DeFi regulatory issues in Switzerland and EU

Transcript

[Music] well hi again another another amazing session with uh me and and other legal colleagues hopeful hopefully you wouldn't get to board this one is um about defi hopefully a little bit um more more interesting than all of the other typical regulatory uh sessions we're almost done with the first question we were actually supposed to introduce ourselves but um um and I will switch then directly to the topic of staking what we are going to do B basically we are going to cover major defi use cases or things which fall under under Defi and which have some

regulatory consideration and go through them one by one giving our opinion on like Switzerland or EU we have amazing V we have also and Grace with experience in EU regulate it not regulate it um should be should be regulated um and what are the major risks for the project I would suggest we jump directly to the topic of staking which has been widely discussed in in in Switzerland and also um in EU uh whatever you feel you would like to tell us about about the St maybe giving a quick overview uh on the how it is regulated in Switzerland whether how and

whether it is regulated in EU whoever fails to comfortable to start first go ahead you mentioned Switzerland so let's jump into that and first of all staking we use it for every for everything say was stake you stake for governance you stake for like proof of stake so the first thing to be identified is what kind of staking are we referring to is it something that's required technically that you generate like additional tokens because you stake something in context of proof of stake is it staking for governance is it staking just for the sake of staking so that you can generate some y that has no utility at all from a regulatory perspective in Switzerland people will just look at how close it is to staking in POS is it required from a technical

perspective is there any activity being done that justifies why you receive additional tokens at the end when you stake and once you answer these two questions you can kind of assess the risk of this being considered a regulated activity or not obviously on top of that you have this whole idea of how is the yield distributed is it just someone deciding that if you st long enough will man ually distribute tokens to you is it something that's fully automated who can decide to change the parameters um so this is very important as well and in general just checking what is the technical setup behind it and then how is it advertised because maybe you decentralize everything from a technical perspective that but bad luck you decided to advertise it in a very centralized manner by saying I am offer

you something I'm offering you a specific yield if you take long enough the major rooki mistake just advertising something with a lot of enthusiasm that has uh regulatory implications yeah perhaps I can uh jump in with um the EU perspective and I'm really happy that that's the third panel after your two amazing uh discussions because I will step on to what you said and say with MAA uh the biggest question right now around defi in the EU is what even is defi what is the centralization what does the centralization mean in uh under MAA because some of you might not that theoretically it is Exempted from the uh from the application of the

regulation but then no one actually knows what defi would mean when MAA is applied and it is applied on a member state level so that makes it even more complicated because there isn't a centralized understanding and kind of a centralized um way of this information to uh be adopted in a in a unified manner so it would all boil down to how your National competent Authority would um understand decentralization and if it even can be convinced that decentralization exists and what we have so far in the EU are a few guidances uh particularly when it comes to uh what is defy the Danish Authority paper that

angra already mentioned is a very interesting uh one because it's the first one when a comp National competent Authority the one in Denmark in this case is saying this is what we consider to be decentralized and this is how we perceive that um regulation and um any regulatory uh steps should be taken further from here we also have of course something that uh yustina mentioned the EBA esma paper around uh what is the centralization how it's perceived uh so those are guidelines for us as an industry but now the real test would be how would National competent authorities really understand the centralization so we'll keep you posted because we're kind

of following this on a member state level I think what is interesting when it comes to staking is if we look at how staking got uh regulated in Switzerland um in 2023 there was an event where the Swiss regulator finma participated and there they stated that anyone who is doing staking Services would require a banking license that resulted in a huge uh let's say in the industry um and an initiative from different blockchain um associations and federations here in Switzerland and what was very interesting is that the um Market participants and the associations here

in Switzerland were able to convince the Swiss regulator finma to reconsider its approach even though it was not legally binding what they said um then they issued in December 2023 the staking um requirements and it is not anymore required to have a banking license in order to provide staking services but I think it's what it was very interesting a very interesting use case of um staking regulatory approaches and the success for the industry that um they were able to convince the Swiss regulator finma to not be so harsh when it comes to the requirements otherwise staking would have not been possible in Switzerland uh really because anyone who

would have um done it would require banking license um I mean I work for Sting the word first digital asset bank and we also provide staking services but if we think about Defi and staking in this case it's not truly defi because it's centralized with a bank or a service provider so there are different I would say use cases of staking some can be considered defi others wouldn't fall under the defi um understanding thank you and maybe to add to that and I'm not sure if I would completely agree with you Magdalena because uh I think the the the finma guidelines

they clearly only apply to uh staking as a service so if we stay true to the word what is staking anyone can stake their um their tokens if they are stable and um this can be do can be done on your own and there no regulation applies at least in Switzerland um what is of concern or what was was concern to finma was the connection between staking and custody so they said if I give my tokens to someone to stake them and this someone has control over them then regulation might apply and I think the crucial

Point here is whether or not these tokens when once they're given to this service provider um if they are uh if they're held ready readily available I.E if they can be um segregated in an insolvency proceeding against this service provider so this is has been the optic of of finma um it was let's say protection of of the consumer so that he's not exposed to the um insolvency risk of uh of the service provider so uh and I think it's really interesting how he tackled that because for once we have this aspect of you know um you need a regulation as a bank if

you hold these tokens in in custody in a way that they're part of the bankruptcy proceeding of the bankruptcy bankruptcy estate on the other hand he said well listen Banks if you offer this service and you don't hold them readily available for your clients um these assets will be considered unbalance sheet and then subject to uh the regulatory Capital requirements which are quite brutal uh in connection with crypto asset so um the guideline is structured in a way to give incentives foremost to Banks and let's say save Havens how to structure their staking as a service business um in order So to

avoid these Capital requirements on the other hand I think it offered some clarifications what can be done and cannot be done and I think if you're not a bank um the bottom line is a bit harsh because you can only offer staking Services if you segregate the stakings per customer and for example with ether most customers um are just not big enough to offer this on a segregated basis so I'm not sure it's good to have these clarifications but I'm not sure that it was done in a way that is very Market friendly it is certainly Bank friendly but um I mean thanks a lot for that um clarification of course if if an individual is taking that is not subject

to regulation that is clear but I think what was interesting about FAS approach in this time um we have a lot of regul of or we have quite a few players here in Switzerland like Bitcoin Swiss um they are providing staking services and based on the finma previous approach it would have been um difficult for them without a banking license um and I mean for us we have a banking license we can do it that would not be the issue but I think it's great that they have reverted their initial approach um to enable more business compared to what um yeah the previous approach would have uh U made possible maybe just to quickly jump on it because it's very interesting at the Nuance you added and like this discussion on staking at the end because

we are on a defi regulatory panel and we end up mentioning a business and service providers and maybe it's interesting just a different shade like centralized entities providing a business and a service where you give access to something that's supposed to be a public good to start with and you add a layer of complexity on top of that which is something to be different shape because people like oh I'm using dii how do you access that off for that app that I have on my phone well is it still like a def how do you perceive that and how do you regulate this interaction that's an interesting part because like true defi just you interact with the protocol directly you connect your wallet that's one thing but then there are so many Serv services that just bundle it up together where the questions are

completely different when you say staking what do you mean how do you access that staking what do you do concretely it changes everything that that's actually very true and I think we can spend a lot of time on talking about what is defined what is not um I think when we at Le not sure about the EU but from Swiss regulatory perspective finma doesn't really care if it's centralized or decentralized um they say same business same rules they say we have a technology neutral approach which is not entirely true if you look at the law but that's their statement and uh back in the days um Mark Branson the ex director of the of finma made this dock test where he said if it que quaks

like a duck swims like a duck and looks like a duck we will treat it like a duck and I think FMA has the same approach with respect to defi now the problem is what is the duck here and um there are a number of issues which I I'm I'm still struggling to get my head around it because we have no centralized um so just localizing a business that is decentralized is difficult and maybe we need to add a layer of Regulation or uh some more Guidance with respect to localizing a decentralized protocol and I've come across decentralized protocol where 80% of the governance tokens were held by the same two people so is this

still centralized or not um and honestly uh defi washing defi washing good maybe you have to get into this yeah just I'm not sure I would agree that FMA doesn't care about decentralization at all because if it's a dock but is no owner of the dock females are like okay there's no one I can reach out to to actually control that dock so it's I would say it's kind of cares to a certain extent well they would say okay what do you do with that dock are you providing that Dock and offering that's do to people I mean what PMA said in its annual report 2021 is how it's going to treat Defi and there it mentioned it same risks same rules as you said and Technology neutral approach but when we

look at defi I think what we can see nowadays is that many def projects have an element of centralization behind it's not truly decentralized and if you are conducting Financial Services or intermediation uh putting the label of defi without being truly defi then this is subject to regulation and I think this is also a very valid point from the regulator um on how to approach it Fabian Sher Professor from University of Bas he has an interesting defi stack where you go through all the layers like settlement asset protocol application and aggregation layer and then you look at each element and based on that you can actually assess is this truly decentralized or not this is always

helping me when looking at T5 projects yeah perhaps I can just sprinkle some EU um uh also um knowledge uh or further confusion um to the to the conversation uh but basically how especially that's especially visible from the Danish paper that I mentioned uh what is the current approach and what we expect to be the um at least one of the approaches uh when it comes to evaluating what is defi um is and who would be responsible for that duck without an O owner it would be uh mostly who is providing the front end basically the The Entity the person that

is building or has uh in some way uh publicly made available uh the app or the front end the web front end that is used for the uh for accessing this um app so and that is very much aligned with how the European Union is uh perceiving those problems especially with like things like the uh the product liability directive where software is also a product and software developers have a liability but that's a different panel uh so they're also going after the entity or the person that has put um this app this uh software basically that has made it openly available to the public yeah just to and to to refer to

this point from one of the EU Regulators what they have they they have to quote them what they have said in public if we can grab someone behind the protocol then um yeah then then it's not so it is it is what matters to a lot of regulators they have a different Optics they always have to have someone whom they can make liable in case of hack in in case of funds get get stone you always have to to look at them with this optic just just to sum up on the staking Topic in in um in in Switzerland I think it was it was really a great victory of the community I've been at this event in in this in SE September well I think Matias o was who announced this practice

and then we were like all shocked because it would would have been extremely unproportionate and then it was a lot of work of the associations and that really a great example of I would say even lobing or educating whatever you call it um what I also wanted to let's say to make it more practical to see what are major regulatory considerations or issues with uh so-called uh um staking pools or yield farming from SS and EU perspective so that the projects here are aware for staking the Reon approaches in in uh for Native staking for staking in general the reason approaches with there is no let's say Unified approach yet in EU what about yield forming liquid staking

pools um yeah I'm holding the the microphone so what I can um already say is that there are attempts to understand it better at this point this is what has been done on the EU level uh in terms of context there is ma but you might have already heard about MAA 2 um because even before the original the OG ma was applicable there were already discussions on okay how we can expand this so there is in the text of Mika already this deadline that was recently missed by the European commission for them to issue um a report on uh the novel um adoptions in the industry that need to be put under the uh MAA framework and among those was Defi and

nfts and so forth so for those to be for that report to be drafted there is the need for uh like an input from the European banking Authority and the um SM Securities Market Authority so it was recently published and they are saying in this text that they are not pushing specifically for any regulatory changes but we need to keep in mind that whatever is publicly available it would at some point influence whatever is going to happen with Ma and maik 2 uh however crypto is not currently the main focus of the European Union uh thank God for AI um and we are not expecting Miku anytime soon but what they're posting there what they're saying particularly about staking liquid staking they're

understanding very well the difference what it means reaking liquid staking and so forth but what they're saying is that at this point we are not considering this such a big issue in the EU because the adoption has not been significant so it does not have this uh possibility of influencing negatively the trfi market and the broader market and therefore it's not a big concern for Consumer Protection so that's the stance at the moment but again what is Defi and what is outside the scope of the OG MAA that's a completely different story maybe to add to this and what you said previously um those Danish guidelines are not bad at all I would say to the extent they highlight that

you need to check in the first place whether the the activity is regulated so what do the SMART contracts do and the parts that are being controlled in a slightly centralized manner at least is it regulated because if you offer a a whole service that is supposed to be regulated That No One controls and then let's imagine the only centralization points is is your rewards campaign on top well clearly it's not relevant you will not regulate someone because of rewards campaign as controlling the whole ecosystem so like having this idea of let's verify what is being done what are the the key functions that constitute the financial service and are these being controlled actually makes sense and it's the same for interfaces like they will look at the interface but only to the extent they provide like a

layer an additional thing if it's just a neutral access point without any smart contracts facilitating the access and so on it's not exactly I mean the maybe we have a different understanding but the way it's written as it if it's just completely neutral it adds nothing to the service it's going to maybe be undrip because it gives access like there may be AML considerations this is different but just they you not you will not be regulated as a bank just because you give access to a protocol that you do not control and that does this um so it really it's all about what does the smart contract do at the end it's not the whole thing but let's comparment put it into compartment based on the functions of the smart contract absolutely but let's get this one

practical to liquid staking I really want you guys to to speculate on that bringing you back back to the subject uh because this is relevant for the audience because that's what what they do and they are not sometimes most of the cases they're not aware of the consequences yeah well maybe I can give some inputs um based on our practice so um I fully agree um if it's only a fully decentralized smart contract that's somewhere um it's hard for a Swiss regulator of our EU regulator to touch on that because where is it um then we have different issues um we usually come across these um this phenomena when you have um asset manager type of entities or of

structures that you know they create um a smart contract for example for yield farming and there um they want to offer that um obviously or often for a against a fee and maybe they have a a seed some kind of entity in Switzerland and then you have some kind of attachment to Switzerland and this is where uh we come into play and um from a regulatory perspective um I think in respect to yield farming there are two main concerns the first one is the collective investment scheme act as soon as you're accepting and here you have to keep in

mind this is a regulator looking at it um I know that you're not accepting it it's somewhere in the in the smart contract but from a regulator from the regulator's perspective um it's you that accept it or have has control over it at least so if you accept funds and pull them in somehow um this gets you into into the realm of a collective investment scheme and um in our experience The crucial point is does someone have um an function as a manager so this can be passive or active so even if you have an algorithm that um that that channels the the the funds or the tokens to the

relevant um liquidity pools this can already be seen as a as a collective investment scheme um and here you have to take keep in mind that also passive funds are investment funds so um there's no way out to say well I didn't do anything it's the algorithm that decided um more complicated are structures where you have a let's say a governance mechanism so where you say we have a community that decides on on the allocation and there I think the crucial point would be to look at this community how is it being decided I mentioned the an example before if you have a community where two people are deciding um well I'm not sure that you can say

we're truly decentralized the second relevant regulation um is often um banking regulation um so keep in mind if you accept or you if you run a a project where you accept um tokens and you have control over them um you need to uh ensure that the that these are U being um that they are able to be segregated in an insolvency um case otherwise you run into issues there that's all on my side thank you a lot you really you really brought it to the point because those liquidity pools uh especially when set up without any formal entity as we

have seen in the case of a recent case I believe of Lio we just had this discussion with it was I was like okay that's fun we just had this discussion with uh Lio in sopia uh whether to have a legal rapper for those projects uh even if not in IR regulated jurisdiction Switzerland or EU approach is similar it is very close uh to Collective investment scheme because you pull funds and then somehow at a certain point uh you provide thir party management even if you set up this strategy once or is set up algorithmically Regulators tend to see it as collective investment scheme um and and so a practical approach has been

so far to separate the liabilities from the founders um it is an Open Secret people people use some of the off off structures but it is a practical advice at least you separate somehow or try to separate the liabilities from yourself from the team while in case of lier we have seen another regulatory strategy I would say where you just try to stay nonvisible but at the at the end of the day if the um Regulators investors or whichever interested party it could be try to grab someone then they make those persons liable directly without because they didn't have an illegal

repper maybe just but this is a practical case and there was a bunch of those cases ongoing it just yeah maybe to add to that um once you're dealing with a da um this this this aspect of personal liability is also an issue um in Switzerland um as the fallback solution if you don't have any other form of entity or you don't fit into another form of entity uh would be a simple partnership and there you're Li every simple partner is is liable so um to avoid that um I would recommend you to create some kind of Da rapper there um some entities

that are uh or some structures that are well suited for that I think there are also specialized legal entities for that purpose for example in voming and I think also the foundation of the pman Islands can be used for that but also don't neglect Swiss law um the Swiss Association is very flexible um so this can it's a suitable form for FIFA it can be also suitable for da and depending on the project also a a foundation can make sense especially if you are holding some kind of assets on trust this can be useful and it can be hard to implement these rappers once you

started the Dow so um these are you should think about it before setting up maybe just to quickly jump on on that basically the question is how do you generate the yield at the end the more active you need to get involved to generate it the risk the higher the risk then the second thing we mention rappers for DS now we have a new type of rapper that everyone comes up with oh it's the AI agents I I love like DS are no longer the way they protect themselves like oh it's AI the thing is if it's run on a centralized server we kind of end up with some kind of questions and then regarding Dow rappers some people think that if they get like one of those creative rappers like whyoming uh the Marshall Islands we definitely defi because we got the defi rapper well the

thing is none of these regulations have thresholds for like decentralization so you could still set this up have token holders and then it turns out that know 75% is still held by the same person so there's like it's not a stamp of decentralizations from a government perspective it just means that the structure is built in a way that is allow is allowing you to be decentralized if you use it in a centralized Manner and hold all the tokens even no one will be able to like even check it so because you are a Wyoming uh entity that this is guaranteed so these were like the threee points maybe to jump on that I think I would like to go back to the personal liability Point um which I think has been very well demonstrated in the case of tonado cach because after the OPAC

sanctions in August 2022 it was the developers of the smart contract which is immutable that were subject to prosecution um that are serving jail time because of personal uh liability um as the software developers so uh yeah that is quite an extreme case but just be aware that even though um someone is designing something in a way that it is truly decentralized um there can be still authorities going going after after the individuals behind no that that's a true this has been well I mean we've we've been discussing mainly let's say uh civil low liability

for um investment Dow or for for those liquid staking pools um and the case of tonado cash I think it is extremely unproportionate it was extremely politically influenced um and in my opinion in in other countries of Switzerland I I wouldn't have imagined in such an unproportionate laow application in this case um but this yes this in a very very worst case scenario if um let's say it is a political uh decision in place yes this can be this can be the case and that's why a lot of developers of those projects uh try to stay anonymized as as much as they can and this is

Justified it's also the difference that you just develop put it in a public rep and left it for everyone to use however they want or are you kind of involved in promoting the use of that that's also the major question because as soon as you get involved well first of all it's a bit more complicated to stay Anonymous and then also you're influencing how people use it which makes sense like you have responsibility because you did not only I mean people always gave the example of guns it's not because you build a gun that people necessarily kill with it it's the same of the protocol but if you sell them by presenting them in a certain way or you sell them specific audience what kind of influences do you use so this is one of the questions as well like Beyond building it what have you done

subsequently Magdalen do do you have something to add no uh we we still have some some time to go do want to jump the questions so can we can we still discuss last one because what what's your let's say take on peer-to-peer exchanges and IML issues because I believe this is also one of the key problems of of Defi and and the projects need to be aware especially the developers of their let's say worst case personal consequences I have a take on that uh for sure I mean I've been doing a crypto compliance for more than six and a half years here in Switzerland with regulated Crypt native companies currently at Signum before that at crypto finance and the experience I made especially with the

regulator when it comes to um defi applications be it uh um boring and lending or decentralized exchanges the regulator is even though you're interacting with a smart contract the regulator wants to know who is everyone behind um the interactions of a smart contract so um AML and kyc are very important um and at this moment in time we see more uh compliance functions built into defi um setups and use cases and ation um I would expect that to increase in the future further um I think with self- Sovereign identity and

zero knowledge proofs we have very interesting um use cases to apply to defi but um if anyone wants to offer um Services uh Financial Services with defi um it will only be possible if it's known who is participating in that protocol or or interacting with that decentralized exchange has that person been kyc um has sanction screening taken place so this is uh the insights that I can share based on interactions with the Swiss regulator finma so yeah from uh the EU perspective we are again uh once again really

prepared with uh regulations that cover pretty much any topic that you might think of including soon uh there's going to be something interesting about that house but yeah I'm going to probably share about it more next year uh because it's not public but um when it comes to AML uh it has been something like rule of th that AML um terms everything privacy related so this is very unfortunate because I'm a privacy lawyer that has always been an issue with me but also when it comes to AML um and particularly the transfer funds regulation that it has become applicable the same time as maika uh all those deadlines that an extended uh periods uh grandfathering periods do not apply so

even if you are like excluded from MAA you might still fall under a lot of AML regimes and this also um cons um takes account like T defined to account particularly when it comes to the so-called quote un unquote un hosted wallets self-hosted wallets what we just call wallets in the industry um there is now um this necessity of providing information each time you're basically uh connecting with a crypto asset service provider Whenever there is a uh wallet like this involved you need to provide certain information and there is not a minimum threshold because with u traditional um transactions there is always a threshold

um in this case there is not the only threshold basically is that above 1,000 you will be expected to also identify if the person that you are transacting is with is actually the one holding the wallet and is not just um claiming that so there is now a lot of I would say business for um different tools that help casps uh provide this type of information and confirmations but AML requirements are there uh and even if your project for example would not necessarily fall under MAA it is very likely that it already falls under certain AML uh requ requirements would it be transfer funds regulation or uh

the directive or the regulation maybe one point um we come across often I think it's we we agree that AML is usually applicable to um to exchanges and this would also apply to uh decentralized exchanges to the extent they uh were considered to be in a certain jurisdiction uh the issue that I see in Switzerland is that um these AML regulations that are in place they cannot be really met uh in a defi manner so um I think with the technology we would be able to create the the best kyc in the world um everything is public on

a on a blockchain after all but these measures are not in compliance with the current regulation and um this has a as consequence that we are dealing with um SOS and finma and I don't know if you've ever talked to people in charge there they're not the most flexible um in my view I'm sorry if someone is in the room happy to discuss this further but um so they're really focused on the old world and and I think in order to have a proper kyc and AML um in the defi space we would have to embrace uh new sorts of of of or accept new

forms of uh of Regulation actually this is what my PhD is about I am trying to propose a um how zero knowledge proofs can be used for AML kyc purposes and how the current laws need to be adjusted in order to enable um to go with the technological developments I just started so let's see uh what the future brings but yeah that's exactly uh what needs to happen I mean that would be great once we have the outcome because then it will be also easier to comply because when when you you said that um people um like the regulator is not the most flexible especially for AML for like Switzerland is a very good example you can kind of argue that banking laws are not

applicable Financial not applicable but AML oh no as soon as we have a doubt it's going to be applicable so um it's quite striking there and like especially in the Swiss context we have this uh very annoying concept of assisting in the transfer of funds that is being interpreted in a very odd manner so when it comes to defi for example you have many of these a bit more centralized providers that try to facilitate access so anything that's related to facilitating access keeping like a a part of the private key having like an encrypted version of the private key somewhere be it in like a HSM system or whatever well as soon as you have this you end up with this question um what kind of control is that and is it enough to create a dependency will the

authorities consider that although you cannot control the funds yourself and that you cannot move them you still are kind of responsible for AML things like a requirement so we create this landscape where although strictly speaking you don't have enough power to implement qic requirements and and have like the whole AML screening you end up on paper being subject to AML and would be forced to do more that you were supposed to do in the first place because your setup potentially does not allow to have all this traceability so they force you to have a bit more control just because the way you structured it gives you just a small hint of potential dependency so so um yeah I'm looking forward to the ZK proof well because then it would Bebe less of

an issue we just implement the ZK proof system and uh give a GI for would be a nice thing at the end well definitely definitely I hope I hope then we would we would amend the the regulation about video identification and the travel rule um interpretation we need to to to work on on both of those things to to make it possible um we don't have some so much time left but we we have maybe a couple of minutes for questions thank you it's really interesting topic actually because I was thinking about this a lot if you think about amling different users in

different pools in defi it's not quite possible there are no zika proofs as so like so far accepted by Regulators so the question is like if you're operating the industry right now let's say in sand in Europe wherever how is it possible to uh really do the AML and kyc for all the defi participants if you're providing the service as a c Central authority to the posts it's not quite possible to make sure that there's no San W there and if there's interaction with saned wall how do you make sure it's like is it big enough if it's like $10 out of five million pool is it like now all the money in the pool are bad and yeah if

you can just like comment on that in the current regulator environment how is it just possible to operate without involving like millions and millions of costs and years of compliance and yeah I can go on and on thank you I think Magdalena would be the great person to give a centralized approach for that but there's one tool actually so I came across recently across tools that allow you to screen the pool because the approach we have most of the time is on transactions but once you end up in the pool like how do you assess how much of that pool is potentially tainted and is it even worth risking tainting your funds by interacting with it so there are now tools that allow you to before depositing your funds screen the pool and tell you okay 50% comes from flagged addresses that kind of percentage comes

from this so you know in advance what is your risk exposure and I think this kind of tools will be very efficient and like will change a lot even in a purely defi setup because even if I'm not subject to any AMR requirements or anything I would like to know what I'm interacting with because it could be that uh then I want to interact with a protocol and my fund somehow got tangent because I deposited them in a pool where 99% was like originating in a hack for example like you don't want this so I think these kind of tools are the future on top of the tools that just really screen like the the flow of transactions but how it's approached by centralized entities that's a different thing I think what I see um out there in this in the industry is like providers service providers

which are enabling compliance functions that you can then use um in the respective smart contract um or uh defi pool or whatever use case you have there so there are already providers out there who are providing who are offering these Services um like having a partnership with them could be one possible solution um and building in compliance functions like um automated um through smart contracts is something that I have observed recently but we are still at a very early stage I would say um but this is definitely where the industry is going to um when it comes to defi a follow question to this which is

I work with protocols I work with Yi protocols in Banks Brokers and ases Switzerland have a lot of interest in depositing client into but at the end you always say no because of AML so what does it take for one of these to be able to say yes how I would say that uh it might not be a comfortable answer but I think the answer is regulation because now that we'll have more clarity especially in the EU it's it's all about regulation but at the end of the day it's also

Clarity and whenever you get a rejection uh that you don't not quite agree with and you are quite convinced that you are actually doing things in a proper manner there is now this tool saying yeah it's actually I can assure you that I cover all these requirements either through using different uh encryption methods because that is also a very big thing that is currently rediscovered through the like a separate framework around e identity so there are a lot of tools being built around Adas there is a EU digital wallet and now all those encryption method ologies are far more embraced also by the policy makers Regulators supervisors so now we have this two set we have the tech that is constantly developing and

we can say yeah we're building this so now you should reconsider your uh response because you're actually currently against the regulation so we are allowed to do that and maybe before you have the regulation in place and I guess it will take a while until we have a proper regulation for yield farming and and liquidity pools um one thing is that we see often financial institutions they want some kind of confirmation that this is not against the law and this is not against any regulations so if you're the creator of such a liquidity pool or if you're behind it you could structure in a way that it is compliant in Switzerland with Swiss law and then have it confirmed

within an no action letter by finma um if this is enough to convince um their comp ciance team of your clients of of the banks or or asset managers I'm not sure um it's usually there's a discrepancy between the business people um that see an opportunity and the comp and compliance that that looks at the thing and says well but now we have assets being intermingled with I don't know potentially sanctioned uh funds from North Korea and uh there you would need an answer to um for example with these tools otherwise I guess it will take a while yes I would just add basically we

need to answer of what is enough CU we are used currently in compliance say we need to know everything and unless we know everything we don't accept it so the question is will some guidelines some additional regulations just uh take into account those models where you can't know everything I mean we had examples of institutional pools where you need to qyc to even deposit usually they are not the most attractive because you don't have enough liquidity so you want interact with the other ones but then the question is like how do I know that all these guys were not like sanctioned or something like this so it goes back to compliance and as you said business opportunity more liquidity versus compliance we don't know what's in that pool so as I mentioned before there are tools but the question is like how much of the pool needs to be safe

can we rely on the list that exists for flagged addresses is this enough so once we have Clarity on how much efforts are good enough to say okay these funds maybe we don't know who they come from EXA exactly but at least we can have enough certainty that they are not sanctioned flagged or something like this if we move to that approach probably there'll be some progress but the question is will the regulator thereare to go in that direction instead of saying give me all the information you can and then I will decide we are we have a one very long waiting question here but we need a very short answer because we are super tight super over of the schedule hey yeah uh thanks I this was great I

have a bunch of questions for a panel full of lawyers but I'll stick to one um yeah I heard you guys mention a few times uh with immutable smart contracts if there's nothing no one behind them that they can NAB so to say they can't really get to anyone but um I was wondering in the case of uh Alexi perv in the Netherlands that was basically their defense right where they said um yeah okay this is immutable we can't do anything about it and the judge then essentially ruled and I know this isn't final yet but the judge ruled this is an explicit designed decision and therefore you are not exempt of liability um yeah how is that may be wider applicable so a very quick response um basically the judge in the in the first

decision now it's uh we'll see what the final ver final decision would be but it um the judge went uh through different steps to evaluate it and including um how much per was uh posting on GitHub how much was he involved with furthering the uh the like the smart contract developing it plus how public he was about uh those activities so in this case those were taken as something like very similar to a company structure and a structure you would expect in similar circumstances if it were not a smart contract and if it was not self-executing so all these little details uh led the judge to uh to this final decision um it was not uh like the

code itself in this case it was more about the human uh attitude thank you so much apologies everyone we are lacking the time but feel free to reach them out during the coffee breaks and the lunch break or whenever you feel convenient thank you very much for oural panelist [Music]