Need to manage DeFi?

The SEC and other regulators need to rethink what they are doing. Lots of things can go wrong.

The cryptocurrency industry has gone through a cycle of aggravation. Like a fair-skinned young man, he was running faster and faster than ever. This is due to a number of key factors, such as the adoption of Bitcoin as legal tender in El Salvador, the increased market interest in NFTs, and the continued involvement of companies such as Visa.

But like the ambitious young man, the new building that recognizes the cryptocurrency has become incredibly facing limited relationships. Gary Gensler's Securities and Exchange Commission has decided to become a strict regulator of cryptocurrencies and wants legal action to ban them. Over the years, the rules for cryptocurrencies have become smaller and more fragmented. The cost of cryptocurrency for adults will be tighter to be supervised by adults who can make rules.

However, the comparison of cryptocurrencies in adolescence breaks on one side: DeFi.

The DeFi process is used for trading and borrowing crypto tokens and derivatives. However, unlike traditional cryptocurrency exchanges such as Coinbase and Kraken, the DeFi protocol relies on a combination of usability and collaboration between a non-portal and an engine run by independent law.

Moreover, in theory, at least in theory, DeFi contracts can happen without clear rules, and the administration often deals with such people. Another unique challenge for administrators is that many existing DeFi systems are not designed for users to express themselves. It's also inconsistent for companies like Coinbase and Kraken, which introduce the “Know Your Customer” process later in this article.

Of all the risks that finance managers are tasked with managing, self-awareness is important as there are three key risks that can be used to transport business for Defi. One is crime, including money laundering, tax evasion, and financial fraud (although these activities appear to be limited throughout the cryptocurrency process). The second was counterfeit fraud or fraudulent sales during the ICO boom of 2017. Of course, it was like the early days of DeFi. Third, the risk that DeFi and cryptocurrencies may not be large enough to have a greater financial presence in the event of a major economic downturn or malfunction, but their future impact is yet to come.

Traditionally, regulators have relied heavily on commercial departments to monitor the unreliable activities of their clients and platforms in order to manage these risks. The leaders of financial services companies have always been the basis of the law at times. In other words, they become people who understand SEC politics.

Without high content, things can go wrong. Katherine Kirkpatrick, Marketing Manager of King & Spalding's Financial Services business, said: “Managing DeFi will be very difficult. As she did, the last question is how to handle the rules. " For who ? " No matter.

In other words, watching DeFi is a bit like trying to raise a 14 year old with great power to fly, teleport, and make himself invisible on demand.

Need to manage DeFi?

Of course, this is the problem. If you have a kid like this, do you want to create a policy to tie him up? When something new happens in the world, should you start building a wall around it, or give it a place to see how strong it is?

Duane Pozza, former Deputy Chief of Staff at the Federal Trade Commission and now a partner at law firm Wiley Rein, said, “Or he couldn't (illegally) stop working. "

But, for better or for worse, most regulators don't think so. “If you think you've helped something big financially, you're not going to sit idly by,” Pozza said.

While there is a risk of fraud, there are good reasons to hope to establish a policy for DeFi. More importantly, it will allow more stakeholders, especially businesses and business leaders, to get the most out of the technology. Michael Shaulov, CEO and Co-Founder of Fireblocks, a DeFi monitoring and infrastructure organization, said: “Because the idea that big banks are creating private blockchains is fundamentally shattered. The technology of distribution chains and registers is the future and is now available. several cases well used to eliminate intermediaries. Uniswap replaces the Nasdaq (market) of these financial companies. "

Shaulov has spoken frequently with large companies interested in DeFi, but said the current situation in the United States is affecting cooperation. As it stands, the use of DeFi exposes banks like JPMorgan Chase to a risk of money laundering or fraud.

This is the main reason for the unusual decision of the DeFi Swarm Markets platform. A move from one decision without reservation to another with more control. The platform was announced in the United States in 2018, but hazy American rules quickly became the norm.

Philipp Pieper, co-founder of Swarm Markets, said: "The tone [of the presidential remarks] is 'I don't know. I don't want to judge because I don't know'." It is very true that in the current economic model, no one wants to take risks. So, in mid-2018, Swarm started looking for alternatives, including moving to places less registered than Malta and Cyprus.

Then, in 2019, Germany passed a new law to clarify the regulation of various crypto assets, including tokenized securities. As a result, Swarm Markets decided to relocate to Germany, as this vision provided a platform for growth for the business while managing the key benefits of DeFi for organizations, including self-regulation, distribution of resources and vision.

Timo Lehes, CEO of Swarm Markets, said: “Manage my assets… choose the right agent. It's very different from investing hundreds of thousands of dollars for mid-sized exchanges. Besides, user groups can also contribute to .Look pool and earn money or income through other DeFi protocols.

Pieper, co-founder of Swarm Markets, said the mid-sized trading operation is concerned with issues such as creating fairness ... but the focus and publicity on directors will make all of these matters clearer. . (Regulatory) The information on the application is getting smaller and smaller. "

Know your customer service (KYC)

Of course, there's the cost of oversight, which angered crypto purists. Pieper said that because he is an authorized seller, we have to make more passionate consumers. Know your Customer Service (KYC), Money Laundering Prevention (AML) and Search Engine Optimization. From a consumer's perspective, it's no different than what you get from the average business these days.

For the same reason, Swarm Markets has established a certain level of governance within it. “If they're managed by administrators, they can delay users. It can freeze money, but we have no control over it.

Consumer watchdogs will also affect DeFi contract and finance integration, and will soon highlight the differences between "clean" and "black" markets. . Funds from negative KYC platforms will not transfer to managed or “free” funds such as Swarm Markets. Indeed, this would highlight the risks that financial companies want to avoid.

There is no denying that consumer care is toxic. However, DeFi and encryption technology promise many improvements to make the KYC process more secure. For example, zero-knowledge credentials can be used to identify a merchant's rights without disclosing information specific to a DeFi contract, so providing anonymity is important.

One concept is the "portable" KYC, where a license from one company can be used for another. You can have NFTs stored in your KYC wallet. However, major changes need to be made before these two new developments can take effect.

Is it a decentralized autonomous organization?

For DeFi monitoring to be possible, it is necessary to get the KYC data of end users in some way. However, in other areas there are still new challenges which require new management procedures.

The biggest challenge is how managers should manage truly decentralized processes. In principle, DeFi systems have a Bitcoin-like navigation mechanism that distributes local tokens in exchange for liquid deposits on the protocol. This means that the system can be written by a small developer or a management team, and turned into a larger or smaller fund. In theory, this would include the management of user communities, making these platforms a Decentralized Autonomous Organization (DAO).

It is important to note that not all DeFi systems are classified as broadcast. But some say they are right. The real estate store is run by a decentralized community rather than brokers. SushiSwap is considered an example of superior distribution to Uniswap.

Stephen Palley, a partner at Anderson Kill, a cryptocurrency law firm, says governance is not as difficult as it sounds. He said the company was a legal fraud with a legal attitude. There may be very strict rules that explain what this means.

This means that DAOs can be judged under the same laws or regulations as companies, even if they do not have an executive.

When Palley asked, "Who should be responsible for the decision made by intelligence?" Is it the software developer or the algorithm? Palley says, “If it's code, you have to recognize the legality of the software. That sounds bad. And science fiction, but it's great. No. It's possible.

The action is ambiguous as there is no clear plan for national authorities to decide on non-state legal entities. However, many self-regulation of each cryptographic application will go beyond supervision. In extreme cases, the government can still make it illegal for the public to trade in evil.

Current events

As DeFi continues to grow, this negative thinking can become a reality. The guards are on duty and do not want strong areas that float outside of surveillance. The modern state of monopoly on terrorism is the end of the rule of law and will likely be able to find ways to control access to unconventional agreements.

There is no doubt that there will be many understandable crypto-anarchists seeking to measure the decisions of the authorities. However, there is always a decision outside of strict control, some Defi workers may choose to do their job in these areas, at the same time as they like people to use quite small rights. If you want to continue using this DeFi technology and at your own risk, you need to protect yourself.

Despite strict regulations, the "pure" DeFi system will continue to benefit the community as the boundary between innovation and privacy. Over their long history, they have served as a testing ground for new forms of digital statelessness.

However, even the simplest management environment will require some intervention for enthusiasts to take advantage of DeFi to improve its financial peak. It may sound uninteresting, but growing up is extremely exciting.