i only have 20 minutes so i will need to keep this short the first part of my presentation on the regulation of crypto assets in france and europe i will try to uh to go over this pretty quickly because there will be all the talks during its cc which we'll cover in more details this regulation so i will try just to um

to go very quickly with this and then speak in more lengths about the regulation of d5 which does not exist currently but mostly what it could be and what it will be and how i feel about it and then we'll move to i hope some questions if we have the time um so first of all we have a detailed um crypto regulation in france and europe it was mostly created after the ico bubble of 2018 and it's mostly motivated by the aml um regulation so basically there was a european directive that forced every country in europe to create a framework

uh requiring every crypto company to obtain a registration before providing services and this is what happened in france and we also regulated icos and basically this regime works quite well there are 19 registered the crypto asset service providers in france right now which is pretty good and there are a lot of others in the process of obtaining the registration with the regulators but still there it's not perfect the the main issue is that there is no european passport so i don't know if you are familiar with this but basically your passport in tradify allows a company in europe to provide the services to all in all

european countries with only one license in one european country and there is no such thing for crypto assets companies in europe so basically if you're a crypto assets company in europe now in syria you would have to go in each country and obtain a registration which can't be done in practice so basically this regulation covers the business models of 2018 and before but it does not cover practically at all the business models that emerged after 2018 and that were the most familiar today so of course security tokens although we have influence

on at the european level some clarity about that but anyway there is practically no use of security tokens in france and europe um also stable coins um they existed back then uh but we still don't know how they they truly qualify in french and european law it would seem that they look like electronic money um but still uh the the regime of electronic money is not applicable to stable coins because it's too complicated so it doesn't work um for nfts um we are still wondering how they actually qualify and uh whether they actually qualify as crypto assets and even i was uh talking about that

with william who's there yesterday and basically the french regulator asked some of the french lawyers in the community to tell them whether they feel that nfts or crypto assets are not from a legal perspective so they are they are lost just as lost as a as we are and also something else that's quite important uh it's absolutely not covered by the existing regulation it's platform tokens such as bnb or ftt so basically this could qualify as securities because they use profits to repurchase tokens and burn them so this is in some way a scheme to uh to share profits with the orders

of the token but still it's absolutely not covered by the existing regulation and of course the fire which is uh completely overlooked by the existing regulation so there is a draft european regulation which is called mica it's it was published the first version was published last year it will probably be adopted in its final version before the end of the year and we can expect that it will be fully applicable by some next year or the year after that so of course there is a lag there is a time delay between now when the the regulation is written and the time when it will become applicable and who

knows if there will not be a lot of other business models that will emerge by them and basically the mica regulation at least in its draft still does not cover defy and probably would make a lot of d5 projects quite complicated mostly because this regulation would impose a very strict regime for stable coins and this regime basically they would force every crypto assets trading platform in europe to only list stable coins that are compliant with european law so uh it would mean basically that the several coin like that

which is decentralized um could not be listed by your european platform because it would not have an identified issuer compliant with the european law um okay so this was the part about the existing regulation now we will move to um defy on the regulation of defy because to be honest it's more interesting so i've been working a lot with the french regulators in the last few years so i think i'm able to put myself in their position and try to see how they feel when they look at the fire so first what they see

is the potential money laundering risk and you have to know that regulators in france and basically everywhere um feel that model rendering is the biggest risk that can affect basically uh the public so they see that we can interact with addresses very easily and uh without an intermediary even though to be honest the money laundering verifications could focus at the on-ramp and not the off-ramp because you need crypto assets to use defy and you need to buy these crypto assets somewhere generally using fiat currency and then the other issue is of course

the opacity because in a lot of cases there are not persons that are clearly responsible for a project even though in many cases there are companies that have been incorporated to uh issue the governance tokens and in some way operate the modified protocols because of course the developers consider that they are not responsible the people that operate the front end consider that they are not responsible because users could interact with smart contracts by themselves without going through the front end and of course the core team they have in practice a lot of power and control over how a d5 protocol

is uh is headed where it is headed but they will say in any case that we have a governance token so basically all the decisions that are made are not hours our decisions but their decisions made by your dao so we're not responsible for anything that happens and then from a regulator's perspective it's harder to tolerate that some business models are not regulated so i'm not talking about um business models like money markets like rv because basically lending and borrowing crypto assets should be outside of the regulation at least in europe because uh crypto assets do not qualify as what we call funds which is

the the legal definitions that is covered by the banking monopoly but there are a few business models that for which it's really hard to argue that they are not regulated under the existing law and i mean the h-fund like uh for example ribbon finance so i'm a i'm a big fan of weapon finance i even use the the project but but when i see that i can't help but feel better it will be regulated in some way or it should be regulated in some way so for those who don't know them it's a covert call strategy that is used to generate yield on deposits of ether of or wbtc and basically it's written under on

the website the vault manager will choose the strike price for the option and purchase or sell the option for the on behalf of the vault and they say currently the role of the world manager is played by the ribbon team so you could not have more responsibility in any way and there are some other models which are also very i would say not suspicious but uh somehow you take a year on finance for example they have a fee structure that is explicitly a 2 and 20 structure the 2 120 structure so with a 2 management fee and a 20

performance fee is a typical of h funds it's been used since the 80s and it's very weird that leon chose this exact same fee structure to represent their activity because it makes them look like a hedge fund which in some in some way there are and other examples mutual funds or etfs like the d5 indexes like the dpi the d5 pulse index [Music] it's written precisely on the website like we are a capitalization weighted index that tracks token performances this looks like something that would be very regulated and

other examples of course include derivatives like options which are very regulated in the in the traditional finance and also and maybe this is a what would be the worst from a regulator's perspective um derivatives like crypto derivatives but based on listed securities like synthetics used to do it at some point but they um it seemed that they stopped they posted this this activity but mirror protocol which is a an ethereum but asynchron terra this is their website so they they list a bunch of uh of derivatives based on the listed securities so you can you can trade these

these derivatives and basically you have an exposure to the underlying security without having to go through any regulated intermediary it's very interesting from a user's perspective but from a regulator's perspective this is something that is a it's uh it's shaytan as we see in french which means it's like the developer and uh so moving on to the regulation of the fire so uh i would say that uh the regulation in somehow will probably happen so this now is a is more personal prediction of what might happen in the future if things continue as as they have been happening in the last few

few months so i would say that if the current trend continues regulation will happen this is absolutely certain and the current trend is first a lot of vc money going to projects not only in tokens but also in equity in the companies that are associated with the projects like of course uni swapper or compound also a lot of very vocal and identify founders there might be some in the room today but they are a lot here at this convention this week and we know who they are we know who is bien ave we know who is behind the curve we know who is behind even maker which

doesn't have a company um so if someday a regulator or even the police wants to question them and to impose some regulation or enforcement on them they know where to find them so this is something that's quite important and also or of course there are a lot of partnerships with tradify and fintechs uh on fintech and a good example is recently the compound treasury that was proposed or basically compound will partner through a different company with fintech to offer four percent yield to the users of the the fintech or even rvpro of course which will create a pool dedicated to institutionals with a white listing

at the gates and then the current trend is also that a lot of d5 projects consider that they are decentralized because they're governed by your dao but when you look more closely we feel like the the actual governance is very questionable the fact that is actually decentralized a good example recently was the default education fund of uni swap which was funded basically against the opinion of most of the community but only because some vcs holding a lot of tokens voted in favor of the proposal and so it's it's questionable whether

they're actually centralized and uh i know that this guy chris black is uh he's controversial he's a bit of a conspiracy theorist but he makes good points in his uh open letters to uh to defy protocols like this one to polygon a few months ago basically he he checks the code and he sees that there are multi-sigs that control uh in some in some cases most of the protocol and uh basically he asked them uh what will happen if a few among the the eight holders of the of the multisig are arrested or are forced by a government or regulator to act in a certain way to maybe uh provide

a transparency on the transactions and also something that's quite important regulators now have many tools to identify responsible people who are behind who will be behind a defy protocol even if this person would prefer to remain anonymous so it was the fatf in its last draft guidelines so they basically recommend governments to use blockchain analytics tools like chanalysis to use the web scraping to use information from the public which is basically a way to tell people to tip the regulator

maybe against payments to uh to to to tax the identity of an anonymous person so it's quite interesting so i will tell you that there are two options for the future of defy the first option and the most likely is a regulated defy where companies will obtain licenses like avedid in the uk with an electronic money license [Music] last year they will create companies and raise money from vcs both in equity and tokens um they will probably start using uh only approved stable coins which means stable coins

with a fiat backing and issued by central entities instead of decentralized stable coins issued by protocols and probably at some point they will start deploying kyc verifications at least at the front end so maybe during a time you will have a difference between using the front end with kyc and interacting directly with the smart contracts without kyc but to do that you need to be much more sophisticated as a user and maybe at some point this would be the the worst scenario but it will probably happen uh some blacklisting at the smart contract level or even some white listing at the smart contract level like calibre so the second option would be

it's uh i would like to quote gandalf so go back to the shadow from whence you came this would be the second option so i i would call that back to the cypherpunk roots because it is where it all started more than 10 years ago it worked started and maybe it is where it should come back now so i would say that every defy project faces a dilemma the dilemma is do we want more money or do we want more freedom do we want personal recognition and fame or do we want uh or do we accept not to be recognized for our talents by the public or only being recognized for our talents

but under a pseudonym so i would say that there is an example to follow and this example is of course satoshi [Music] because he managed first to remain anonymous during all these years despite having used emails and created websites so most of you would say if i use emails and create a website at some point i will be taxed because i can't hide my identity for for so long he managed to remain anonymous and he also chose to remain anonymous despite being very wealthy and and having the opportunity to become very famous because a lot of people consider that he would have gained obtained a nobel prize in economics

if he would ever disclose his identity it makes sense because he brought so much to um the economic community but on the other hand if a defy project today would choose anonymity or opportunity there would be a lot of drawbacks first it's harder to gain trust from the public and harder to raise funds of course and you need funds to hire developers but still is that really a problem there are examples of projects that are doing well without having either a company or their founders that are known to the public under their own name and for example alchemics it's a pretty good example and you also have

a lot of pseudonymous founders or like influential influential core teams members in defy like banteg from urn or scoopy troopers from manchester mix etc and there are also some developments in some kind of what we could call an incorporating venture capital such as igor capital so uh it's a question for for you in this room today would you trust a cat would you trust a couch would you trust a blueberry uh maybe why not because you know them you read them on twitter you know that they are experienced you know that they know very well they're they're on their topic that they are

able to to uh to to produce a high quality code so why not after all and another drawback it's much harder to manage the life aspect of a business when you don't have a corporation when you want to remain anonymous because you need to yeah i think i'm out of time um so i'm going to go very quickly over the last ones so basically uh it's hard to endorse the real life aspect of a business when you don't have a corporation or at least an identity like a signing

contract for example and of course there is an increased risk of scams and then i would say well anyway a few ideas to limit the risk of of four pseudonymous d5 projects is my last slide if anyone is uh controlling that um not legal advice of course first i would say a very good idea would be to separate the deployment of the of the code from the front end and maybe also having multiple front ends and this is something that was done recently by liquity and i think it's really interesting they deployed the code or the other company but it's different and basically they said anyone can run the front end

for our code and then they get a smaller kickback so they are diluting their responsibility and they are sharing that responsibility between themselves and the front end this is something that's quite interesting the on the two other advices would be to first use pseudonyms and create communities online around the pseudonyms and i think this is something that already works in d5 today you just have to look at twitter and see how many absolute most accounts are very well known and very well followed by basically everybody and they are trusted and this is the the most important thing and then the last point i would say i think d5 projects need to think really seriously about governance

tokens whether they are really useful or really that useful because they increase a lot the regulatory risk because they might be at some point re-qualified as securities it probably it might happen in many jurisdictions we still don't know and they also increase the legal risk because there is a liability if you sell as a company governance tokens to investors basically you are liable as a seller in accordance with the the traditional law of uh it's uh it's contract law basically it's contract law so if you don't sell governance tokens you don't have that risk i would say that some projects works

very very well worked very well without government tokens like uni swap they just need to pay their lps they don't need to pay the protocol unless there is a very good reason to do so so um i went a bit over my year 20 minutes so i will take a few questions now if anybody's interested and if you want to continue the conversation i'm on twitter what do you think about using tokens to

like make laws basically like just as you had the lawyer hang for a service and you make research on the topic you would like yeah get money to make some political candidates in some countries more popular like yeah you mean politically so the question is like do you would you use tokens to make politicians politicians um no i don't think i would okay in europe like in france would you ran for office and then like find yourself with tokens to like gain legitimacy um not using tokens i think because it i think it should keep it should remain separated uh what happens on the internet it works on the internet

and because it's it's not based on trust it's based on the on mass and in the real world we have different interactions and the trust is creating is created differently uh with uh with people that you know and you know them under their own name so i would not add tokens to that i think it works not that well but it works and adding tokens to that would probably not uh solve the issues there are issues that would remain whether or not you have tokens i would say yeah i don't know if this isn't topic

but can you comment on the recent finance crackdown and how do you see that game between exchanges and regulators going on uh it's a very interesting question obviously the strategy of finance during all these years have been to avoid regulation by basically saying that we are not incorporated anywhere but at some point that strategy uh fails because [Music] on the long term there will be basically every jurisdiction in the world except maybe a few tax events will have their own regulation for crypto services so they can't they they can't hide forever they will need at some point to get incorporated

uh very officially in one jurisdiction and then obtain licenses uh which they already started to do in the us and also in the uk but it's uh from a regulator's perspective it's uh it looks weird this kind of organization from a regulator's perspective looks very weird because it's very different from what they are used to with the tradify companies hi uh what's your position on dows creating legal entities within europe or even multiple legal entities do you think that ruins the whole purpose or is

that um even possible with like on-chain governance uh technically it's not possible at least in france and from what i know or elsewhere in europe you can create a company of course with shareholders but for the to do that you need shareholders so you need equity and equity is in europe always paid in fiat currency so to be honest dios remain like a clear legal or they have their legal status is still unclear in europe so uh i know that in wyoming they have created uh they have passed the law allowing the aos to have a legal legal status as an entity

but to be honest i would rather have daos that are not legal entities that are not incorporated either as companies or associations and then just find ways for them to enter into contracts and to maybe pay their their developers or pay their partners without having to create a company even though i know that it increases the legal risk because every person that is involved in the dao might be at some point considered as having like a and how we say in english it's uh unlimited liability whereas on the other hand when you have a company

the liability is limited to the amount that you have put as equity i'm going to ask a bit of a philosophical question so you know that people that do blockchain they don't like government they don't like regulations many many of them probably don't like european union so this is like this battle definitely this blockchain people and this guy the government is clear that i mean it's it's a conflict so what's going to happen like 20 years from now

is it like the government is going to win or the blockchain the crypto is going to win how the world is going to look like you know 100 years from now it's like gonna be all crypto no government or the whole government no crypto somewhere in the to middle honest i'm a bit pessimistic because a lot of us we do what is easy and what is easy is not to use tools on the internet to make ourselves untraceable or anonymous and basically we just we are fine with using emails under our names using our um our phone number to register on websites

and not not all of us i think use vpns i don't even use a vpn myself so if we all do collectively that kind of effort to remain anonymous on the internet it could work but if we don't at some point uh it will be too hard to uh or too easy for governments to uh to enforce regulation upon us um so we have understand that there is two options uh to be regulated or to become uh to get back from the difficult from uh honestly i understand that there is

at the end only one option because uh getting back to the anonymity something that is for most of the project is uh its economical death on the other end be regulated right now it's a regulatory death so what is your timeline i mean for the current jeffrey project that is out of the of the regulatory i mean requirement right now what is what is your expected timeline for the project to be regulated or to to to land somewhere yeah that's a good point um to be honest the regulators at least in france don't have the teams or the staff in sufficient number to enforce that kind of regulation upon a lot of companies

so they are limited in their abilities to actually enforce the regulation so i would say that there are there are at least maybe two years before the mica regulation becomes applicable and before the regulators start to hire more people to enforce their rules and first to clarify their rules about defy and basically projects that are doing stuff today which are not that regulated like maybe not h funds but maybe like stuff like uh decentralized platforms or money markets uh it's it's likely that they will not have to uh they will they will

continue to operate with some kind of tolerance from the regulators at least in france uh and at some point probably they will have to obtain a status maybe a saddle that does not exist yet but that will be created in a few years some kind of flight that the asp registration i don't know with maybe uh adapt the kyc requirements because for this project the kyc is the deal breaker you cannot have kyc verifications on d5 projects without losing 95 percent of your potential users on tvl so it cannot work right now so i would say there is a tolerance okay so i think that's it thanks for

coming you