DeFi Survival Tactics in Europe’s Regulatory Circus | Anne-Grace Kleczewski & Romedi Ganzoni - MME

[Music] hello everyone Hi everyone so we are with fromed and my name is and Grace we are from Switzerland and a law firm there called mme and we're here to explain something that's not related to Switzerland but actually Europe and the whole regulator cc is with maik Dora and a lot of acronyms for regulations that cause a couple of headaches uh since now over a year and yeah our goal is to give you some defi survival tactics so first question is when should you actually care about the EU I mean we're here in the US you might have your us company or in the Bahama in the Cayman or wherever set up so why should you even care about the EU but there are two reasons or two um incidents when you have to care about the EU one is if your user base is in the EU um if you sell tokens to the EU if you provide applications to users in the EU and the second one is you have Partners from traditional Finance or centralized Finance in the EU and in most of these cases you'd think because I'm defi I'm transnational I'm not related to a specific jurisdiction so I don't need to care but as we will see in the next couple of slides this is not necessarily the case Okay so regarding the user base it's main the main cases where you have to think about it is if you're offering a protocol so for example an application or on the infrastructure layer um or if you're offering an interface to these protocols or if you're offering a token then you should really look into MAA and think about well am I regulated and there are actually three requirements that have to be met one is it has to be a regulated activity so regulated activity would be like the token sale or the provision of custody Services trading services and so forth and they should not be exempt and the second thing that you have to fulfill is that you have to actively Target the European market um there is a thing called reverse solicitation so if you don't really actively Target the market but clients come to you then you also don't have to care about maika uh the thing is this reverse solicitation the applic of it is very narrow so first of all you will not be allowed to go to conferences there have your kol's in the European Union and so forth and also if you make use of reverse solicitation the clients come to you you're not allowed to offer them additional services so that narrows down this possibility to avoid M actually quite a lot and then the last one yeah you should if you're fully decentralized you will will not be subject to maika uh so that was also a requirement so things are not that bad it's not whatever you do that could end up make you end up in trouble in the you just specific things and uh as red mentioned the decentralization part but as we'll dive into it uh it's not because you think you're decentralized that you are decentralized according to the European regulator now the second instance is if you have Partners like everyone is mentioning uh this idea of integrating defi into other types of projects so you have integrating the protocol with um a centralized service at CI relying on a defi stack or you could just have the protocol being accessible through an aggregator or like being embedded with a wallet um you also have this idea of having your token being launched through EU loung pads you have so many defi projects that still have a team that wants to offer a token and they will as a team reach out to a lounge pad or just take uh listing on the EU trading venue so all of these scenarios could lead to some EU implications from a regulatory perspective and then what you need to think about is especially for the first ones I mentioned um MAA and Dora could come into play depending depending on who you integrate with because if you are in touch of someone who is itself subject to regulation this may have some consequences on you as we'll see afterwards and yeah what is if you're whatever you're offering is truly defi under MAA then you see offering the protocol is not a problem so you don't have specific obligations offering an interface if the interface is ESS centralized that's not an issue and offering a token if the token offering is decentralized is also uh there are no specific obligations that you have to comply with this explains why everyone wants to be decentralized nowadays uh it makes life much easier um but then for EU Partners being decentralized May uh become actually an issue sometimes because integrating uh with them may become complicated you're not really an ICT asset because they don't control you if your AI protocol is subject to decentralized governance potentially or simply immutable and controlled by no one uh but you're also not a third- party service provider a defi protocol doesn't have someone who will sign agreements on how the protocol is being used so there are some limitations on how can these um centralized actors or traditional Finance actors compl with their requirements under Dora for operational resilience when they're trying to integrate this hybrid weird structure that doesn't fit into any of the categories um then also offering the protocol for a centralized gateaway this can be the easy thing like if it's just an interface that's aggregating things they they are regulated for their own activities and then you are uh fully uh defi this should be okay then offering the token for EU Lounge pads well if you're offering it for a lounge pad probably there's an entity somewhere in the loop that is handling this process and there may be obligation for the offering because they are offering it in a centralized manner although it is related to a defi protocol so it's not because you are defi that everything you do will be defi at the end same for the listing there's not a community that's getting in touch with uh with a sex there will be a team and potentially an agreement that's being signed with a centralized entity same again there will be obligations uh in the loop and then next one was but if it's not defi so you have licensing obligations if you're issuing this uh or providing an application or an infrastructure um you have the licensing obligations regarding the interface we'll look at that in a second and you have obligations like y paper issuance uh notification uh for offering the token and with the interface that's an important point so if you offer an interface for example which is centralized to something decentralized so an interface to a DEX you would your interface would still be considered centralized and you could be subject to regulation now in the case of a DEX it would be that you're not treated as a provider of a trading venue but more as an transmission uh what is it transmission of orders transmission maybe just one other fun fact on the licensing requirements so once you become decentralized you don't need a license anymore but this from a business perspective doesn't make much sense because it would mean that you start your business you pay a lot of money to lawyers to get a license on their MAA but then you fully decentralize one year later and all of this gets thrown away um I'm not sure how many projects are willing to do that so um look maybe for jurisdictions where you can start without a license Switzerland may be one of them uh now for EU Partners um if you are centralized well Dora is there it's you you need to reach out for it because you'll need to have some contractual Arrangements in place with anyone who integrates you as a third partyy service provider and these contractual arrangements are pretty heavy so for having discussed with a couple of traditional actors there's a lot of representation warranties and other things included there just to make sure that they can rely on you because you're supposed to be a 100% reliable uh ICT service provider and you will be subject to oversight if ever the part of the service you're providing to them is critical so this will even more pressure on you as a ncity service provider um now offering the protocol itself well for centralized getaway nothing changes there there are no problems you just offer CI instead of Defi and then offering the token exactly the same thing because obviously centralized entities so obligations in terms of white paper marketing communication and then same for the listing so when you think about it for EU Partners the only thing that changes is if you're defi it may be a bit complicated to figure out how how third parties being themselves subject to regulations can integrate you if you're centralized it makes things much easier you just know that you have a bunch of obligations to comply with and someone who may oversee you so now the the tough question is what is actually defi on their MAA so I have mentioned that you may identify as defi but it doesn't mean that you will be defi according to National authorities in the EU yeah and I mean we have CI and we have defi but there is actually a a broad spect of different shades of Defi and CI so the CI on one side you would have a CFI like a centralized exchange they have your assets and they provide this trading system which they control and then on the middle the centralized D the cdfi you would have actually also certain aspects are decentralized like the the the settlement of it the the transaction they take place over smart contracts but still these smart contracts or the Gateway that the to these smart contracts is controlled by uh a certain provider and then you have really the pure defi which will see or which we saw that is not regulated there it's really transactions they take place via Smart contracts and there is not legal entity that controls them and yeah you see I mean the degree of decentralization on this on this slide you see it increases from left to right but usually the user friendliness decreases from left to right so it's very hard to have a completely decentralized setup that is extremely user friendly defa is basically like playing with wires acccess electricity so if you want to have something super convenient you need to have like this full stack that was prepared for you and you just interact with that if you want to play with the wires and do it like in a very uh let's say bootstrapping model is defi you're directly accessing the technology so now when is Def when do we have defi concretely well a service is decentralized where there is no counterparty at least not a counterparty that's a legal entity what does it mean so counterparty on the first side is someone who has control power over the service you need to have control to have obligations if I don't control something I'm not supposed to have obligations related to the specific thing it's a bit the same debate as what we had regarding um online content and like platforms online the platform doesn't control what you are posting so they were not supposed to be uh subject to liability for it here is the same if I don't control the protocol why should I be responsible for what the protocol does so you need a counterparty that controls a service but that counterparty needs to be a legal entity and this is where things become complicated is that you have on one side the golden standard being technical decentralization so code alone cannot be a counterparty code is not a legal entity it's not an individual so you can can set aside all the issues of MAA and other regulations because the only counterparty that someone has are just lines of code if this is not the case because the protocol is somehow controlled there are some admin functions there are some dependencies we can always check whether at least there's decentralization at the governance level and then uh you would need to have a decentralized floating Community uh that's also not the legal entity and as remed will explain later it's not so easy nowadays to have this fully decentralized uh governance aspect um and then the last layer is what is being controlled what is the service is this um some do we have a valid contract between this counterparty on a regulated service because if I have a community that is not fully decentralized but just decides on some names for specific products or decides to change I don't know uh an air like a small airdrop campaign but doesn't really um control the core aspects of a regulated service no one cares we need to really check what is the relationship between the actual regulated service the functions that underpin that service and the centralization points and yeah this is the side that summarizes defi so basically what is defi according to the or regulator it's the defi that makes people scared so if there's no one in charge No One controls anything and you just have this wild Beach without anyone being there to to to save you if something goes wrong you have actual defi if there's someone to take you by the hand potentially you may be subject to MAA because you're a bit too user friendly great then then yeah you actually actually have to as angra mentioned I mean you have one possibility that you avoid the applicability of maika that is the golden standard if you have really Technical decentralization and that means that your setup has to be such that the smart contracts they have to be self-executing that's actually standard in on ethereum but then they also have to be autonomous so you don't have to have people or entities that really have the possibility to interact that have admin keys to do something with the smart contract adjust it um and then the last one is even if you have something self executing and autonomous if you have embedded some special rights into the contract for example that Revenue flows to you then you might still become subject to the maybe a good example of that is re distributions rewards are distributed on Shain that's great it's self-executing if specific conditions are met but if I still need a human to input who gets how much it doesn't work it should be a pre-coded logic and then the second one if you realize well we're not completely uh decentralized on a technical side actually we see that often with projects they would like to be decentralized from technical side but they see well at the beginning we will not be as of day one and as a Ang Grace told us you have to be decentralized as of day one you cannot say well we will do that later um otherwise you need the license or be subject to other obligations um but if if you see well that's not possible then there is still the possibility to decentralize the governance and uh because there the question is if you have a centralized element can you can this centralized element actually be attributed to someone and that could be you as a project company so it can be someone a natural person or it can be the project companies so a legal person but it's important to understand that it's also general partnership or simple Partnerships that could also fall under it and there the special question is what we did in the past is Outsource these uh uh critical uh these critical functions from a regulatory perspective that we Outsource that to a dow but also there you have to watch out because the da could actually qualify as a simple partnership we've seen that in the Oki da case where there was a ruling that due to the fact that there were distribution of revenues and uh governance rights regarding really fundamental questions and not what angry set you can choose the name of the token or the color of the logos are really um fundamental questions then you can qualify as a simple partnership so when you when you transfer something to a DA think about it how should to we structure the da so that it doesn't become a simple partnership and then the second thing is also I mean even if the da as a whole is not a simple partnership it can be that uh specific actors in there become liable for it so if you or someone as a single person has more than 50% of the governance token will be responsible for it um if a group together holds more than 50% and they're again considered a simple partnership they will also be responsible for it and then of course what we often see is that in Dows that you have these delegates or committees or whatever the Dow can Outsource certain things to these committees and delegates but they could again become a simple partnership so you really have to watch out how you structure it so you're still considered true defi um and not subject to Mika yeah basically the more you structure your Dow the greater chances are that you will not be considered defi by me under Ma which is kind of contradictory with what this s and what we're doing until now and because time is running out we will wrap up with the Mika survival tactics um just at the end of the day what do you need to keep in mind based on this presentation first of all don't be a regulated activity if possible it's not always possible but if at least you identify from the beginning that your activi is not regulated you kind of can feel safe yeah the second one reverse solicitation you can do that but again keep in mind reverse solicitation that EX exemption applies only in a very narrow field then the technical decentralization what we discussed don't have any control or if you still have control make sure that it's not you or a legal entity that has control that would then be the the the governance decentralization so build opensource public goods that no one controls or watch out for meup thank you very much thank you