DappCon 2023: Start Your Web 3 Project Compliantly - Dan Jakubowicz

Transcript

so thanks for joining today I'm going to talk about how to start your web3 project compliantly or how to launch a token and not go to jail uh now I'm going to talk about a lot of uh kind of ideas some hard uh fact rules that you can go and Implement uh today or tomorrow but the first thing I do want to mention is that none of what I'm going to say is legal or financial advice nor and and you should hire your own professionals nor is it any type of legal service and the views I'm going to present are my own and not the ones of collided Ventures great so let's start a little bit about myself um so I come from a background of uh working with startups uh um today I work as an

associate GC at Cater Ventures um what we do a lot of what I do is is a is working on investments and also working with our portfolio companies on various legal uh crypto related issues and also we work uh with the um um regular specifically in Israel on uh on policy issues now if you're tuning in it's because you want to start your web three journey and do so with minimal to zero uh kind of legal or or regulatory risk so the way to do that is you know go work for Apple or Google uh this comes to say that this is a Uncharted path and a lot of what we're doing is new and it

we're talking about mitigating risk and managing risk and not eliminate eliminating it completely so keep that in mind when uh you start your your journey um so I want to kind of uh begin the conversation with kind of a um timeline of of crypto kind of a brief history of crypto uh so we have obviously Bitcoin 2009 ethereum uh 2015 then we have the 20 2017 2018 um uh Ico boom and bust uh followed by uh kind of a bare market and then defi summer in 2020 and uh uh coming into kind of blowups that we've seen culminating with

the FTX printer and the reason I'm I'm I'm pointing out these events I'm obviously losing a lot of color in the middle is just to kind of draw from them some major issues that present legal uh um kind of legal new Waters if you want to call it and and things that um um we have to deal with and this is not totally new to crypto you can see it in areas such as cyber security each time there's a leak or a hack there's regulation coming so uh yeah brace yourself uh and the as the Asis is because we have MAA that's coming in and there are some regulation that apply but

this is this is going to be um kind of what you what you should be used to there's there's going to be changes coming in there's going to be regulation that comes in response to other uh to to events uh so let's let's Jump Right In uh uh to kind of the heart of the conversation and I want to start by discussing about decentralization and this will be very uh useful when we move on with the presentation into uh uh uh kind of U the middle of it in the end uh this is a um how I want to start um and what it matter so the centralization uh uh um um makes technological infrastructure public good and especially when it works

interoperative with other uh uh Tex TXS and protocols uh it it's also uh sens sensorship resistant so we talked a little bit about uh uh you know Apple and Google we all know uh about the the force and the control that they have so decentralization in that aspect makes the the tech St that we discussed uh no one can block you from it um it allows for new insetting mechanisms and financial eosm ecosystems that are innate to crypto and crypto systems and it allows for uh new ways of participation okay again that are native and unique to crypto so this is kind of uh one of

the most important merits of decentralization that I would like to focus on and here are some Frameworks or kind of mental models for Builders uh uh listening uh when you think about decentralization so we obviously have decentralization on the tech stack right we have blockchain Computing uh um um which is open source and freefor all um economic decentralization meaning uh with token economy value can accur to multiple stakeholders and not necessarily to a shareholder or some manager at the top and legal decentralization which is kind of the what you guys know is on chain voting but in general the the permissionless decision making and the

open participation for all so these are kind of the the the Frameworks of decentralization and I want to expand obviously on the last point because this is a legal discussion um so the legal framework for decentralization generally uh uh Financial regulation around the world comes to tackle the problem of information as symmetry meaning uh you have this agent principle problem where one person or a group of people control or has access to information that is disconnected from the people entrusting them with be it funds be it investment in their company okay so we can think about a bank we can think about an IPO

these are things that you probably know from uh uh um just general and daily knowledge and the way to to mitigate that risk and tackle that is by uh disclosures right so if a company go to goes to do an IPO it present these stacks of papers these are disclosures this is just information about the company that comes to level the playing field and make Financial uh uh financial markets more efficient and more uh open and fair now diving a little bit into the ho test that most people in crypto know very well but it's the American test for what uh makes uh an investment contract a security so this comes to uh basically this touches the managerial efforts of

other the last most important test of the h test uh which which basically comes to say that if any person has managerial uh uh Powers over a certain asset or or or or underlying a certain asset then we we want to tackle that with regulation that is solved through disclosures and this is kind of the single most important issue when we talk about crypto in the sense of Securities but also in the sense of uh cative assets and many other uh um uh topics and and I argue that that this is the most important topic so you you you Bor with my presentation and you still want to uh uh

go ahead and and and start your project that's great um so now we're going to kind of tackle uh uh or see some more practical advice and do and don'ts and I'm going to focus in or hon in on token launch just because that is maybe the most uh you know special and hard event for a crypto Project Life Cycle and it's obviously very specific to crypto so we're going to start talk about that so you want to launch a token the first question is why right why why why have a token your life is great the SEC doesn't want to you know go after you or your loved ones why do it uh so you want to introduce a

token because you want to have decentralized onchain governance in your protocol um you want to use a token as um a unique incentive mechanism now you can do that with usdc you can do it with Bitcoin or ether but there's something that just opens a new world of opportunities when you do it with your native token right it's programmable it's it's linked to the success of your project Etc um and safety uh token can enhance safety on the decentralization part meaning you know talking about a 51% attack talking about buying tokens to circumvent the will of uh of the project the financial as the financial price of

the token will make it very expensive and very hard for that person uh so we want to launch a token to uh uh to kind of touch and enhance these points uh but when so as you can see uh and as opposed to what we saw in kind of 2017 2018 uh launching a token should come at the end of kind of a uh um uh process of decentralization uh so you start your project as a centralized entity kind of a startup and you start off kind of uh uh traditionally as as you will say you try to find a product or build a product find product Market fit marketing business development and then you slowly

move into the Realms of web 3 uh build a community uh you know find uh different third parties to build and participate through grants or or what have you and at the end you do a a a hand over control over the protocol to the Dow with a token and you do it gradually um uh through kind of a a wellth thought out uh uh uh plan so when you ask when the question is a it depends obviously because I am a lawyer but also it has to come at the end of of a road map and and and you basically want to strive for sufficient decentralization which we're going to talk uh in a moment so

now we'll move on to talk about some some kind of more practical advice that you can Implement uh tomorrow uh so the first is about token sales um when you're starting out you're you want to sell your tokens only to accredited investors meaning I see projects where where very early on they want to go to an Ico or an IO or Ido uh do not do that uh until you're decentralized and it will just put you right in the how test or and the how test is is an example of many other tests around the world so it doesn't really matter where you're operating from uh you might have this problem regardless uh so you want to sell your tokens to credited investors

which means some uh um you know equity and and and net worth requirements or selling to professional investors which in today's day and age it's is less of an issue with more professional angels and VCS around there kind of the the industry has evolved and matured and I do want to say that with Mika coming into effect it it will happen in a year we will see developments uh regarding token launches we don't really know how the Playbook will look how different uh member states will enforce it but there should be development there so in a year from now this presentation might might look a bit different so this is an evolving space uh next next big advice is uh try to avoid exposure to the US

specifically on the part of Securities laws so we know that Gary gansler does it like crypto and everything is a security um in general try to limit uh selling tokens to us people even once you're decentralized and you want to do kind of this big token sale limit us people um secondary markets have a lot of benefits but they might bring regulatory scrutiny so you should think with yourself whether limiting it blocking it on the tech level for some period of time uh brings more good than harm and maybe pursue that um yeah if you can at all not have

much footprint in the US that's obviously uh a good idea and uh on the same token as uh also limiting access to users again more in the UI front um you know if this is something that uh your project can handle you should definitely think about that next up is uh is Communications in general so if generally there's someone here who wants to develop a you know a protocol and is hyping it as an investment opportunity just stop doing that okay this is just a really really bad bad uh bad idea uh and this comes this is true

externally so don't go on Twitter but also internally you should really pay attention to how you communicate uh and these uh ISS these things will be scrutinized in potential future enforcement or litigation um eventually people will have access to those Communications and it will look bad and also it just shouldn't be kind of a an invest a only an investment scheme again the token should facilitate decentralization uh any communication it be external or internal indicating a court team in control making decision in kind of a again a centralized way is a red flag and it shows that you're you

didn't achieve or didn't reach the sufficient amount of decentralization that you should be and this is true regardless of decentralization obviously the third point if there is is a core team it's not really decentralized and any of kind of the uh investment hype that you might be building will look bad uh um regardless of your decentralization level and it's again not what you should be focused on okay um as we uh uh um talked about a few slides in a previous slide you want to achieve sufficient decentralization and the way to do it is through this process that we discussed that is

basically titled Progressive decentralization meaning you start off as a centralized entity and slowly over time you you have a road map to achieve decentralization okay and this doesn't happen overnight this happens kind of a wellth thought out plan and the token should be kind of the final note or the final uh act in a in a in a well thought plan for decentralization um and the utility doesn't really matter this is something that is uh um kind of new from you know three or four years ago uh we used to think this if the token has a utility it's not a security it's it's not an investment contract

that's not really the case anymore and what you can see on the screen is that this is a very recent uh kind of Court um a dismissal of a suit against Unis swap they were attacked in court and basically the judge uh released them from any uh um obligation because of their decentralized n nature so utility did not play a part it wasn't part of the discussion it was all about decentralization so maybe the point the the most um easy advice to implement is to wait and plan it thoroughly uh you have to realize that by launching a token you create a lot of focus on price

and a lot of extra noise that that maybe is not the right thing for your project and also makes hard makes it hard to Pivot makes it hard to go back and change things uh it's kind of an only forward um um mindset so we talked about token launches now I'm going to touch a little bit about other legal matters and basically uh uh uh we know that crypto is kind of this new beast in the world it's a it's it creates a lot of new legal issues privacy banking taxes and these things sometimes are not that specific to crypto and they're ever changing so perhaps the the biggest advice I can give you is H you need a

lawyer need someone to understand what your project is doing exactly and when you're crypto and can be available and uh with you uh on an ongoing basis but I do want to pinpoint one thing which is K AML and if you're building some sort of a defi protocol and you can Implement tracking monitoring of suspicious behaviors wallet that wallets that have interacted with be tornado cash or other uh you know malicious addresses and do something about it meaning blocking them uh um or whatever it is that you can do it will greatly improve your position in

case of future enforcement so so all of all of the banking legislation uh talks about it's a lot about effort a lot about risk managing and not kind of a zero1 so if you show effort it will uh put you in a much better spot okay so this is going to be my last uh topic that I'm about to discuss and we've covered cover kind of um uh some uh advice some things you can do uh but obviously uh the most important uh uh uh topic that I would like for you to kind of go home with is the importance of decentralization and how decentralization puts you in another

world when it comes to Legal compliance okay not because you don't have to comply with the law it's because a lot of laws and regulation will be less relevant to a decentralized protocol that's that's at least the argument brought by a lot of the cryptool law community and what we are working uh people around the World working with Regulators to kind of uh transmit to them this information that a a centralized and a decentralized entity are not the same when it comes to you know managing assets or or issuing um whatever it is that you're selling uh so how to decentralize how to think about decentralization so on the Tex stack you want to be interoperable so obviously

we're talking about protocols at fronts on the on the blockchain there's the element this element embedded but you want to have your TX tack uh build such that people can join tap in build on top use it as much as possible this will help for the decentralization narrative you want to promote transparency so obviously we have onchain voting and everything onchain is transparent but you want to uh uh have this transparency off chain it can be your communication channels documents anything that discusses uh uh technological development the more you can bring things to the surface uh will just improve uh U your again your decentralization

level and the role of the token should come to promote decentralization so we covered that in a previous slide but you want to use a token as an decentralization tool and not some excess strategy for liquidity not a way to uh you know just bring marketing or or or something of that sort this should be your your focus when launching a token and the last point I'm going to discuss today is kind of a a model you can take home and think about you want to let's say You're Building the protocol right you're building some smart contract or or protocol that runs on the blockchain you want this level to be public and uh decentralized and people be able to tap

into this service and build basically kind of businesses on top of that and these applications or user interfaces can be a private business can work um you know not be a kind of a decentralized entity and have all of what you're building before meaning the the the incentive mechanism or and uh things on the decentralization level support this thesis so what we argue is that on the protocol level if you if this is decentralized and the level above allows any person to kind of tap in and create these businesses on top it will also improve decentralization there and can H uh divide incentives between

the two um yeah thank [Applause] you question have a question yeah thank you I think that's important part of the web 3 the legal site um I wanted to ask you about sanctioned addresses uh so if you have some um protocol some product um is it is there some uh framework already how you can handle uh not interacting with sanctioned addresses to

not um yeah not appear in some least for some Regulators so so you're asking how can someone uh actually enforce or or mitigate that risk that I discussed by blocking or limiting problematic addresses let's call it so yeah the the main way to do it is on is on the UI front and this relates to the last point that I discussed is we argue that because these Protocols are open sourced free for all you can't limit someone from interacting with it what you can limit is the level on top from interacting with the UI of Unis swap right but people can interact with Unis swap in other ways if they're

Savvy enough so this is the way to do it and then the legal argument is that because that under that underlying level is decentralized one can say that this is kind of a public good so you don't necessarily regulate the street the same way you regulate a store regulate a store that is on that street so this is the argument thank you hey cheers for the for the presentation um can you go into ma a little bit and the sort of changes both in terms of the travel rule that we've already seen in Europe um but also the changes that will come into effect in next year with Mika yeah

so I won't go into that too too deep um but we know that MAA greatly uh uh tackles um kind of the custodian part of it right the centralized it does a great job of that it's very Savvy uh it doesn't really cover a lot of decentralized entities so the unisoft of the worlds and Dows it's not really clear H it covers a lot of of issuance of stable coins and also it talks about launching tokens you have to file a white paper this is pretty clear by the law but as I said because there's another year for it to come into effect we don't really know how the Playbook will look add on top of that is that enforcement will be will Li in each

individual state so there's another level of uncertainty I would say that for a future you know like coinbase Kraken operating in Europe these custodians it's much clearer even more true for um um stable coin issures great work all of the decentralized part we we'll have to see uh thanks for the presentation um I had a question about data retention so let's say that my service uh needs to maintain some database with some private data from or let's say craen right I might have some private data for for

each customer let's say what are the regulations in this sense of what authorities can force me uh to give them access to I guess this changes also between jurisdictions as well but um yeah well well again when you talk about a service like Kraken I I the conversation shouldn't be much more different than just any other service but when you talk about some like generally information that's stored on the ethereum blockchain which uh which and which jurisdiction should uh enforce that so and obviously it's it's addresses which are not personal Identity or identifiers but what if there is in the future with ZK and stuff of that sort and this is a

world that is Ever Changing we just saw an article by by vital um yeah I don't have much to give you on that front we uh uh we work more with Dows on decentralization and token launch but there's an an an array of different legal topics for you know many lawyers to Ty in just quick question if you had to open web three you know startup where would you open it which is where in the world yes you're free to go everywhere you want so you have a lot of money against yeah I would definitely not optimize for like jurisdiction selection there are uh you know Portugal is good for crypto Zurich is good for crypto these are fine I would first try to find

a place where you can actually build a company so you can bring Talent you can bring money that should be your focus and once you're big enough you can later do the most elaborate schemes of you know opening a foundation launching a token we all move to a different part of the world you will have time for that but at the start you should focus on making the best product exist and if that means being in Europe next to your hometown because you know all the developers and all of the ecosystem then you should probably do that okay thank you