Bridging the Gap Between DeFi and Regulators | European Blockchain Convention 9

[Music] 2 1 I think we can start straight away uh my name is Max pleasure to have you here I'm honored and delighted to host this great panel today on Def Bridging the Gap between Defi and Regulators um with me we have yon Ison from Unis swap we have Aline from ebaa we have Mark CEO from banker and we have Thomas uh who's attorney at law and also one of my colleagues at inapa and chair of inapa the International Association for trusted blockchain applications so the topic Bridging the Gap between Defi and Regulators one of the hottest topics we have at the moment a lot of uh discussions being led about MAA and also exemptions from m in one of the recital it says that MAA shouldn't apply to fully decentral ized applications and systems so what does this mean and maybe my first question to one of the actual co-authors of MAA who's now with uniswap Labs yon please elaborate on this okay um yes I think that's uh a topic we cannot avoid with this uh title of the uh of the panel I think to Max this point what I've been doing ever since I left the European commission and um making the rounds in Europe speaking to anyone from Regulators to legislators is of course that why does it say fully decentralized what is the meaning of this uh recital and what exactly is within scope and outside of scope what is actually fully decentralized and I think an easy way to look at it which uh I think most people tend to agree with is that there is one discussion which is more about the definition or qualification of an interface which is is something within Title Five of MAA do you perform one of the activities by a centralized entity and then when it comes to the protocol level often the question is when is a protocol actually decentralized now of course I can come with the reasons why I believe we wrote MAA the way we did but the fact of the matter is that there is not really any uh agreed upon definition so putting anything into legal text as in XYZ means you are fully decentralized wasn't really an option and Mika as most of the people who know it will recognize is very much traditional in the sense that it focuses on intermediaries it basically just extends the scope of financial regulation to a new asset class and new issuers but it doesn't really go into the question of what when something is actually decentralized it basically was created during the time when everyone from International standard Setters to others started coming up up with this Dino approach saying well decentralized in name only which is my MAA clearly states well if part of the operation of the activity that is in scope of Mika is performed by a centralized entity then it should apply but it doesn't say anything about new types of intermediaries or uh extending the scope of MAA beyond what is in Title 5 which is custody exchange trading all that stuff that we know from traditional financial markets thank you very much yon uh we have someone here from the European banking Authority that might have a different opinion about this uh so I would like to hand over to you Aline uh what's your take on MAA and its application to decentralized finance hi hi do you listen yeah okay so um so yon was right that there's this recital in in MAA saying that um if a service is fully decentralized or the issuance of the of a token is fully decentralized then it it does it is not covered by by Mika but at the same time fully decentralized or decentralization is not a concept that is defined in maika and at the same time uh when uh the crypto sector uses this term it always means something different um and this this is something that for us it's very relevant like we always have to look at each case and we go Case by case and we don't necessarily take the words and the even apparent qualification used by the industry as our own qualification you know like we have to go by Case by case in the case of maika I think it's also relevant to understand that um uh it requires uh Prov providers or of uh crypto Asset Services as well to um apply all the rules that they are required and the MAA when they offer services on tokens that have been issued in a defi way or decentralized way so the requirement would not apply to a fully decentralized issuer or Casp but if there is a centralized Casp offering services on a defi token then certain rules apply so it's not like defa is completely out of MAA or out of Regulation so that's a I would I would think this is this is the key to understand um yes thank you very much Aline I think it's a it's a great take on this I mean a lot of discussions are being um LED about what even is fully decentralized right it it means I think right from the get-go there is nothing fully decentralized it's a progress step by step and something something can develop into and the question at this moment is what is sufficiently decentralized um mark from you from practice something we have been discussing quite a lot as well is responsibility and liability in the decentralized world so ultimately the question arises if something goes wrong who can be held responsible we want someone that we hold a claim against we want someone that we say oh he she was the one being responsible for this collapse so how should this be handled in your view and do you think it would make sense to have a developer or interface liability responsibility yeah um there's a a little to unpack here so I think in the context of the the discussion that we were just having um I think that it's interesting to see the like Regulators in the industry sort of converging on this idea of decentralization because just from a historical context it was not necessarily that um the industry is going to be decentralized for its own sake but that you can in a way uh be such a vague moving Target for Regulators that there is no way to regulate it right and this is kind of where where blockchain and defi was born from it wasn't a there is a legal definition of decentralization or sufficient decentralization that we're going after and it is by that measure that we are going to you know uh fit into this legal structure and so for Regulators to Now sort of be approaching and say well if something is you know sufficiently decentralized and actually giving it a legal definition is kind of strange it's sort of like art imitating life in a way um because it wasn't you know it was never this sort of standard that we're holding ourselves to for any um you know for its own sake it was pragmatic in that sense um with the liability thing I think it's important to see it through that same lens when something is sufficiently decentralized there should be no one that you can literally hold up and say this was your decision to do this and therefore you are accountable for the consequences anymore than you can say that a cultural movement for example can be attributed to someone and whatever consequences that it might result in and of course there are examples that we can point to um where you know something is just an emergent property of the people that are participating in a system um and within that sort of vein you can't say that there is one person to which we hold account and I think that this is this should be the ideal in defi of course as you've said there's usually at least a group of people in the beginning who get the bull rolling in in in this start um but uh there is also a very strong pattern of then sort of giving responsibility of the protocol and its operations to the community members who control it um and even then uh you have the issue of well you know if someone writes a proposal and that proposal is accepted and that has an adverse consequence should they be held held accountable for for the decisions that they made I think that there is um a convenient Line in the Sand um which is that it's it's almost obvious when someone was the person to whom you know you can attribute something bad happening whether it be like wides you know widespread fraud in the case of people like do Kuan for example um or or when someone uh deliberately introduces a malicious piece of code or something into the protocol in order to exploit users or something like that but then there can also just be um you know uh people rallying behind a bad idea like liquidity mining for example which can then have a devastating consequence on the um you know on the economy of that token or the protocol that that it's you know uh that's dependent on it and under those situations it is and I have been in this situation myself very difficult to say this is the person who decided that you know liquidity mining was going to be the thing and so it is their responsibility to pay for the consequences because it wasn't that way at all it was you know an emergent cultural phenomenon in much the same way that you know uh you know that uh a lot of things that large communities gather behind and so I think that there there are cases where it is clear and I don't mind saying that this is an individual who made a bad decision and we should hold them to account but that doesn't mean that we should always try to do that there will be situations where sometimes bad things happen and it was the you know the the the crowd wisdom or lack thereof that caused it and just the same way that in Defi and in blockchains in general the idea was to be decentralized in the sense that you cannot hold one person to account there are going to be those situations today where you know things go wrong and it was the you know the uh the decision of the many um that was that that caused it and you know you can't hold a group like that that is so uh IL defined to to account in any legal sense thank you very much Mark great input there uh also with regards looking to practice of like stories like tornado cache right where someone developed an idea of protecting privacy and afterwards it's used for money laundering can I hold this person accountable for this yeah yes or no there's you know the would you hold someone to account that for example left a loaded weapon in a room with small children right like defi is I mean I I apologize for the the ton of phrase but is mostly populated by children um and to give them something that is so easily weaponized like tornado cache um was probably something that you should you know even as a developer just wonder if this is a a good decision and I don't you know for the record I actually don't hold the tornado cach developers to account uh I think that you know they are privacy maximalists you know then they uh there is a legitimate argument for the existence of these types of protocols but you can also understand the counterargument right if you are a taxation agency or you know someone who is um you know committed to anti-terrorism financing um then something like this is is obviously offensive uh you know on a personal level but then also uh obviously incompatible with traditional Financial laws and so under that under that premise I would say that there are a lot of things where people you know end up Ming themselves for something that they believe in that is so obviously you know incompatible with the world and tornado cach is probably a good example of that so I think that we can hold someone to account because we have you know you can identify the person whose idea it was who implemented it that then resulted in a large you know money laundering ring um but does that mean that they are like ethically you know if they if if I I think that they did something unethical I'm not entirely sure but legally I think it's easy to to make a decision y thank you Mark um maybe taking also away from what from your answer and then handing over to uh Thomas we have existing regulation and sometimes this existing regulation applies to new developments such as decentralized Finance sometimes we say we can put this into existing boxes sometimes we have to create new regulation um what rules should be applied to those platforms and applications where existing regulation may not apply and also maybe taking some something from what Mark said in decentralized finance should we focus on a topdown regulation approach or rather expect the market to create regulation Bott up um thank you for that question I I think it's if you want to go a step back and um whenever I talk to regulators and I I had the honor to be in in several work groups already I think the right approach is to First understand what we are dealing with right and um that's the first step and it's now in Europe at least and in a lot of countries we have very well um like people who really understand the technology that was not the case years ago um and for me that's that's my personal opinion I think if we would have something which is really fully decentralized which we don't have in 99 whatever percent right uh then the question is where would you really need regulation so give you a very small easy example if you operate the Dex it's really fully decentralized exchange which addresses the risks properly which we normally address in the centralized world with regulation you're you're provide like nobody can front run your orders nobody can place fake orders all of that stuff is addressed in the end there will be no harm because people get the outcome they expect right they the system will do what we expect from the system it should do so then the question is where do you need regulation then everybody comes up with the question yeah we need um like money laundering and we have to to to fight against financing of terrorism that's like putting that aside when you talk about the supervisory models I am a big fan of the idea that may not now maybe not tomorrow maybe not in a year or two or five but Ultima right technology is a capable solution for these questions it's not now but we have as an industry we also have to be honest most things we see nowadays is not fully decentralized right it's just not and um therefore regulation is applicable and I really like the approach and I'm very proud of Europe and the European approach with Mika you can you can think about Mika whatever you want and soorry we are in 2023 it's not happening that we don't have any regulation that's not happening we have to have a sensible regulation which protects consumers which but but which is also liberal enough and provides our entrepreneurs the the ability to get licensed and then to provide the products and services so I think it is it is uh uh you need that understanding first and then you hopefully come up uh with with good regulation um to give you another idea if you would like prefer using existing regulation that really depends for example for issuance of of of a digital security the prospectus regime was quite good right you don't need to change that but if you set up a dow and you don't come up with a a suitable corporate form kind of thing for a specific subset of the Dows you will end up in a situation where the existing like the courts will say look this is a group of people aligning with their with with their idea and putting efforts to to to a certain goal you're nothing else than a limited partnership so everybody will be liable for everything you as a group do and that's an outcome you don't want to have right so there you need to to to to change laws there you need to regulate to avoid an outcome you don't want but coming back again right it is complex in every aspect we are like regulation we we just say that as easily and then we think you might think of ah regulation that's the MAA thing no it's not only MAA it's tax laws corporate laws it's it's the supervisory laws it's the Civil laws like nobody tells you that if you transfer a token from A to B from a civil law perspective in some jurisdictions that's not even like has any consequences and then they tell you yeah you know we tokenize piece of art and if you transfer the token the the the piece of art the ownership right is transferred it's in most cases it's just not right so this it is really again a process the same process as maybe with like nothing starts fully decentralized and we will not have a perfect regulatory regime in Europe for all of the questions we have but we are on a very good way I have to say uh and uh we and actually the the bridge the gap between defa and Regulators as as a chair of of the board of Ina that is exactly what we do we we try to to do that right we try to bring the industry in front of the regulator to talk to them to learn from each other and to come up with with a good regime thank you very much Thomas so I think what we what we highlighted right now is the different approaches globally we have state driven regulation in China we have Market driven regulation the United States where it's regulation by enforcement SEC cftc Etc and we have regulation the European Union uh in the way of M the markets and crypto asset regulation we have the new AML package the new new dac8 with taxation coming up so there is a saying strategy is to this um to decide what not to do and um this is maybe also where I hand over to Aline to get his views on do we need a MAA 2 for decentralized finance is there any any or do we say we want the market to develop first and as a European Union need this room for in ation or is there different approaches that we can follow on like for example DL pilot regime or sandbox regimes of course just your personal opinion not not the European banking authorities one no and I can give you like our our opinion actually um first of all like already starting to speak about mikachu is too early uh this is like when people started to talk about psd3 I remember on on open banking before psd2 was implemented it's like no stop let's implement did first um Mika already contemplates somehow a review of of Mika there's actually uh for the end of next year for December next year uh the the commission has to uh somehow submit a report to the both collegis lators the the Parliament and the council uh on four topics four topics that were not covered by Mika on purpose uh one is defi the other one is lending the other one is nfts and the other one is let's say the relationship between transfers of EMTs and psd2 and what I can say is that we will contribute to that with some sort of publication we will do we will organize um workshops we will organize um meetings where we will uh invite um industry representatives to there um and then there's uh by 2027 the commission will have to table this MAA review report where where there you will see we will all see the legislative proposals to actually am MAA if this is considered necessary what kind of content we can we could find in such reports either next year already I think we we will see in our reports for example or in commission's reports um we I would say we care about three topics I I would group one is investor in consumer protection another one is financial stability risks and the other one I would say is governance and operational risks just to group everything into those three packets financi stability risks in the case of defi we are not I would say if you read all the reports from Regulators we are not too concerned the D5 Market is so far small um there is excessive leverage there's high collateralization but but the because the the the size of the market is still small and especially because the market is somehow um now dedicated for like institution is based on institutional investors entering defi for the moment this is not a big concern uh in terms of investor and consumer protection I mean as I was saying like there's not too many retail investors in defi we would say but if they were to enter they we consider that they don't have too much protection as of now one one side one one aspect would be disclosures explaining better being more transparent another one I would say is how oracles work and how we supervise or we do some sort of oversight on that data that is provided from oracles into defi on chain and automated and I would say that um the other one is how retail consumers or investors access Defi and um most of most of the providers of this access to defi they could already be regulated under MAA some somehow they provide Casp Casp services and and and that's fine but you I I think John John mentioned earlier um web web interfaces that just provide the service and uh and then the user can somehow um do uh transactions on di from a non-custodial wallet so therefore like it doesn't that web interface doesn't fall under MAA because it's not a Casp um but in but we could bring those web interfaces within MAA like extend MAA and in terms of governance and I it also rea to the question that you did earlier I think it's um so there's there's a few challenges one would be uh conflicts of interest I I think defi especially in daos there's many people working for for for multiple daos there's no control of that there's no identification of if there is actually any conflict conflict of interest which may be even harmful for the for the for specific Dow Andi protocols but also for Regulators there's also um what we were saying like who is like vible um we could somehow bring daos into a legal status and this probably would be beneficial for for da participants because somehow the liability they have now as we saw in some cases in the US uh they they can be scared they can be brought into the full liability so a DA would protect the individual that participates in a in a DA but this may may not solve all the solutions and this is very complicated like who is who will be liable and then uh in terms of operational risk and governance as well it's very important uh for us and there's already like a lot of global Regulators looking at this is um uh the security standards and the let's say certifications necessary to deploy a smart contracts there's no sort of control there's very uh the the the market of auditing a smart contracts is very small uh we know that many defi protocols claim that they they have to wait for one year if they want an audit but maybe if you actually regulate the auditing and you require it you actually create the the market for for Auditors of smart contracts um and also in terms of yeah security which includes not only smart contracts but also the open permissionless blockchains in which they are deployed and not only the level ones but also the level twos so I'm not saying how we will regulate all of this but I think all of these aspects should be in the regulatory discussions thank you l so we see that in Europe there's already a lot of thought being put into how we going to regulate it and how we going to do that so maybe next to Y who's working globally with um for UNIS swap in The Policy Department speaking to a lot of international Regulators from different jurisdictions and I mean crypto by Design is borderless it's a borderless phenomenon that is not bound to certain regulation barriers so what is the approach that you see internationally are other Uris ditions or other other bigger bigger players following the European Union in their considerations about how should we regulate defi or are they saying okay we want the market to develop and Thrive based on less regulations so to say um yeah so I mean I think mostly all of us know what the US approaches which is of course uh a lot of enforcement some uh that goes through some that luckily does not go through um but I think from from most of the discussions that we have whether we are in APAC or you're in the Middle East or you are in the US you are not able to have the same Advanced discussions as you are in the EU because Mika is coming and it has been coming for a long time which definitely leaves Europe a step ahead in terms of thinking differently about defi I mean just here to Alan's answer before how am I going to follow up on something that they haven't already thought of so I think here we can have like an a factual discussion about okay so what is actually still of defi what is still within M what do we need something new for um I think if you look at the UK they're basically doing well they have a couple of days left to confirm but I think they're supposed to publish the outcome of their consultation which as far as I know should say that for defi they are still assessing and trying to figure out exactly what to do which is basically what Mika says there are not one but three reports about we will continue to monitor it is not as simple as extending the scope of assets that we cover in a centralized manner it is completely a different way of looking at regulation do we apply it to individuals do we certify software within Financial Services it's a completely different way of thinking if you want to protect in the same way without hindering The Innovation there is of course always the choice to just apply the old regulation which is some of the enforcement actions we've seen um but I think in in Japan you see the same thing where they're also so pretty much every jurisdiction as as far as I've I've seen they tend to go stable coins centralized finance and then decentralized finance and some places they make the mistake of trying to do Allin one which means they're held back and they probably could have had something out there already if they had done just stable coins in the beginning um so I haven't seen a regulatory Silver Bullet if you will I haven't seen a more advanced discussion than the ones that we were able to have in the European Union um and I've seen a lot of mimicking of the European Union framework then they take the parts they like about M they throw away the parts they don't like or it has to fit with their additional regulation where it might be different than our miid or our EMD 2 or whatever it is that we have in Europe but I think for the most part I think m is success in that way that I could imagine people looking at the European Union when it comes to defi as well um but to Alan's point I think whenever people ask the question as in when will we have something when will we have mik 2o that's definitely way too early and the question is of course when you're at the European Union is when is defi really big enough to propose anything because proposing a framework for and I don't have the actual number but I'm guessing like 40 billion in tvl or something like that it's it's just not going to happen so it has to be either a huge influx into defi or we have to have a b very big market crash or we have the European Union saying well maika was a success why don't we go first when it comes to Defi and try to shape what you said is a borderless environment so the more we can also as an industry get Regulators not just in international bodies but in member states and jurisdictions globally learning from each other talking to each other the more Innovation you will see because we don't don't have to adapt to every country we can rely that when France the European union says something maybe UK sees it close to the same way max if if you allow me y I have one question for that yeah one of the uh interesting tools would have been an equivalen in provision in mikon right uh and for those of you who don't know what that is so we talked about what what are others doing and if they look what Europe did right and uh a tool which we could have used is that we say okay if another jurisdiction let's say in the Mina area or in Asia comes up with a with a similar level of Regulation it eases then the access to the European Union and vice versa right and that's what we want to have as an industry we want to have an easy access to a as big Market as somehow possible right so we don't have to go through the regulatory hurdles in Europe at least with one member State and then we have the 450 millions and 23 million businesses which is amazing right but like just add Asia add Mina uh in a very easy way and obviously uh the equivalent Provisions are not in in MAA so uh this is for me it's actually a missed chance because the discussion you have in other like uh um in in in other countries even if you propose that it makes a lot of sense to use MAA as a as a as a blueprint um like the cherry on top is missing do do do you have like any idea why but this is the case if you want ask I can't speak from a European commission point of view anymore but I think you have to remember that at the time when it started which is all the way back before 2019 there was simply nothing comparable and the functioning of equivalence rules was in some regulations being questioned so I think I think now I'm I'm with you I I agree that right now as an industry participant that like any kind of Regulation that would um kind of invite others to uh to make it similar so you have okay if you if you make it the same way that the mik rules apply we will then give you access or an easier access I think back then the the thinking was that well the more we can onboard the more we can make people set up something in Europe the more we can kind of control it and since there's nothing that we can kind of mirror or compare it to I mean you had the maltes you had the French Frameworks which was serving as inspiration but there was nothing really across or outside of the EU um Lin sure sure there there there's a token framework that's true um no but I think I I agree with you I think but again as alen said there's what 18 months and then you will have a review uh and there it's not bound by the four topics there will be several there will be a 24 and 48 like an actual review clause for everything so this might come up uh and I think at that time I think we'll probably have something that is more comparable and you also have to consider we we would have to see how well are people taking the for example the stable Corin recommendations from the FSB are they being implemented in a similar way do we want that equivalence or do we want to protect European consumers but I tend to agree with you that it's it could have been something that would be more future proof I would say I think this something we see on an international level in general so right now in the European Union we have this process of developing regulation uh in the space but this regulation to be adopted takes quite a long time right we started back in 2018 um finished four and a half years later so in the in the US right now there are rumors that there is something being negotiated on stable coins uh until the end of the year so that's going to be interesting to see we have uh law by enforcement regulation by enforcement where the SEC takes a um takes action is really fast and efficient so to say say but there's never legal certainty if this decision by SEC even holds up um in front of the courts so it's something we saw with grayscale um it's exciting to see what happens with the Bitcoin ETF um now with black rock which pushed the market in the past couple of days because of fake news last week uh so yes talking about regulation the European Union talking about the different legal approaches in the United States maybe I hand over to Mark who as an industry participant now has to look at all these legal Frameworks and as a CEO of a very big company decide okay where are we going to place where we going to do business what's what's for us as a company the perfect concept so to say yeah um homogeny I think would be the uh you know exactly what uh the other guests were speaking about um the you know the challenge that we really have had um over the last you know over the course of uh Bor development is that you know in the very beginning uh you know before there was any sort of regulatory climate at all around cryptocurrency there you know the the idea of having a decentralized exchange or even the idea of decentralized Finance those those terms hadn't been coined yet this was just an exchange and the fact that it was using a blockchain was neither here nor there and I think that in a way I kind of wish that that would enter back into the discussion because we're kind of you know I I feel like we lose some perspective by pretending that because something's on a blockchain it's kind of other right there are some things that you that you can just call them what they are and and it's perfectly clear so under that guideline um you know the idea of setting up a liquidity pool was something that was reserved exclusively for companies right for other token projects this was not a user participation act um and the Swiss government was very clear that that this is uh their their view of setting up the exchange on the blockchain at that time um and they don't really mind who swaps tokens on the The Exchange um it would be really nice uh if we had that kind of clarity now right like this is the way that it's going to work because uh you know at that time it was also clear that we had to you know block United States IP addresses and then with the Advent of of Unis swap in fact that was very clearly you know an American blockchain company that was offering a very similar service um and offering it to the you know American public set a new precedent and you know the the approach was still let's wait and see what Regulators do and when they didn't do anything it's like well I guess it's okay and that's not a really good way to make decisions right it would be really nice if they just said this is okay and this is not okay um on the international stage I would really like it if there was you know uh some sense of consensus uh to kill a pun in in blockchain um but yeah it would be really nice if the same rules applied everywhere or if at least there was some level of syntony as to how these laws are applied because having to sort of divide up the protocol and use IP blocking services and other things to make sure that we're not you know encroaching on what might be considered risky activity in certain jurisdictions and not in others is a nightmare so yeah really good if there is like some level of agreement I'm not sure that we'll get it anytime soon but that would be the idea thank you very much and maybe last but not least Thomas um maybe give us some inputs on the actual topic of the discussion Bridging the Gap between Defi and Regulators you as the chairman of inaa what you think is the most meaningful way and most effective way that industry players can participate in the policym process and really try to to work with Regulators as well I think you answered the question yourself already maybe almost no um I think that is exactly what inba does inba was initiated back then by the European commission um and to represent the industry in front of the regulator and policy maker and what you need and it doesn't like it is crucial that we have associations not only not but there are other associations which represent the industry in a very meaningful way uh and in the way how The Regulators um and policy makers are listening to them so you have to our industry is very colorful sometimes very loud sometimes a little bit special right um then you have the some people call themselves Maxis they don't need any regulation at all right um and what what I really truly believe is that uh the work of this Association is incredibly crucial because we as you said we need this Global approaches and for that we need this this advocacy work of associations and Ina is trying to do that on a global on a global scale uh we are we are representing the industry in front of regulators globally to hopefully have an impact and and an out outcome of good regulation so if you want to talk to Max or you want to talk to to me or uh there there is even uh the one of our executive teams Morgan Stein is also here uh if you want to learn more please approach us thank you Thomas fostering the private partner P public private partnership I think is one of the mo key cornerstar here also for for The Regulators um because we can just learn from each other thank you very much for taking your time thank you very much for the audience uh I hope you enjoyed our panel discussions and I'll hand over to the next panel thank you very [Applause] much