Legal Troubleshooting for DeFi Projects by Jacek Czarnecki (Devcon5)

[Applause] the title of the workshop it's legal troubleshooting for these projects and before I say a few words about myself I'd like to learn a bit more about you and also test out a polling system that will be necessary for for dysfunctional so can everyone see the screen please visit this website at this link will be able to vote like answer the questions it will appear on the screen in case you can't have enter information you find details of one network over there but its maximum in 50 comments so use your own internet and don't try this one [Music] and by this question I just mean that that you're not necessarily part of the part of my decline defect project but if you are like interested in this space you want to work in this space you are dealing with some problems related to the different space I don't have all right so it's working right does it work for everyone yes okay mr. so let's move to another question for you which is another technology weary of device have more interest to you and here you should be able to type a response here we have some examples right so that that would be a filling of what's most interest for you guys Texas rubycles seems likely to reflect right and the last question to you guys very based and here I rather mean like where is to defend project based right or where is like your your main interests in there in terms of like different activity so we may need to even live in Japan but we're working on US bases per project I know that it for decentralized projects if my that is so so easy but let let's so now a few words about myself I'll take that I'm floating in that lawyer in crypto for no more than five years and here you have like a few issues are most important ones I think so I'm a little council if they make your foundation and also I serve on some industry builders and some define focus groups such as the multi chain asset managers associations Association in in Switzerland I graduate of Oxford and also I got to Harvard Law School but my - option was that I wouldn't go there before before the multi-class both I slashed and it's gonna happen next month so I will be finally to go to next year novel engines log I focus on the legal aspects of my under this address those underground a huge length so actually the first thing I and important disclaimer before we start I am a lawyer just not your lawyer nothing here is gonna give legal advice at risk for me are there any other lawyers in the room all right quite a few so you guys are free to you know give out your legal advice but nothing that stays we go nice and use our mail right so I'm not representing necessarily representing make their views right now or any other organization that I am somewhat got it with the leg included so nubs troubleshooting of some legal problems so at first my idea for this workshop was to present you some very specific problems that I think are relevant like also which also falls through my practice but they thought that like this workshop a format is like I said it would be a better opportunity for this program actually ask you about some some thoughts so what's going to happen I'm going to present you a few more general problems that I see legal problems they see the defects base and they'd like you guys to answer like like ask you about your opinions about these problems and also about possible solutions and we can also have some discussions around this so any questions the moment this is remember this is the workshop so I'd really like to see some discussion here let me present the first one it's gonna be like at this one that i called front inflatable which is it seems it seems pretty obvious to me but let me explain in case you know you can fully decentralized products in that big white space which are you know some smart construct based protocols that are emitted role unstoppable and so on they use some centralized profits to attract users right and this centralized contents are usually some websites which have which have some visual domains enjoys hosting there are some crisps connected collected at this comfort level there is data collection going on just like everything that you'd expect from some usual you know traditional financial services when you're visiting this website in Europe you're getting some services you are praying for them your data is being collected and support and this province and the operators sometimes may run into legal trouble because they what they do is they facilitate access to financial services and products and I have once the example I was trying to provide example sketch of the problem that they present you probably know this this website is a resultant you probably know that they they were never hid behind some first meant actually in the US and when you look at the content of of their settlement it's quite striking that the SEC divert and SEC recognizes the the difference between the protocol level and the fronton level yet in the proctor in the practice it's it's it's like it's it's really difficult to to to differently analyze book right and this fear from the language literacy right that they do mention a few times that the website need to know the website thank you features similar to all my securities trading but it's right then they take actually listening this features right they are displaying the orders they're salted by tricycle or directories user account information provided field speak with deficit with drawl and so on right they provide all of this information and said this looks like exchange right this looks like securities trading many there is no difference from the user perspective and of course we all know that there is a certain smart construct going on in the background perhaps eternalize not that let's like example of like a total decentralize problem yet you can see that especially if there is just a single problems to to the protocol which is very often the case in the different space there is a certain problem that from the regular regulators perspective if they will not see differently than any other central answer profits any questions do these problems to this problem before we get to my questions today so why like just a centralized point of entry could isn't the fact that anyone could make a fronting for removal I'm an activist very visual so mother is a durational from my sides that's a good question I'm not talking about twin left in the specific litter or specific reverberation right I'm trying to like abstract away certain problems and all of them I think would be would be relevant humanitarian issues right so of course like an answer to this type of question might be different in some in some places and I just look above a certain practice right that very often this is protocols have single from right and of course this is this is this is very good advice that I'm giving out some time is that you need to like make this difference between protocol day and from that later right so that so that you focus your efforts on the protocol layer only but you know from the business perspective each other difficult right you just live it up to our two people to do something on your protocol and each other difficulty beauty business model on your back console right so that's why people want to put struck this activity they want to earn money on this they move they they are building this conference right which which might get them some some regular Travis and actually have a second example which is again it's like without any confidence right but I think it's like I think it's gonna be relative like no matter what was that like a precise legal rule or its interpretation if that's clear that you know you're providing a certain financial service via this certain front-end and you are like using this like claims about the centralization smart contract based protocol some other front ends this is not gonna work if like functionally and practically this service is mostly available via the single Crompton does not make it different from any centralized services right the second example is said mom you only care about like the recent 5a validations this is a kind of like a global ALL regulatory ITER governmental body there are settings and certain standards and recently they came up with a new recommendation that is very relevant for crypto and so far the interpretations like all this is going to be implemented in something in all the countries right so this is like a inter like international level that says and so far the traditions like what most right so they recognize that they seem to recognize that if there is a certain service that is decentralized especially noncustodial they learn requirements should not apply right but we'll see how this how this works out in in in many countries and I can see I can clearly see that in some places the interpretation might be different right so actually something that is providing you know even if it is not custodial but it's providing like virtually the same services as some centralized products it's gonna be subject to my requirements which is of course like difficult right because you know there's nothing like I've ever liked a ml at the protocol level you need to apply a valid opponent level and then you know you end up in the situation in which this protocol is not so relevant anymore because there you need the second frontal operator to use the services so now some questions to you guys that I'm really curious about this is the first one from the plane it's the problem that they just presented here we consider this problem before right so I know that my majority of you are working different projects and not the question is did you consider this [Music] right my killer doesn't work for everyone this is polling social all right that's interesting so there is this problem it would be great to hear some discussion but let let's tone it up till my last question the second question is how relevant is this issue for your party you want your reward is this something you think that it's you know you have consider this but is it relevant that's like this results is surgical information of the fact that it's like large majorities saying property saying that it's relevant the surgical information there is a certain problem in the difference with that that you actually people are actually building this competence on top of there are other protocols and there is like there is the second level of course I not you know this is not to scare you all right this problems that presenting they're just issues that I think we we should like spread knowledge about them also in order to educate regulators and lawmakers about these problems right because sometimes these people are are just not aware that there is displayed between per sometimes like quite obvious to us but not to them they split between another more general question how relevant is this for the entire deeper space in your all right and the last key question is with everyone's finished with this way what's the best solution so initially I was planning this as like myself proposing some solutions to banks but I'm very very curious about about your solution so here again propose I think to two solutions and then upvote or downvote solutions provided by anyone rememberable unfolding in Dublin this will give us a filling of what will English at work [Music] start in your country [Music] I'd like to start a new luxury option that's that's a coolness but it's [Music] all right so it seems to me since my multiple constants this is the winning option yet look at that like IP advice up here to Natalie's right so that's that's certainly a solution that also came to my mind that's anyone any like a proponent of this idea know like what's the state of like actually being able to decentralize both losting and domains that is anyone aware of Lucas like everyone knows that it's possible right but I haven't seen anything like that in practice I would say the state is that I like the the problem is the DNS entry you can you can use DNS or something and I think now like metal mask will handle getting you to that domain I may be wrong but the problem is that's not widely supported so in the end you if you want any body to just be able to access your website you need something you need something somewhere for basically anyone except the most already taken it yeah because I can you say like definitely like this tech technological solution right so just like from things are a problem because they are centralized so let's decentralize Commons would be would be probably a very good solution right but like the fact that it's not does not exist in practice like like items like at least my conclusion is that it's not ready it does not exist right it's a physical solution that is not available right now multiple contacts that's that's that's a really cool idea that is like at least what we see as well it's just like to share experience these are if I have been I have been one receiving the you know SEC prosecution or is it are you just like difference of finding the number of people they can yeah I think that of course it's it wouldn't be like like it's super soon I mean by doing this you're just on the line with the fact that the front of layer is like separate from the protocol layer right so you can you can you can like the part of the leader strategy here that I'm seeing from time to time is to say okay there might be some regulated activities going on in there but they are not happening on the front of liquor we are just like providing this information they're happening on the protocol layer try regulates profits not the front evaporators this is a decor of this strategy does anyone want to like have an experience with this like building a decentralized product and trying to actually bootstrap from to support because first some reason it's not happening very often as well right like I already I already said at the beginning that's my feeling is that it's just they've come from the business perspective right you encourage people to do this but there's some incident yeah [Music] I think that my experience is a similar I think that multiple intensity is not good you particulated and say listen look there's another front-end let me off that's a kind of argument to make to a charger extremely legal arguments a purpose of this and it's a little more popular than that because of this technicality let be on the computer yeah this room I think that we we need to think about this together with this so she pulled a double boiler from right this is like like the first step it's just actually just so much like this select by incentives it can have a very strong also if you do not have some sort of really consistent and sustainable business model than these projects become harder and harder to be able to believe we're just saying that expand themselves especially a little legal risk or associated with mostly my projects that it's very expensive very quickly yeah yes of the if you have done that the runes makers to speech we would see like but like our strategy I mean like approach over ideal approach which is regulate on edges right and like in the same way as a bit different no returns but no one is trying to regulate what's happening in this networks yet there is there are several regulation on edges such as the exchanges right this is like a certain strategy that that many people are trying to convince regulators to so that you know they they like live it like believed is the centralized essential I start like the loan and try to regulate those bowls around but of course you know like it's for them it's this difficult access I think like this right to a low that certain that you know regulate activity is just being you know transfer to some protocol value and that's why I think that it's not it's not here on the list but I could see them on the phone that there was a few change and change the law right no one knows like how exactly but that's that's a subject option as well right perhaps this law doesn't work anymore in this context right we receive like like this is like for us it's it's focus how can you regulate the speed right you can regulate this bottom you can you know put these guys to jail but this protocol still exists right this is like Regan will establish itself right any other comments on some other solutions here all right we have this one right in place and yeah it's interesting one in practice is there anyone from floss is here because in practice this is being followed by that right that if they establish this the excel which is which is governing Duchess Duchess thanks right there trying business without the practice of it so that these dogs are actually controlling controlling the Dex I mean interesting but like outside of this example I haven't seen this in practice right the question is if this if you if you have like the question is if you really can learn that like centralized us think I'll bite down right this is this is this is still open right there is a second reason at least some jurisdiction this that would be just classified as a certain partnership or Association or something right which would not protect its its its members or whether building right but let's let's move to other problems because there are six of them and to be honest so the second one I call the centralization and the problem is again simple I think which is that the centralized final financial products are often partial partial centralized and this I think is is quite obvious due to many people in this phase they're just examples of of these sensors and transitions thoughts there is also sometimes lack of transparency right so that people are actually not aware or they don't know it's centralized it was decentralized right there is like certain marketing about about the centralized financial services yet when people look closer it's just clear that just some parts of decentralized or there are some centralized elements and I think Texas is the best example of this right so that people for for business reasons are very like you know incorporated some centralization in their services so that it's more like it's faster it's more its best better for users because it provides better the vendor service and this why is it important this undermines the core legal claim of many different projects right because many projects like like talking about like totally high-level legal strategy they're saying this is complete decentralized right I'm not controlling it so how how would I be like mine would I be responsible for this if I'm not running this yet it seems that there are sometimes there are some operators or people with keys that do something and again example a compound was last known compound just like a spotlight on this project essentially centralize the features which is not necessarily like accusation or anything against compound because they are at least to my knowledge they're writing this quite openly the white paper that it tests like this centralized functionalities with like this ultimate goal towards towards but towards the centralization right but that's the reality of many approaches right that they do to like many reasons also like lack of you know like under under like not sufficient development of technology there are they're demanding decentralized features and but still did this may undermine this this legal strategy so now questions and this is with the same to consider this problem in the legal things [Music] thank you I just I just explained the decimalisation by itself is very open like a legal career right don't regulate this product this is central this is the sentience right so there's no one to regulate yet in many cases you actually see that there is someone behind you right even for example even if like this is non-custodial there is someone who is controlling price of its which effectively gives a lot of control over over the product great so they can come for you for using that it just underlines this very claim that there is no on the island right so that it's running on the town it's like hopefully this request like a bit right so quite a big awareness [Music] that's a sex machine which is how relevant is this issue for your project right this anyone went to open the same which project they are representing and why they do choosing one of deception yes I'm going to talk about finance we do interest rates across county wide exit and so I think you know from our perspective one where they can prefer than watching today so we're super new and like obviously generally is like trying to make sure we're decentralized like eating the direct areas which is English we're like running with other standard regulation those yeah that's a good point and that's that's absolutely true that like again I'm trying to present like to general problems so that they like people might think about that like no matter what country they're coming in what they're actually doing but of course this is like this this kindly highly depends on context right so you're you're you know you're certain the centralization centralization balance my tourism might you know the result might be that you are subject to payments in the surf intersections but not to secure restraining requirements right that really depends of course you need to like very careful look into like specifics and also specific regulation maybe given country in order to come up with with like precise answer like you like out of necessity we need to stay on this on this terrible today okay next question how relevant is this issue for the entire different space [Music] [Music] seems like a really straightforward concept and the last one solutions any ideas have come to I know that it's extremely general but the same time I see it is probably being repeated in many complex and it's notions in this one [Music] [Music] does anyone move to see what the understand wait for Elvis in position but I assume that means utility or do you start out at war regularly centralize that you know maybe saw the horrible trilogy based on databases my matches and then as you I think through a multiple stage multiple strengths you a sort of design architecture application try to be more amore centralized so let's rely on use on centralized point of data and black boxes I made somebody want to migrate man and just want to add one more thing that it's also important to be careful about medications if the token is a part of a certain person certain that's the case and I think transparency is really good point it's getting a lot of votes as well right this is not like a solution per se but the places you know it's it really delivers all the value no towards your users commercial interest is regulators as well so that you're transferring over time right awareness is possible right let's move on so the third problem is about integrative income and finance which is not only a legal problem I think but also so what example is that these are like from from the legal institutional perspective these are two completely different worlds right and one specific example that is that in define or in general we are mostly talking about pure assets rights like bit coincident you know you know beyond the kiss you on the assets right and that's all you are you are there there is techno custody there's like no no other part in here finance this is about all of all evolved registered nozzles so so that your asset is actually claim against someone that sometimes it's really complicated who they are to put this other person is that is like some whole be obligated towards right if you're holding like a stalk like most of the colors in the word you're actually not like you're not having this like we're having this this claim I guess the company but actually there is a certain castes to be understood in broker that is this you know actually holding this legal right and this is just an example right we all know that you know default is is mostly about building things that are permissionless in traditional financed by their definition these are permission so she's right that they're based on some awesome trusted partisan essential controversies and our example that America actually had this this discussion in the committee recently about MCD and no trustless or permission as I as I call it authenticity right how would it play out and how exactly can we combine like this permission nature of many assets with the permission less nature of or the whole product of em city and elevators and this is you know that sounds to me general but they're very practical questions about it right like how do you how do you you know answer this question what will happen if certain asset that they scaled is collateral exposed right or the forced transfer function is uses right these are these are also technical problems not to mention that there are legal ones right because what does it mean to to stop something at whose call degrees us at once it is in the provisional is that so that's that's a very specific problem because that's not necessarily a problem regulator problem right that like as the the other ones that we're talking about that there is a certain risk that us as like defined project creators might be helped to lay a build this is a strictly legal problem that we have because we we somehow want these two real-world assets to be to be brought into the device space yes we are facing facing with this these problems and this also nothing but not just about us but also integrated with the traditional minor financial structure right so for example bringing define assets into traditional fires this is the same problem right up to brick permissionless assets into a prohibition triangle environment there we go with questions did you consider this it might not be totally relevant for some projects for some other it is extra perfectly so let's see if you guys think it's relevant for you all right and if anyone this is also the legal problem in a way that this is how regulation is built right like financial loss our response to our financial system works and diverse in the permission of permission model right this is visit perhaps to develop like the source the source of the optic of the problem and come relevant is for the entire different space of course it depends in the perspective right because people are think about deploys like completely significantly towards the person manages our financial system perhaps it's not really bad at all but those that think about like integration and converging go stereos [Music] let me speed out of it Solutions it seems that the friendly jurisdictions are getting a little folks it's a revelation digest which is a winning option here this is a nice month yeah it's it's it's it's not a solution in a way that this is not something that we can apply right because we are not regulating but of course I mean one thing that is becoming more and more obvious to me is that we just like the define movement need to like engage in this relator discussions right now it seems that certain momentum is building especially in the state comes face with libera from cheek and we need to build this awareness right how the fact projects are different from all the other my also a function like krypter krypter space get there so yeah so cute I think that majority of us is saying that change the law of Revelation ages which is convinced regulators allotment wish to regulate all ages and some facilities have convinced them to build some boxes is the winning option and that's that something I agree with in a way that I I think that's that's what we need to do right just just to just me try to be but without the voice right right right next problem which is which is very simple define is global right this is like by again by our definition something that like you know people can use like whenever whenever in tourism yes revolutions walk right like you are facing sometimes completely different problems in Inventor addiction sometimes totally different yet these details are of utmost importance and I have now it's not an example it's a catcher example and because that's that's what you're saying as well we you know we are facing this problem as well right the diamond might that's right now I play I'm wearing my maker it isn't that I might be treated in many countries different right as like money is a financial instrument as something else right depending on the local boss yet we are trying to do our best sometimes in realtor day as well to to protect this free status of digit of digital cash right of like a spot instrument that is not regulated it's just not a regulated instrument so far we are going job here but you know the problem remains right that this this product services might be regulated differently and it's difficult for us to respond to that right because you know we are doing something that is is global digital scales problem and by the way this data I'm gonna shirt of course but I hope that that is - this is giving the option to go save all this of course all this is in my name is right but it's gonna be very useful I think an interesting to see this disaggregated data and presented to the wider community yes so you know why it sounds like yes it might be a problem but it also sounds like it could be a way to print the solution like other people's standards around the financial the big things is that you know the current state of any label the standards around if you're like most probably things yeah just because there is even just between China and Southeast Asia so many why did it entire structure where we need YouTube for example on Netflix all have to complete a background the way they contribute for more evenly like watching 55 will be about victim interesting people like Rihanna financially this well actually I devoted my talking to defy summit in London last month exactly topic by 30 minutes exactly do that so encourage everyone to this is also interesting because sometimes it's just you know people are just saying hey we are not we are not available or operating in any specific country we are every move globally but that means that no specific laws of my right because we are not present specifically any country so that firms some sums that this strategy for some people is but right how are all about is that for yogurt so really related to the question about like global compliance standards and who would be the multinational regulatory bodies who watch there's there's nothing like that but there there's something political understanding bodies which are not the surya regulators in terms they're not able to adult by equals but there are developing center standards and encouraging others that don't generate it's not like i enough it's right I've been a more space there's IOSCO in securities security space and a few others right and they are like think tanks that are yeah I mean you know actual regulators are Pacific countries are participating in these bodies right so they're not like just think things and they are like example shows their exchange rod yeah how relevant is or is it for two entire different specs quite good and then I said this is this is you know the current state atleast it's nothing so me like a bad thing right although always so it's like a certain legal issue that is really problem right so what's the best solution [Music] [Music] [Music] yeah the display initially that it's not necessarily probably global standards yes definitely definitely interesting one yet they might be at least it's um like a male for example that's something that might be some close to the global coordination that's been steppin agree some other things like security circulation this is Cana this is gonna be impossible to calculation the one interesting example is the approach to stabilize with Libra approaching and all of this you know mess people from like central bankers reverse countries saying that they're not gonna load this this will be a very specific test for international coordination art but I think people underestimate how difficult it is if you have global standards and you don't like these abilities that I was in line it rocks that you start and filled the spaces between the regulation people infinitive and the different ego that's our biggest beef Latoya's but not for people who are admitted projects and devotees standards exist like this laws are more or less similar in many countries because the policy concerns are the same or almost identical right so there are suspenders the question is these are not detailed details which are problematic here right when you come from disrupt this is there a difference between global standards of regulation and rules engines of definition about various things like maybe like for example definition of die his die of error actions and not as bias energy is not is there I don't know the world works with definitions no that's that's more or less the same as right like for a male rubbish for a mole for the purpose of paperwork that thought it was like extremely relevant out there to Paris is defined right but it was like one of the car bombers right let's let's run this really quickly never local liability I'm not sure that two cars an explanation here just one example because there was like a lot of like theoretical thoughts about this but one example Averill laws are being implemented by many countries in Europe right now and this is this is something that the UK government's like propose like the US big wish would it make sense to apply this regulation to people that are dealing with the publication of open-source software which is includes but is not limited to longest within world software other types of group doesn't related so right so this would be not just banks or exchanges that will be subject to this type of regulation but also open source death did you consider disability [Music] all right that's this acute quite surprising I thought it would be to be close to hundred percent yes let's move on how relevant is this before we go to project I mean is of course difficult to say right if you're not a lawyer but just people are fragile and thermal other than it is for the entire defy space Thursday again is is that you know if you have like this centralized financial services and regulators are looking for something that this is called access points you know you may want to address users minors but developers like people that are actually doing this and not only developing protocols but also products seem to seem like an office Isis but from the regulatory cost point of view to think regulators with one after this developers because that computers a huge amount of cost for the Americas yeah I mean again this is like a generic problem that might materialize in some specific complex right of course I do not foresee this this sport in which developers would need to go underground because there would be like huge regulatory enforcement action at the toe of human strength but in some context that might be relevant like I'd like a shot with the same models right it's enough if there is like this small detail that that would really make a difference like right right solutions actually I think that here material best solution would be to do literally I thought it was best darkness you know it's not that sometimes we may be who may think that it's like without any sense at all right but you know imagine it like that that that is just developing a Ponzi scheme like with full knowledge that it's going to serve this purpose we deploy the cotton promoting it right then that's it's not obvious right whether we might want to go after this guy pass that there is a certain brush around for trains right we're tight the information available here if is open-source and everybody in contributed yeah is a community of desert yes yes really right okay so we are really running out of time so let's quickly go through the last piece which is just like pure legal martyrs right so some cases in which examples just so last series of questions legal barriers so you know like you know laws that are just not responding well to these new new products which does not mean that you know sometimes the fact that they are not covering something explicit to these other problems you saw their opportunity but sometimes there are stopping people from doing doing things to go right natural common answers seriously however your right some as usual overestimate this the stigma certainly fun to do things about the role general but this is the necessary problem breo's how is this relevant for Bacall defy space and solutions it seems that this one actually that this one actually have like a very simple simple solution right just change the law justice make these people that are responsive responsible for gays aware of this problems which is which is possibly the the best result it's something the question if we want to do that right especially those people that have this mindset of giving something that's completely alternative you know they just don't want to make people aware that regulators right because they think that it's going to be some problems and it's invalid all right so we are terrifically late I think use this data hopefully on defy example all sort and present present these ideas and I hope like I really hope that this this will be just like the initial discussion about general problems and we'll get into specifics as a community right because we really need to share these problems common problems as we can see as projects and think about solutions that whatever they were a fright they may throw or no six sorry it was my mistake I said these were six problems so that's actually different [Applause] you