EthCC 2: Jacek Czarnecki

hi I'm neurotic I'm a lawyer working the blockchain crypto space for almost five years now for a few different projects some of them should be called defy projects probably right now and since the end of 2017 on a legal counsel at maker doubt I'd like you to say a few words about my perspective on at the topic of the legal side of decentralized finance this will be you know like highly subjective but at the same time I'll try you know try to convey some some message about in my view on how that looks like when we are heading and what is important what is relevant on a pretty high level but I will try to provide at least some practical examples that might be useful now you know something about me so let me learn something about you I'd like to know who here thinks of him or herself as as a person developing or building a defy solutions like products protocols hands up okay about a half and who thinks that regulation is one of the major obstacles for for development of defy as a movement okay almost all and the last question are there any lawyers here in the room ends up just one okay so I'd like to start this presentation about wait doesn't work properly so let me start with with you know a very general view on the topic and I think that this topic can be divided into three things and some interconnections between them so first of all we can talk about the law I mean this is quite obvious also we can talk about finance which is destined is finance right so let me start between let me start with building some you know some connections between those three things so we can present them on a triangle and explore these free relationships between each pair in the triangle so first of all law and finance so many many especially decrypted space have a very simplistic view of law and finance or of finance in general it's something that can exist in a totally pure form you know a view that you know in the past there was something you know purely a pure economic activity a financial activity free of any you know like legal overhead right and this legal overhead appeared over time because of some regulation because of the state and so on and this is this is as I'm saying simplistic and most likely over simplistic because the law and finance are actually much closer much closer than many think and just one example is among many is something that is called the legal theory of finance proposed a few years ago by Catarina Pistor from Columbia Law School and here you can see a quote from her the legal theory of fineness asserts that fineness is legally constructed it does not stand outside the law financial assets are contracts the value of which depends on in large part on their legal vindication so this is a very specific view of finance and law that always exist together as markets as of markets that are you know like both from from public and like private perspective always have like legal significance and always have legal structures in them and of course you know one may agree with such a few or not but when we look right now in the define movement on in blockchain general on what is what we call asset organization we can see that it's actually quite true in many cases I mean when we are talking about for example the condition of real estate such as I know tokenization of this building at the end of the day we want token holder on forever to have a legal claim on the part you know of this stuff that is around us right a legal claim that can be enforced in real world and this supports this actual supports this view of of the legal fear of Finance because we have like complex financial relationship that we you know are parking he knew you know technology solutions but at the end of the day we need to have this legal component which is very evident in especially in a real asset organization all right in the second relationship is decentralized finance really quickly about that because that's being discussed over over the past few days so I I think I totally agree that defines hitting the word I mean this is one of the reasons why many of us are here right now but yesterday is the evening on one of the meetups the vinegar PAH likes it very wise thing I think like he said that finance you know like finance will be like decentralized finance that works right that you know this expression decentralized will will have no meaning when we become mainstream we're when it will become the best solution the best existing solution right it will just become finest so the question is what is a decentralization and whether we are using this term to describe something that is you know really the centralized or maybe and I think that many people are coming to that conclusion right now maybe it's more about values such as transparency or security right so we don't have products that are fully decentralized but there are you know decentralized to a certain extent and they're fully transparent which is you know which is already quite a breakthrough of in comparison to them to the mainstream finance and I don't think that I need to convince to do to that that in reality we see a lot of different hybrid models which are partial decentralized for many reasons sometimes we have some technology constraints we basically have note yet to deliver something that might be fully decentralized or sometimes you know we have much simpler reasons sometimes our people want to earn on the or bear products all right they won't apply certain business models they want to have you know central party that is earning money for right for from running a certain certain product or service and even though it's it's it is decentralized there is the centralized component of a fee for example so one conclusion that is relevant for this presentation is that different is quite a diverse and ambiguous phenomenon right so we we cannot we cannot very often you know we intuitively see many common like many commonalities across all the defined movement but at the same time there are a lot of differences in how this projects and and products and protocols that are being built are structured because they are decentralized to a certain degree depending on on a given product and lastly the deferred the firt pair and this triangle is the centralization in the law so something that is most interesting for me to be honest and here one thing that I want to say about is that you know the centralization we are you know talking about this word all the time it has a very particular meaning at the same time everyone I think has his or her arm understanding on what does it actually mean to be decentralized and the question is is that you know the centralization something that we you know understand something that we support is that something recognized by the legal system and of course that is a very theoretical question but the simple answer is that we don't have a legal concept of the centralization we see that emerging in some fields so in academia we see the first papers on the topic and also we see that in practice I'm sure that many of you have heard about so-called Hinman test the guy that that said from that from from the SEC that eater is likely not a security any like now because it is sufficiently the center right so like he introduced in practice this concept in a very practical legal problem whether whether a certain thing is a security or not solution is it's not because it's sufficiently decentralized but what what does it actually mean right and also this is a problem that is very often being considered in securities law right now but it's it's actually quite the same across many legal fields and one one very concrete example is here in Europe is gdpr because you know this is a type of regulation that was aimed to be you know it was thought to be technologically neutral from the very beginning but at the same time it does not respond well to the centralization right it basically is about regulation of central or centralized personal data controllers right and it's it's really difficult to apply this regulation to in the context of decentralized networks so now when we when we talk about you know these relationships between the centralization law and Finance let me talk about a few legal issues that seem to me most relevant that might be a bit philosophical or abstract but I will try to provide some some examples of why it's relevant for for the D Phi movement so the legal issues are as follows responsibility jurisdiction sovereign or rather lack of sovereign legal personality and the fifth point is some other legal challenges that I would briefly talk about at the end so so first responsibility I think that this is you know a car problem that we are facing right now across all the you know legal field across all the all the areas of Finance basically everywhere where defy solutions are present this is this you know directly follows from from from from this decentralisation primus so if something is decentralized who is responsible for running it this is the basic question that lawyers are asking themselves that regulators are our skin the cells and we see you know first answers that are being provided not not so satisfactory so far but that that is you know that the largest legal problem that we as a define movement are facing right now and here to see how practical it is you have the very first article the very first provision of method 2 which is in Europe in India is like a cornerstone of financial regulation right like equivalent to the Securities Exchange Act in the u.s. like defining a lot of you know basically providing you know basic regulation of financial services in Europe as you can see you know this provision says that this directive shall apply to centralized entities a centralized entities be centralized entity see a centralized entities D right this is a very specific method of regulation that we see everywhere right that you know even though theoretically speaking we know that we shouldn't regulate banks we should regulate banking the you know prevailing method of regulation is that certain entities are being regulated right and now everyone like each defy project that is developing something in a decentralized environment that these guys are doing needs to face the question whether this regulation applies to them right because you know I can provide some some investment services without a centralized provider and how this type of regulation applied to me right and even if you can't a conclusion you know in a good faith that you know there is no centralized provider but I want to comply with the law you know this laws are not adjusted well to decentralize networks right because the basic assumption here is that there is a centralized entity that is there is something and is regulated so that's as I said the largest issue or challenge that we are facing of finding a solution for for that the second legal issue is about jurisdiction you know like at the beginning of the 90s so 40 years ago with you know the beginnings of the internet there are quite a few interesting legal theories of you know cyberspace as separate jurisdiction right as we all know it didn't work out for it I think for many reasons but one is is really significant here is that all the you know firms like you know Google Amazon Facebook all this are big companies they operate in the internet like in the global network but at the same time they are based in certain jurisdictions right you can easily define where this company is based in terms of jurisdiction and they have multiple you know companies across the whole world and we can easily or more or less easily define who's responsible for doing something and now you know the blockchain brings against this brings this question again you know whether we don't have a separate something separate like something that's separate from existing jurisdictions and I know a few lawyers who are you know operas support supporting the view that block chained like permissionless broad chains are actually separate jurisdictions right this sounds like a very theoretical problem on but you know from the perspective of different projects who are building products that are global right which do not know any borders which can be you know used by anyone in the world it's actually quite confusing to find itself in this legal world of you know huge area of land divided divided in plots and and divided by you know huge fences this is how no lawyers look at the world as you know as a you know like many different jurisdictions you know you're moving to another country you are under you know another set of laws right and here if you are building a global product a decentralized financial service that is available to anyone in the world it's really difficult to to to know to to to comply with the laws in each of their jurisdictions right and so far we've seen a lot of successful crypto projects that just didn't care about that that just you know providing their services everywhere without caring about local circumstances but that's you know that's that's becoming more and more challenging you know with with direct with you know the the rising significance of what we are doing and with rising awareness of regulators that this is becoming challenging and this is a huge threat right because we see that we see that at the moment that you know people are in a defined movement something that was meant to be open decentralized are behaving like in this old world right directing their products and services to certain jurisdictions only limiting to large extent you know the technology that that possibility is that technology is giving us the third and the third legal challenge is about sovereign or as I said lack of sovereign so this is quite quite interesting you know from the legal perspective that you know you may think about this as a lender of last resort in economic terms right in in traditional finance you always have this central bank that can do something right that can provide you know last last chance liquidity to anyone right we don't have that in that decentralized Ward but at the same time we hope we don't have this legal sovereign that can do whatever they want with with with the existing reality right this is this is very significant from their perspective right because they you know like sovereigns like states their agencies they are not used to the situation in which they cannot you know force someone to reverse a transaction or force someone to close product right this is this is very small but a significant change that even if you you know find this responsible party put them into the jail for example developer you know this product still runs right because it's being deployed on a decentralized network and just exists it just provides services right so this is something that you know like in extreme scenario that leads us to to a complete clash with with the existing regime where there exists this sovereign that is used to its power right so we need to find some somehow find ourselves in this situation and try to you know somehow solve that problem right because otherwise defy will will it will be really difficult for us to become this mainstream finance if we don't solve this particular problem the fourth challenge the last so so abstract one it's about legal personality I think that it's it's totally underestimated right now you know it's not at least in my opinion it's not a coincidence that you know the development of capitalism 400 years ago was combined to a large extent with development of companies you know corporations legal persons and when you think about that you know legal person company is this is not something that exists in the real world right this is something that exists in our you know social imagination that we are thinking about I don't know Google as a concrete player right but what is Google I mean outside that this is a group of people that have you know some buildings technology like they are for example X these are legal entities we are thinking about them as something that exists and also when you think about finance looked at the one of the reasons why bankers or you know other individuals in the financial world are not being held accountable for what what they are doing is that basically what the main you know entities in the financial world are legal entities right they are so widely used this is not just because you know banks or insurers or stock exchangers are structured as legal entities but these legal entities are used everywhere I mean for example securitization this is a type of a business that uses a lot of legal entities special-purpose vehicles right this is basically this shows like strong interconnections between law and finance in the existing mainstream financial world right and we need we need somehow to find ourselves in this reality because you know our products in different movement it they do not use legal entities right we use smart contracts we use downs right which provide the same goals right that they're quite similar because they also do not exist in real world but at the same time we're using technology to run it right to achieve the same goals but this type of you know let's say entities smart contracts that are completely autonomous they do not they are not recognized by the by the current legal system right they are like compare not existent to a large extent right so unless we solve this particular puzzle and we see quite a lot of interesting ideas of you know extending the scope of legal personality to cover such you know new mechanisms such as certain smart contracts unless we solve it we will see a lot of problems of expanding further as defined and now we have of course many other legal challenges here I listed just free deter that seem to me particularly relevant for Europe right now much more concrete that what i was talking previously the first one is especially relevant for secondary security token exchanges right that we see popping up everywhere also those decentralized so we have in the you and in principle a mandatory use of central securities depositories this is this is something very like coming from very old financial word basically with with like a concept of trade at settlement completely completely like existing on a completely different layers right and we have special entities such such depositories which are responsible for the settlement layer but here in blockchain you know we are to luck to some extent or completely even completely solving this problem because you know like blockchain is providing us with a possibility to do a trade with you know flat automatic settlement I mean this flood like settlement and trade are becoming really close to each other right we don't have any specific entity that that would take care of just settlement right which would take two days for example as it takes place in traditional finance right now but at the same time this type of structure is now petrified in in the laws right so when you need to use this entities in order to provide the services if you want to comply with the law right so this is a very specific legal problem that is come quite common across to you and you know we need that to be some somehow solved before before we are able to provide such services that will be recognized by the traditional finance second in a few countries including Germany we have the concept of paper based securities this is extremely interesting topic a very long one it's something perhaps difficult to understand but basically you know these regulations provide that at the end of the day you know we have like many institutions but at the very end there is a certain save books in a certain institutions that contains a paper and this paper is this actual security right and this leads to many problems with actually no digitizing stuff for example using tokenization right because you have this you know this paper certificate that is actual security and if you create something digital it's not legally the same I mean you can get really close but it won't be the same and the third very specific problem it's being it's being talked about by by Milan port and other people in the front in the street now it's about custody of invest investment fund assets you have certain requirements that's relate to this custody right that need to be exercised by by certain parties but you know in the crypto world you have a concept of self custody you can you know be or your own custodian you can hold your private keys and be responsible for your own assets right and that's again this is quite similar to the first point here again it's it's it's a you know problem in existing regulations that are petrifying the old approach right it need to be open in order to really you know like free of possibilities and opportunities that that are that are being created by it by the different movement and now just a few words about some solutions or maybe recommendations from my side so one thing is that you know no strategy will work for everyone we are coming from so many different backgrounds areas you know like stable coins lending derivatives securities trading these are you know like of course interconnected but you know separate fields and we are applying various solutions we are building you know various business models different using different technology solutions right so I I think that each dfi projects here should use their own strategy develop their own strategy second thing is that we shouldn't be cheating ourselves and think think about others our sauce is you know we are really Suffolk decentralized and we just cannot care you know we shouldn't care because like not nothing applies to us right to a certain degree that's that's true right the centralization even though it's not a consistent legal concept and yet it provides some some degree of legal defense right because we can claim that you know we are different than all these others so we should be treated differently right but at the same time as I said at the beginning we hardly see any completely design choice projects like usual that's about that's about certain degree of the centralization and centralization in you know various proportions and we need to manage that carefully right because depending on on this type of management you can to potentially come to different legal conclusions so that's about you know measuring the risk involved in your particular projects at the same time I think that we should still stand firm in in in our principles right I think that we all can agree that we all building you know something new something that you know did not exist before right that have certain principles and values of openness decentralisation transparency security right and we need to string the extent stand firm in these principles that's that I mentioned that I think that you know even though even if you know if you're creating something completely crazy and decentralized it's quite good to have a regulatory strategy in the current environment that has changed a lot over the past two years and you know sometimes some of the projects are are you know are like I cannot fly under the radar anymore they are just you know just too too much money is at stake to avoid interest right from from their regulators so I recommend that in that case of course you know that's not a legal advice whatsoever but I recommend that in that case you may want to go to your local regulator even if you are not regulated at the moment these guys you know they they like to have things under control or think that think that they have things under control and actually you can get a lot of value from that right you can really that's not about you know very often these guys are not about you know just punishing they are they're sometimes not always but sometimes and quite often to help and also my last recommendation perhaps the most important one from my perspective is that look for other projects which have similar challenges I love I love that that we can call a define and use the word movement right like that has a certain directions direction and the common goals and you know our voice is like it's it's badly needed yesterday I write here late for this conference because I was in the European Commission and I can say our voice is badly needed right now so my dream is to hear specifically in Europe to come up with something that I you know that is just a working name I call it a defy Europe because this voice needs to be heard you know we will be strong as a group and even though we have some you know diverse backgrounds and we are building different projects we have these common principles and are they're often very similar bigger problems that we need to solve and you know will be stronger as a group rather than individual projects as that's the end thanks and questions hey we don't have time for questions right now if you have any questions please feel free to contact the lecture I think that's not the problem thank you