Regulating DeFi for Mass Adoption - Juan Llanos

good morning everyone my name is juan lanos and i'm here to talk about regulation how to regulate d5 for mass adoption which is a very hard topic so hard that uh i do not have answers i have more questions and answers it's a very uh difficult situation and i will explain why in a minute and this is a this is what i promised when i signed up for this talk take a quick read so the first part is stating the obvious right uh regulation is coming to nfts and d5 and the second part that this is my aspiration for today which is to call on you to jointly design self-regulating mechanisms for d5 otherwise regulation will come from outside so a little bit about me i've been in fintech for 20 years in new york i just uh last week was my 20th anniversary as an immigrant in the united states i grew up in argentina and obviously when i saw bitcoin around 12 11 i was very interested i saw that i was very disruptive and since i was in compliance i immediately noticed that this was going to be there was going to be a lot of pushback so i started writing a blog and started writing for coindesk and for coin center pieces that have stood this test of time i believe because they are substantively what regulation intends to do and then over the years i basically started working for many companies and i've had the privilege of working with many early entrepreneurs and pioneers uh some of whom are listed here so uh currently i'm the chief compliance officer for ripo a crypto fintech um unicorn based in latin america starting out of buenos aires so this is what i plan to do today in the next 15 minutes let's talk about some simple principles i'm going to explain regulation and save you 150 000 if you're listening paying attention and i'm going to ask some hard questions some of them will be well-meaning and will come from a hypothetic hypothetical regulator persona with good intentions in trying to understand the industry and other questions will come from the industry with more cynicism i've been crowdsourcing questions and i'm going to present them here and i hope they it gets recorded for home they're long but i will i i plan to leave them on the screen soon enough so something that i think i have seen especially younger early adopters there's a bit of a haste speed and lack of depth in thinking rigor in thinking so my recommendation in general is to apr right have awareness perspective and reflection about things uh the other thing that i think is very important is to have what nick zabo calls quantum thought meaning to state your mind or a courtroom in your mind trying to think your case argue your case and argue the other side's case at the same time and that is what uh scott fitzgerald has called first-rate intelligence so that is what i think should be done not have an emotional reaction to these constraints but have a more thoughtful and all-encompassing approach to thinking so and the reason this person is here is that there's good and bad people everywhere there are well-meaning and ill-meaning people everywhere they're smart people they're you know all kinds of people everywhere and people change and we ourselves could change can change i believe so and regulators and policy makers also can change proof of that is as this guy was a pilot for the empire and then moved on to the resistance okay so so this is the hardest part this is why the reason why you will not need to go to a lawyer because everything is encapsulated and abstracted here so if you want to spend more time and getting to the wheeze and and know things that are completely irrelevant talk to lawyers otherwise uh just pay attention to these things so regulation in general this is in general obviously there are three things that regulators do they set policy they supervise and they in the and they punish right three things every regulator around the world does these three things the policy aspects come from the law come from congress right they don't set the law they just do what the congress tells them to do in republics at least this is how things work in a republic right whether it's division of powers but uh so these are the three functions a regulator has then there's three types of regulators in general again every time i talk to lawyers they find 3 4 5 6 seven seventeen kinds of regulators i just encapsulating this for ease of comprehension so the first the first type of regulator is a policy maker these are elected officials these are the governors of the world these are the deputies and congressmen of the world the senators of the world so these are the most influential people this is where the targeting of the message uh messaging of our should go right and they care about job growth and development and progress and being re-elected right that's motivation and i include in this section of regulation taxpayer tax policy fiscal policy and monetary policy which has to do with regulating the economy at a higher micro level right so i wish we were flipping my other presentation but this is a pdf so the other kind of regulator which everyone calls regulator is the administrative prudential regulator so these guys have a stimulative role right or objective these guys on the contrary have a preventative or a prudential type of role and they're just admins they just do what they're appointed politically appointed or professional bureaucrats or public officers so they if you go to talk to them if if you want to see them in conferences you can be as friendly to hester pierce as you want but she will do what she wants and what she has to do right she will not be able to change policy okay hester is a brilliant lady by the way so and the other type of regulator is the police the department of justice the punitive aspect of regulation and this is where we come we get law enforcement we get uh the police basically and their focus is to catch law breakers right that's the only thing they have in their mind is like terminator they just go and that's their focus that's what they paid for right anyway so these are the three types of regulators and policymakers regulators and law enforcement stimulative prudential punitive that's all you need to know about how regulation works now let's start discussing the problems and how this is problematic for the world the world of crypto and blockchain right first of all there's conflicting public policy objectives across these three one some people for example the prudential regulator cares about investor protection consumer protection privacy confidentiality right things that are good for the industry systemic risk they don't want things to destabilize and blow up right so but and and they care about privacy but these guys do not they care about full transparency right they want they want they completely the enemies of anonymity and privacy right so this is the first part of the first problem we have a conflicting policy public policy objective so which policy does the government or the republic or society all of us as a society prioritize do we prioritize the civil liberties aspect and the consumer protection aspects of confidentiality and privacy or do we go full-on into a police state chasing criminals that's something that's happening today right and i've been saying that for years on twitter right so and obviously privacy preserving technologies zero knowledge proof zuko hi zuko all these technologies will have problems facing the law enforcement aspect right so that's problem number one right the second problem with regulation is that it's industry specific product focused activity-based jurisdiction dependent and intermediate enforced i have coined these five monikers so they're easy to understand i'm going to explain them briefly industry specific we have regulation for food for aviation for transportation for medicine for financial services right so there's a division a categorical discrete division there product-based we have we have regulation for securities for commodities for money for [Music] anything insurance it's segmented by product by financial product in this case and also based on activity if i do money transmission if i transmit money money transmission applies to me if i issue a security issuance of security applies to me if i exchange a security securities exchange applies to me if exchange currency currency exchange applies to me that is how regulation works anywhere in the world okay so here is for example the united states very busy table but this is what i just said right depending on what you do something some regulator has jurisdiction over you right if you're issuing a token the issuance of a token has to meet the requirements of a specific kind of token if it's a security token a currency token or whatever right stable coin token token so that is very important to understand and uh i hope it was uh frozen and for the uh for the slide was frozen and then we have the um the new verbs the new actions that have come up recently which are things that are crypto native things that have not contemplated in regulation no one has ever thought of staking no regulator ever in the history of humanity has ever thought of staking it's not written in the law how do we deal with it right so clone delegate mint burn all these these are things that crypto native so that is another challenge for this regulation so and then jurisdiction every country has their own jurisdiction their own policy their own laws and regulations and they they're not interoperable nations are not interoperable today we want them to be but they're not right so and contrast all this to with a decentralized paradigm what do you see is it compatible is it is is there a mapping of everything that the meat space wants and crypto space wants no it's completely incompatible right so we have that problem we have the problem of incompatibility between regulation and blockchain and then we have another problem which is enforcement the enforcement part of the mandala whatever so the that part is very subjective and discretionary meaning sometimes there is one one person that decides to enforce the actions and force decides to go after one target and not another so it's very selected and it's vicarious it's indirect it's done through financial services so anyway and that enforcement today is done through banks through financial institutions the unbanking problem here is where it comes from it's vicarious so this is the questions that regulators have they're very valid questions they cannot control it and they're very wired right and this is also something that they see and we see ourselves if we are having the code room in our mind right we have a lot of immaturity in organizations and we have a lot of value at risk don't don't we we have to be honest about that right and we have rock pools we have exit scams we have all these things that are very concerning to society so the problem is or the concern in general is fd5 unmanageable right so here are some questions i'm going to leave this here these are questions i hope they're being put on screen and these are questions that a well-meaning regulator will ask of us the industry very read one and you'll realize that it makes sense right here's another set of questions that a well-meaning regulator will ask how do we enforce our laws without third-party intermediation intermediate immediately it's impossible right whatever if everything is a robot a self an autonomous machine how do we enforce our laws something has to be done so here are the another one a busy one this is the republic right the other one was the empire this is the republic these are questions from the republic right crowdsourced from many people throughout the years right how can we achieve the goals of prudential regulation meaning protecting consumers rights investor protection consumer protection and also without creating a central databases right the financial action task force was want to ask to identify every transaction and every sender and recipient of a transaction in crypto that means that we now have full transparency on the blockchain and full identification what do we get with optimizing that 1984 george orwell's 1984 that's what we get is that good for society we have to think about it and we have to make them think about it so these are questions that the industry should be asking itself or should we asking regulators we should be asking regulators we are asking regulators right so are you aware that the proliferation of clandestine marketplaces is directly correlated with heavy-handed and discretionary enforcement that's a kind of cynical hard question to ask but it is a it's a valid question and finally this is also a valid question why is a tinder swindler not in jail i mean have you thought about that the guy is everywhere in the world as a criminal and he's still you know riding jets and driving ferraris i mean he's obviously a swindler a law breaker you know no one cares and we have the same in argentina we had just a huge ponzi scheme that was never stopped by the government people were being duped into buying something that was like obviously a lie no one reacts so law enforcement law enforcement is being ineffective so here's the inspiration i have got in my last two minutes right so this is what i've been researching for years now so how again we're trying to think uh in a balanced way trying to think about the needs of the marketplace and the need of need of society meet space and the needs of the industry so one of the first things i found is this wonderful essay by team o'reilly where we he talks about focusing on outcomes forcing our regulators for focusing to focus on outcomes and not on bureaucracy which is the perpetuation of the means over the ends right so let's focus on desired outcomes measure things do adaptive algorithms and do deeper analysis which is what i'm trying to say here another piece of research i've followed is u.s ventures i don't remember his name but he's saying why don't we trade off permission to operate for data we have plenty of data in the crypto space right why don't we give the state data so they can monitor us or we why don't we monitor ourselves right and then we also get permission obviously nick sabo right wet code and dry code why don't we create one and systems and mechanisms also vinay he has been kind of philosophizing about these things that are coming into play now with zero knowledge proofs and other things that are being automated so self-regulation by design feature and crypto economics to me is what you guys the industry geniuses have to focus on if we don't do that someone's going to do something about it someone is going to come up with a regulatory framework that will not be friendly to crypto economics so what i've seen here this is my three findings here in this incredible space uh foresight institute follow them they're doing excellent work the this uh there was a benjamin google that did a great presentation yesterday by collaborating with the state and obviously uh zero knowledge proofs so here is what my recommendations to you i am finishing now in the next 15 seconds and uh but this is my advice to you gray hair uh 20 years in fintech experience the name gives give to their mistakes i have a lot of experience and i work in this crypto space because i'm passionate about it and i'm very thankful and very and acknowledge the generosity of the ethereum community is incredible but you have to do something about it and you have to work on both sides of the api the technology side and the human side right thank you very much all right