Can DeFi and MiCA get along? / Anne-Grace Kleczewski

Transcript

hello I hope everyone can hear me well it's on and the slides are on just a tiny check does it work yes but in okay so good afternoon everyone uh we're diving further into uh complicated topics regulations um well the speaker just before if you were here um already touched upon Mika and D5 and whether these two can get along I will zoom on on that specific matter so can defy and make a get along um so as introduced Andres katowski I'm a senior legal counselor in Switzerland

I have the pleasure over the last two years and a half at advising only web free projects specifically D5 very Hands-On and a lot of dollars as well and I'm in Switzerland but I have a EU law background I used to practice in Belgium and when Mika came out one of the first question was will it impact Switzerland and if so how all these structures I came up with will they need to be changed because of makeup so the first step is to check is Mika actually referring to defy and this was already mentioned before there's one important quote on makeup it's recital 22 referring to crypto Asset Services that are provided in a fully decentralized manner without an

intermediary but what does that mean and at first sight it may seem that EU is maybe going even beyond what we've heard so far from the US meaning the sufficient decentralization where you don't require foolish intermediation you don't require food decentralization you merely refer to what can reasonably be expected can we reasonably expect that there's like a centralized group a managerial efforts or entrepreneur efforts coming from a centralized group so the problem with what we have in this recital is that both decentralization and this intermediation are extremely complex these principles are apprehended differently depending on whether you have a legal background a technical

background or you simply analyze it maybe from a sociological organizational perspective so everyone will come up with a different understanding and it deserves further analysis so if we were to still analyze these topics to have some clarity in Mika Well Mika would still be in the workings and we would have no text whatsoever currently and this point a problem was pointed out in a report that came out recently that's pinpointing the different remaining issues that still are unclear with Mika and as the reports uh so I've put the screenshot from um an important paragraph States is that we have a spectrum like D5 fully decentralized D5 which projects can actually claim to be so

um what are the side effects of that well first as we've seen recently there were many failures in the C5 space and many projects tend to shift to us rather the D5 Paradigm but they don't shift fully so we have an entire spectrum between C final and something that can be considered as one of 100 defy so what about this entire Spectrum if only fully decentralized and fully disintermediated projects are out of scope of Mika what about them so there's a whole legal uncertainty on the horizon for a big part of the market then Mika is supposed to be refined with practice we'll have all these National authorities

specifying with guidelines we'll have caselo at the end of the day well there could be potential discrepancies on this topic because jurisdictions have different approaches they may be more restrictive less restrictive but also they may have different understandings let's imagine France a country that already has some sort of wasp approval versus another jurisdiction that is not really out there and only published guidelines on tokens end of last year for example Belgium they may not have the same approach and not have the same understanding of this very complex um terminologies like what is this intimidation so on a side note Beyond this problem of the exemption well there is no reference to decentralization in method and

Memphitz or the financial regulations that are in place at European level and one of the questions that is still unsolved is our tokens and these services financial services and financial instruments and when are they crypto assets and I've put a quote from Mika well they still have 18 months to come up with guidelines on that so for the upcoming 18 months it's unclear whether are you subject to Mica or are you subject to method and if so well the problem of decentralization and this intermediation actually is not even a problem you have bigger problems than that another important quote is that at the end of the day well there's also an 18 and month period for

um the commission to come up with additional assessments on whether it's important to regulate defy and how so 18 months once again if I wrap up this context we end up with D5 being a principle that isn't normally out of scope of Mika but the definition of D5 is unclear the definition of what is a financial instrument versus a crypto asset on the Mika is also on queue for now the clarifications will come for assessments guidelines and practice so you may have discrepancies Plus in the end you have just stormy and deep on certain waters for at least 18 months and in practice and maybe way longer than that because just having those

guidelines you'll still have practice afterwards plus there may be comments on the guidelines so we're still not there so let's walk into the storm to better understand what exactly are we complaining about because there's still like a bunch of people being extremely happy about Mika because there are very good things in it but what may be a problem for D5 so let's start with the light rain the things that may be a bit tricky but or maybe not the worst so if we look at the subject matter and scope of Mika well we realize that it's all about a provider an issuer an offer so you need a natural legal person that's identified they also refer to other undertakings which would be all these entities that don't have a legal personality but could nevertheless be

taken into account and when we read that and we think about how complex D5 setups are it's not because they want to be a shady or anything but just because of regulations constraints in terms of like how do we optimize the expense of setting up a new entity you end up with one Association then a software development company a DA with or without a wrapper you may have a foundation you may have like a BVI SPV for just the issuance of your token so it's not always as straightforward as one entity handling the activity how will this entire setup interact with Mika and this is maybe the first let's say light train part like you you just stand there and need to assess your

setup and think okay my token issuance company may need to double check whether they are subject to Mika the software development company depending on whether they may be deemed to control the protocol somehow the same the Dao well as well you need to check what exactly is the Dow in charge of and is there an operational entity as well so you need to reassess your entire setup and just identify the entities which may be subject to Mika it's not as easy as that then what exactly will be the consequences if one of these entities is subject to Mecca if we Deep dive into a very pragmatic approach well for example in terms of marketing Communications well marketing and web free is quite

particular you don't use necessarily the same tools I mean see if I may but D5 will not have huge banners on public transportation you will never see that it's more about branding at conferences Discord Twitter you may have influencers well marketing Communications are supposed to be clearly identified as such how will that work out on social media are you supposed to add a disclaimer under your Tweet well how this work out in terms of how many characters you put in your Tweet these things will be specified over time in practice with guidelines but for now like you may really ask yourself the question if I am subject to it what am I supposed to do so marketing Communications are supposed to include an email but also a phone number so let's think about it you have a team of

10 you may have some Community managers whose number who's gonna answer that if you have 1 000 users at all call at the same time and you have only two people handling the phone number like this does not seem to work with a D5 setup when you look at how most teams are structured it may perfectly well for C5 with like big teams everything is structured in a corporate manner but for D5 maybe a bit complicated then the white paper shall be finished first before you even publish any marketing Communications so if you want to announce your token before you have finalized this very important white paper well you're not supposed to but to what extent what is considered a marketing communication so there is some place here for interpretation that will

need to be clarified over time like can I announce that there will be a token coming soon even if we don't have a white paper yet what can I say about it exactly then in terms of the white paper and I see there's a cat in an audience so my cats and the slides may be a good thing for him the white paper shall be published in the same version as the one that was notified to the local authorities so if you want to do some last minute adjustments as it may often be the case in practice well too bad if you have submitted it for approval you need to stick to that version as well if there are any significant changes mistakes or inaccuracies which could happen because I mean these topics evolve over time you may discover new things you want to add

them well you need to First notify it at least seven days before you publish the updated version so let's imagine you have an intern that did a big mistake no one spotted it you need to correct it ASAP well you're first notify to the authorities and then only you can update the white paper I'm not quite sure how this will work out as well in practice on paper it may seem a good thing but then it creates a sort of delay that may be tricky and they also clarify that there's liability for the white paper currently I think it's not clear maybe to everyone but this white paper is potentially the only clear source of information about the token the project and so on and one of the very good things about Mika is that they clarify what should be in there currently you have some white

papers or like light papers there are five some pages long orders that are basically research papers that extend to 50 pages how do you handle like this discrepancies sometimes you have all the information necessary sometimes you only have part of it so Mika clarifies that and adds this layer of you are liable for what you put in there if you state that this token is generating some sort of yield well you need to stick to it uh and you can't just exclude or limit your civil liability for that so these reminders are actually quite welcome but maybe something that a lot of D5 protocols don't want to handle because these are shaky grounds like some other speakers presented all the aspects relating to risk management for example the white paper is supposed to specify

the risks but this is still an ongoing research topic all the risks are not clear it's very complex so what if you have omitted a risk that only stood out afterwards are you liable for the submission just because it was not care based on the pre-existing research there's also a right to withdrawal there was a lot of talks about that like a year ago or something well currently if you purchase tokens well you just stick with them if they are if you change your mind it's too bad well in line with the EU approach that you have for all the consumer goods for example which does not exactly exist in Switzerland so here there's a big change well you have a right withdrawal you purchase tokens you don't like these tokens you change your

mind or it was a mistake you have 14 days to change your mind and the person is even supposed to reimburse to you and it charges so as well it's not exactly compatible with the approach that Divine may have currently but there are exceptions and this is what everyone loves and as a lawyer this is the fun part as well to have exceptions and some of them are quite useful so you could use the fact that it's less than 150 people that purchase these tokens from you that it's less than 1 million um and then this is only just for the white paper and then you even have some exceptions to be outside of those constraining uh guidelines not guidelines but Provisions regarding marketing Communications you don't want to add a phone number well you can just

offer those tokens for free airdrop automatically create them as a reward in a proof of stake or and that's actually quite important if everything is already up and running and it's a utility token that's also an exemption so the solutions could be dropping tokens on the decks to be further explored to offer them at a very low price to be below the 1 million just go all the way for airdrops there's quite a lot of them recently maybe that's the way forward oh maybe to launch the protocol first have some sort of test tokens that you offer prior to the actual sales so you can argue that it's a utility token that's already integrated with an existing protocol but all of this are like potential solutions to be explored depending on

the setup so this is not legal advice I'm still doing the disclaimer because it looks kind of like a legal advisor that I read it on the screen but the question is how do you assess whether you're exposed um to those regulations anyway in the EU based on the IP address do you block it I mean people just use vpns so there's a lot of questions there I'm getting into the funder and apparently I have five minutes left so I'll go quickly through it and just to mention these things this is the worst part so this was about the tokens but you have this entire part of authorizations and operating conditions and this is where it really gets tricky uh for D5 protocols so the pain point is that you can't offer your services if you are not authorized um in the EU and

you need for that to have an entity in the EU so the temporary solution is to rely on a reverse solicitation as it's done currently for a lot of protocols most of them actually but reverse solicitation has no proper interpretation for crypto currently so people just rely on what is done in terms of financial regulations but is it suited there's no practice really extending on that there was like one occurrence with the buffing and the hello Deutschland uni swap wallet so that's one example how will it evolve over time will it still be able to rely on reverse solution Association that's unclear and if we check what are the implications of the

authorization well there's a pro once you're authorized you can really practice everywhere like provide your service everywhere in the EU but there's still a few cons like you need to have effective Management in the EU like how will this work out from reptiles you need like a wrapper but who is the effective management does it mean that you need to have a specific committee within the dial like a multi-sig that doxes themselves and are puts in this application if you don't have a legal person you need to display equivalent levels of protection but how will this be assessed in practice like how do you assess um the requirements in terms of proper funding and insurance for adult if you're not authorized and maybe this is

quite important if you're not authorized as a provider in the EU you're not supposed to present yourself as such so if you have a lending protocol are you still allowed to present yourself as a landing protocol or a Dax at the EU based conference can people go to fccu after Mecca and say hey we're a landing protocol even if you're not uh registered S1 and du and then you need to specify the services in the authorization so if you want to upgrade your services and offer something new well you just can't launch the new product before you first explain it to the authorities in the application there's a long list of 19 actually types of information needed to provide and if I go to the pros well at least you need to think about all these elements you need to

clarify it be transparent which is a good thing because a lot of these elements are not necessarily clear currently it can be obscure like the governance often you need to really dig into the documentation to understand it in terms of compliant handling like how many D5 protocols have a compliant handling procedure that is out there so this may be good and as it was pointed out in the report sometimes people have the feeling that maybe those projects go far beyond the skills and the competence of the technical like developers that put them forward but the cons are well the authorities actually be able to assess the information that they receive is this Authority skilled enough to understand the complex risk assessment

that was done by your protocol how will they understand all the economic exploit possibilities or the technical aspects of the smart contracts underpinning the protocol so this might be quite uh tricky and there's also Outsourcing there are so many protocols that are intertwined and if it's considered as Outsourcing it means that you need an actual agreement specifying the rights and obligations but when you check what's happening in the landscape you mostly have handshake deals something that's on telegram like on Discord well will this be enough and then the bottom line trying to be in time hopefully it's the case so the bottom line is that for the token issuance it may be not such a big pain to have Mika out there it may even be a

good thing if proactively you just decide to have a clear white paper you don't necessarily register it it may be more of a pain for the marketing Communications but then there's some new way regarding the existing exemption so for token issuance you're you're actually actually pretty good but then when it comes to provision of crypto assets because of the some clarity of whether does it apply to um to defy or not well it may be complicated so it's good that they are these recommendations because you need some professional diligence in those in um in the D5 Sphere for sure but requesting the entity to register is just raising a lot of questions regarding which entity is this entity really there like does it require all

dials to get a wrapper at the end or what about protocols being fully automated where you live actually throw away the private keys or being decentralized so it creates a lot of questions so maybe if I should should be subject to some not even maybe like certainly there should be some standards to ensure professional diligence and make sure that people know what they're doing and it's not just a great ideas it's great ideas being correctly implemented but the way it's done currently in Mika maybe needs some tweaking just to take into account how D5 works and the different uh the peculiarities of the field compared to C5 thank you very much for your attention and then don't hesitate to reach out to me block the other on

Twitter or on telegram gladly discussing anything defy or Dao thank you um any questions I know if I need to take questions or one if anyone has a question it's now and ever there's one okay so I I will ask um just uh because Defy is the place for the whole world so maybe why the regulation is not made in a way that it it's offering it's offering for

those companies or users who want to come out from Shady identity to to public because maybe they want to gain Trust of the address so I I mean the regulation should be done to in a competitive way uh that the companies and users want to be regulated to receive the trust to receive the public money and by why Dominica regulation is not doing the job in a way that is smart to be regular or to be regulated

yeah yeah I mean I completely agree regulations are also there to create some some feeling of trust especially for the broader audience like beyond the ODS digits or whatever like most people don't interact with those protocols simply because they don't understand them they feel like it's unregulated so really not touching it and the regulations may help because if you have someone licensed like a lot of C5 providers for example in Switzerland uh you may have swissberg they well they on board people who had never touched crypto otherwise so you can it's completely correct to say that these regulations may be helpful and it's a Pity if they are not done the right way but at the EU level it was pointed out that D5 is evolving it's still unclear so it needs to be further investigated

and this is the problem there is is that these are not things easy to grasp and the regulator if they want to do things correctly needs to understand them first so this was like the first thing I mentioned if we needed to First investigate D5 further we would not even have Mika yetz so there is like a trade-off the only thing here I would say that it's really a problem is that this intermediary period those 18 months during which some things still need to be clarified this is where issues may arise depending on how local authorities will actually decide to implement things and it may create as well a lot of fearful protocols that would be like just stressed out oh I need to comply with Mika or not do I proactively comply

do I need to shut down because of the regulatory risk so this unclarity is just maybe slightly stiffing the ecosystem if people take it extremely seriously and really fear it otherwise it can be an opportunity for Innovation oh there's makeup potentially I'm subject to it how can I Implement a few changes just to make sure that maybe proactively I'm at least partially compliant so we will see over the next months how it goes but clearly I'm looking forward to having some more clarity on DFI because for now it's a bit tricky thank you for the question have a nice end of afternoon [Applause] [Music] foreign [Music]