Fireside Chat Recap | Episode 11 | Legal Issues within DeFi? What’s on the Horizon?
In the last 12 months, DeFi has seen an unprecedented level of growth. But as the industry continues to grow and mature, recent legal questions have arisen concerning several aspects within DeFi’s ecosystem.
To help tackle this topic, Steady State’s very own Paulo Coelho and Aaron Krowne, partner at Krowne Law, share their thoughts on navigating today’s uncertainty. They also share some personal thoughts about regulations around it all!
If you missed the previous episode of Fireside Chat, the show’s recap can be viewed here.
Silvia: For many crypto enthusiasts, digital currencies are a big deal. What are your personal opinions on the most concerning regulatory issues?
Aaron states you have banking and monetary issues (mostly about financial stability and yielding arrangement and KYC and money laundering concerns.
Paulo agrees with the KYC and money laundering issues, and then for companies like Steady State, he adds to lack of clarity and fighting over jurisdiction with various regulators leaves the industry in the unknown
Aaron then adds that there’s no detailed guidance to abide by and regulators don’t understand crypto or try to fit in the old regulatory structures.
Paulo agrees there’s a big disconnect right between companies like Steady State and regulators. He adds decentralized products need oversight because of terrorism but asks how to go about it considering DeFi.
Jon chimes in with a thought — before a transaction would happen let’s you would need two bank accounts to process money going to either a third-party vendor or the new bank’s wallet address, that’s all. Everyone should be allowed to participate.
He continues many founders don’t mind being compliant. If you want to be fully compliant, you will never be able to launch a product to the point of being on the cutting
edge of technology. In history, we see this in the dot-com bubble with a lot of businesses are launched with no compliance right telecom versus the internet, and then we saw this in the fintech bubble — fintech banking versus regular banking, and we see DeFi, crypto, and NFTs
Aaron continues in a situation you’re left with cost-benefit analysis — looking at the legal risk.
Silvia agrees companies want to comply, but it’s tough for them to comply, giving an example of Estonia where to get the license you have to pay 300,000 euros to get the license
Aaron adds he believes they’re going to adopt a travel rule notion to crypto, i.e., centralized exchanges and virtual asset service providers where they have a centralized nature, which means to send crypto between those entities. You’d need some KYC information.
Silvia: What could the future see with regulated regulations?
Aaron joins in the future involves more KYC and AML requirements. Adding it wouldn’t be suitable to apply old regulatory structures to DeFi.
He then commends Coinbase for providing a template for a more comprehensive solution and approach to crypto that reflects the industry’s thinking.
Aaron: echoes Jon saying he’s excited to see some regulatory actions coming from the state regulators saying the idea of unlicensed lending only adds to false notions there is an agreement on regulatory characterization, which isn’t the case.
Paulo joins in, saying DeFi could be split up into the decentralized world and the traditional markets.
Jon agrees there will be layers of markets, for instance, traditional, intermediary, and then decentralized technology, i.e., DeFi. Pointing out SteadyState’s long-term vision is for the platform to stay decentralized and owned by the community to establish some intermediary between the two worlds,
Aaron introduces the concept of the markets learning to embrace each other, giving the Microsoft and Linux battle example and how they eventually accepted each other forming mutual partnerships.
Silvia: Do you centralized exchanges as well, like with KYC and regulations?
Jon agrees tokens will be cracked down on exchanges. Adding confusion about rules on token regulation could compound the centralization risk. Jon then adds that he believes projects like Coinbase and tier two and tier three exchanges are in for a rude awakening for their listings and how they conduct their KYC protocols.
Aaron agrees on the KYC front as well. There’s a lot to be worked on, and meaningful discussions need to have on the context of enforcement.
Paulo then talks about the importance of enforcement rules to curb bad actors who embezzle funds from the system tarnishing the industry.
Aaron finishes by saying he’s optimistic the Biden administration will get positive conversations going and set up concrete steps to tackle the massive anonymity on the blockchain.
Join us for next week’s episode of Fireside Chat where the team will discuss more of the latest and essential topics. We can’t wait to hear your feedback on these important conversations!
About Steady State
Steady State gives DeFi protocols and platforms a practical solution to safeguard their financial future. With the help of Chainlink Keeper technology, our platform aims to eliminate bottlenecks in DeFi insurance by using automated processes, shared coverage policies, and a cutting-edge risk analysis database. Steady State is creating a new paradigm for decentralized insurance by delivering DeFi’s best-ever insurance platform for protocols.
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Steady State cautions that statements in this communication that are forward-looking, and provide information other than historical information, involve risks, contingencies and uncertainties that may impact actual results of operations and prospective transactions.