Does Compliance Hold the Key to Mainstream DeFi Adoption?

Transcript

um thank you everyone uh yes lunch is over let's work a bit on the defi industry first of all I would like to introduce uh our great participants today I know some of you comes from other countries today I start from uh Angelina and then guys you can just introduce yourself and we start the discussion about Define compliance so my name is Angelina Quan I am um visiting your amazingly beautiful country um I usually come during ski season so it's really different to see it with sun and warmth uh I am uh a senior adviser at IMC Asia Pacific so I work in Hong Kong

for IMC where we do Market making on every major exchange traditional exchange uh around the world um my previous experience includes uh being the global coo for bitmex uh being the global for hash key I am very very involved in crypto and we really really want to see a global ecosystem build out with collaboration and cooperation with um crypto Valley um and uh web3 Harbor so one last plug please come to Hong Kong in October we're going to have a ton of events called blocktober we would love to see you all there if you're a developer or if you're just interested in um digital assets please do do think

about coming to Asia Pacific because we've got deals we've got people we've got um a lot of support in terms of digital assets and a lot of things are happening so thank you Angelina so it's great we have Asian representation today because I would like really bit shift from only MAA and Europe but we will cover everything Julian hi uh good afternoon Julian GRE from yodler um legal council um it's now I think my fourth crypto Valley Conference have been in the space since 2017 um here to

discuss um this blessed question here um I just want to leave a bombshell I would say that the does compliance hold the key to mainstream defi adoption I would say partially but if you allow me sometime later I will explain why sorry I didn't hear that you said both partially oh partially partially fantastic would I think I think Lucas would agree that would be my answer I think Lucas will agree but so I I think it's important that we have fun because I want people to remember this session not because we are boring compliance people yeah Benjamin partially swear to you I thought he said

so sorry I'm so sorry hey everyone um I'm Benjamin zimu I'm the head of Sayes at score chain so I started crypto in 2017 actually a a little bit before the crash um as you may expect I didn't sell at the right time it didn't teach me anything because in 2021 I didn't as well so if you search for any advice about crypto trading don't ask me otherwise you can ask me about um crypto kyt and blockchain analytics tools so I'm on the product site um because in 2020 I started early at scor chain and what we provide is a tool for blockchain analytics rather focus on pure B2B compliance rather than for n6 so it allows compliance officers to get access

to dashboard API connection um with a rule based ngi system so they can kind of receive real time alerts a realtime freezing system with third party solution providers like custody um and yeah that's pretty much it so I will be able to um to tell you a little bit more about that just for you to know score chain started in 2015 uh so quite a long time ago and we have helped customers in 350 uh 350 companies and 45 different countries and Lucas your turn yeah thanks I'm Lucas the CEO and one of the co-founders of 21 analytics above my first Bitcoin 11 years ago I work in this industry since 10 years I'm based in souk and I'm I'm here every year

so um yeah with 21 analytics we the Swiss market leader in everything related to travel rule we're technology companies so I'm techy like most people are in Bitcoin since a longer time and um yeah I'm very keen on diving into this topic okay thank you uh maybe just couple words about me I'm board member of crypto Val and also um I'm COO of uh smart compliance and smart shift a company helping uh startups and projects uh to track the liquidity on exchanges and also Consulting in terization and uh regulatory matters in Switzerland so let's start we don't have a lot of time

but we need to solve a lot of questions uh and my first question will be let's decide what we're talking about defy do what do we mean by defy and uh Julian let's start from you again and uh let's exchange opinions truly defy defy when we basically talk about compliance does it really coexist or we're talking about non comp able things I look before I said partially um let me start with the reason why I think they complement each other clearly you can't have one without the other the technology is designed to be transparent if it's designed to be transparent it means it's designed to

show at least the greatest extensive part of what happens on the blockchain okay that part is clear now what is decentralization I have to take it from a I will take it from a MAA perspective from a European perspective and I would say that there is no um coherent approach as to what decentralization is even with Mika and to prove it in a simple way the regulation came came in the the the proposed regulation came in now it's now it's it's it's accepted it will start

being effective from June 30 then June then December look at the report from the committee um on economic and monetary Affairs in the EU the parliament which actually introduced the law one of the main players they themselves recognize that post MAA the first problem that they will have is how to classify decentralization and defi so honestly if I have to look at a legal point from a legal point of view I can't really answer it directly I can rely on what I've seen and it's just peer-to-peer transactions through a protocol plain simple look at Unis swap that's it Ben Jamin From perspective of the um

te technological company you're tracking the uh red flags and uh so on the question is U do you really work with defi or it's a what is your subject where where are you looking for the answers to the compliance questions yeah yeah so so today the response for me is no we are not working with any defy protocols or Services because it's not yet regulated not as clear for them and they don't need a tool like score chain but score chain for you to for you to know track transactions track wallets so the defi as in the sense is fully transparent for us it's even more transparent than the centralized exchange so everything that happens in

the deex everything that happens in nft marketplaces or anything staking and so on we can track this so the product is ready and it can adapt to Future requirements because the technology is there um but as as speaking about technology and and defi I'm I'm thinking about kyc I'm thinking about all of this and it's already conflictual in a way so in terms of anti-money laundering blockchain analytics reportings that's no issue for us just waiting for the actors to to have clear requirements and then say okay uh I need to have reporting combined by Dex for instance where the funds come from where my uh my user buying the funds for instance where they are sent to it's also kind of this

kind of reporting but when it comes to other kind of layers of compliance kyc and other things that um that also exist uh here there is a main issue for me um but for transaction monitoring wallet monitoring there is uh nothing um like complicated for us um in Asia Pacific I think uh we have been going through a really interesting time so cast your mind back to 2019 uh roundabout covid time we didn't have any rules and procedures in place and if anything um when I was at bitmex people would say Angelina you've gone

into crypto oh my God you're going to be eaten by uh tigers and and you're so evil and I just went I'm an ex- reggulator I'm the same person um we were able to convince the financial services Development Council um to push and work with the government um and the government then uh convinced the sfc to actually come out with a comprehensive set of rules Flash Forward to today um a woman who actually said oh my God Angelina you've gone into crypto you're you're gonna be like ripped off or whatever she came up to me and she said Angelina I'm sorry I was wrong you were right um crypto is now a key area for

Hong Kong and why am I telling you this story because I think that's why when he said when I heard I just oh um regulation and compliance are the key to go forward in terms of institutional adoption and defi is a very hot area in Asia and if I mean if you get a chance to come over to Asia nobody talks about it but yet everybody knows about it and um everybody participates in projects from DG to um to normal people I just like to try it because I like to try getting involved in different things um iosco unfortunately which is the international organization of Securities

commissions they've only issued one piece of guidance and then um our regulator the C came out and recapitulated the same thing but what it does is it doesn't really give you very much guidance but at least there's a bit of guidance out there that at least they rep they they know that it's out there but I think that if more regulation came out not to stifle but to help uh the industry grow I believe that uh defi will be even more popular now there's a lot of discussion and I spoke at money 2020 in Bangkok and our whole um uh our whole uh uh panel was on Defi and whether or not it really helps and I

think um throughout the whole panel everybody believes that defi is a way for financial inclusion if it's properly used um there are a lot of great use cases that um digital assets and systems can use from and learn from Defi and decentralized finance is something that I think will lead the way but we just need to have have regulators and Market participants working with Regulators to help them so that they don't stifle the market so um I would agree with the premise and I think I and I would challenge each and every one of you here especially with ector working with c um Crypt Valley um uh uh this whole group working with The Regulators to push

forward a reasonable regulatory regime that would help link to adoption yes uh I think if we look at the regulation and how they treat uh the defi industry basically we have truly defi we don't need regulation because it's purely about technology but most of the project we see in defi exchanges they have element of the centralization because they have somebody who profit on this or who marketing it who have behind some legal entities which we don't know probably disclosure disclosure and the question is uh we still need to imply travel rules which already in discussion for several years and I think Lucas you

are the best expert to tell us how we can scale it because uh when we look at Asia and Europe there is some discrepancy in the regulation and I don't even touch America so the question is uh how we H get into the situation that we can in a safe manner uh in comfortable way for defy organization transfer information about users because we will have to do it I guess we don't have any other choices uh it's uh if it's not truly defined it it will be uh regulated yes system security wallet protection um interoperability all of those are really important so sorry yes

and maybe I just before you you start discussing we will have one more session on privacy so I don't want to touch privacy now because my colleague Chris will uh discuss it more in details with other team and uh look just let's talk about travel rules and what will be the future where the bottleneck why we are not uh you know easily transferring money at the moment globally maybe going back to the question I would say does compliance hold the key to mainstream crypto adoption yes Define not because there is only one Define that is Bitcoin as soon as you have a foundation or a website or somebody in charge is not defined there is somebody to regulate and if you don't follow the rules you

would have to follow the travel rule or any of the other kyc rules and sooner or later some some Regulators probably come knocking down you and especially if you don't follow the American rules it doesn't matter where you are yeah if you don't if you like to travel then you have to follow the the US rules and the US rules are also not so easy or or clear um so and then coming back just to the travel rule I mean it's it's still a mass after four years in the let's just centralized exchange world so taking that into defi considering most things are on defi but the centralized is going to be a complete mess if you really would apply

that so I think most projects will just not be compliant with mik TFR me them not being compliant with with Swiss travel rule UK travel rule those who actually enforce it didn't matter too much but the EU is just enforcing it also if you're not based in the EU not like Switzerland who's only enforcing it if you're based in Switzerland so I think they will all this projects all this Foundation might sooner or later run into quite some some regulatory issues okay where is the how can we solve it uh what's the solution and uh do we need something different as travel rule to the for the industry I mean I've always thought that we as an industry should work together

with The Regulators because we know what works and what doesn't and it would be better that we speak to the regulators and work with them to come up with some type of legislation that would be easier for them than them coming up with it none of them have ever worked in digital assets most of them are from traditional Finance so um I would really really um encourage yourselves to engage with inma and engage with um esma in terms of coming up with at least some thoughts of a of a more productive um uh way because iosco

it's just a few questions it's like do you know who is behind the uh uh decentralized Finance um uh organization do you know this do you know that but it doesn't say anything about regulation um so it's better that we do it than they do it yes but I was just in in in Paris at the fatf meeting where they have The Regulators on one side they're mostly quiet and then the industry on the other side and the issue is there the industry is contradicting itself a lot like they're different viewpoints different uh I say interests at play and so we are giving contradicting statements to The Regulators so we look very chaotic can you give us examples so the

contradictor statement just to understand where the contradiction is well it's a bit uh uh High um difficult but uh sensitive topic because I don't want to call out specific ones but let's say if you're an exchange and at the same time you you also have a a solution just to pretend you have a solution and then of course you have a total different uh communic iation than than the other Solutions yeah so it's not was same way in finma is in Switzerland where technology neutral for

example it doesn't matter you just need to provide information Julian please yeah but look I I think I understand Lucas when he says contradictions I would say the the the the you said it actually well at the second point the message is delivered differently as to what the industry would actually need what concerns me at least I would say from a finma perspective it looks very promising I am and uh Angeline I just want to bring you also on the loop that in at least on how how I've experienced it we've done our fair share of collaboration with the regulator I think the product of what the EU produced is

something which resulted from collaboration with the regulator with Regulators is it what we wanted okay interesting maybe not because again I I represent a company that is more cd5 so CI and defi combined we still for under the scope of MAA if you check the recital 22 if we are even if we are partially decentralized we still fall under it um the fully decentralized project is still out they they they don't there's no idea and there has been a a loophole they don't know what they're going to do but the problem that M solves was the problem that we had last year with the

FTX with the whole bubble boom that happened if there was a MAA there it could have probably solved most of the problems that we had there but we are we have problems now that are not going to be solved by m but you are European business basically right you are yes European and if we look on the glob global scale there are a lot of business shifting outside Europe because of MAA as well people try to avoid and Asia still the biggest market for crypto the question is what happened next will we see like a bolic system of just Europe which not the biggest you know if you look at the population it's all in Asia we have us

with the rules and nobody want to touch and we have Asia or we still believe it will be some type of harmonization that basically compliance uh will be key to have non border transactions because by default crypto is uh Without Borders yes we we have crossborder transactions so I think now we need to unify interpretations because again um I refer back to the report of from echon they listed Unis swap as a very as a DEX project an interpretation within the EU and now look what's happening in in the US Wells notice they rebutted rightly so they are right to rebut but the

interpretations are so bipolar that you can't you can't uh gauge with you're going to go into another country you is it the right solution is it going to solve a problem it's too unforeseeable a Pandora's Box I would say even if you move I advised um I I haven't been advising them now but I advised a def5 protocol um which is still trading even after Co covid so they buy and sell Bitcoin decentralized and when I first gave them the advice I just said look here's the sfc rules here's the Malaysian rules here's the Singapore rules you can see them all um safekeeping don't rip off people full disclosure don't screw

anybody and just stay off the radar and you know what they're still in operation so they haven't screwed anybody they haven't um lost money uh and they survived Co and uh the female CEO uh who runs this um has followed that and she's been successful um and it's going on but she runs under the radar and she doesn't really cause a huge um big stir the wallets they know who they are so I mean that's one way of thinking about it and but one day The Regulators are going to come and and they're going to start regulation for this area so you might as well at least advise whoever you know to

start at least thinking about being compliant and the question is what happened with those who didn't do it right uh they blew up they blew themselves up she's doing great so so Benjamin what's your well well for me most of all first of all Market is Europe um and we deal mainly with the centralized companies not defi um but the questions arrived the same because they most of the time complaints officers ask me do you do you actually within your Tool uh succeed to track every transaction through Dex dexes or or swaps from any different kind of decentralized services um the response is yes but they always ask what should we do with that should it be

risky medium risk low risk how can I interpret this transaction which is just a swap is unis swap more riskier than another Dex for instance so that's why as a product perspective there is a lack of understanding from the regulation there is no clear rules so the players have to adapt themselves they have to adapt their risk appetite even for centralized uh entities regarding defi right um so in in our main uh job at score chain is providing flexibility to adapt quickly and that's mainly what we have to do because even ourself we don't really know where we are kind of going if the regulation is not strictly saying what we have to do even for centralized so um from anti-money laundering perspective

from defi we track everything we know if this is a DEX trade the risk related to a centralized exchange then send to a c wallet then then sent to a DEX we track back to the centralized exchange so the risk for us is related to the centralized exchange rather than the dexs right this is our approach today this is how we try to help our communities or our partners so they can uh basically adapt their on risk appetite with our ruine and as a product this is what we can do today but of course we are waiting for regulation clarification so we can just help our customers with better features real time analysis and so on yeah I I I I think it's a it's a great comment uh because basically if we don't have a proper

regulation we need to use best practice in industry and uh in Switzerland we for example had um uh the recommendation of banking Association how to on board your client and other things when we try to consult client we try to get all resources available globally just to combine them together and to make the best out of it but uh fatf also trying to do good things when they trying to provide recommendation they meet uh with the participants and they try to consult but we also see here the uh you know disharmony between the participants of the market where each of them have a bit different interpretation of the rules right so but still uh the question is uh

which country may be the leading uh country in terms of Regulation what is your opinion who should be the role model to use in your use cases when you create company uh I'm not asking to advise which which country we should register your business but at least to be you know to be the best like we have a Swiss standards for example and when we say we do it in Swiss standards it's usually people percept it's very good and uh Swiss regulation quite advanced in crypto so maybe uh Lucas what what's your opinion about uh which uh regulation or where we have more advanced situation

globally I often find it entertaining when there's actually rather sad there's company setting up shop in Switzerland getting a VF SRO a membership kind of license and then they tell me yeah somebody told us we need to do a travel Rule and then they present me their business model and I just say guys this does not actually work anymore in Switzerland because of the regulation that we have it's it's very clear but it's also very strict and uh that's I don't know if that was good for our economy um so therefore maybe other something like s shells where you can do whatever you want of sure we had a session this this morning where lonstein was promoted a

lot let's or that sounds a bit better yes and uh what's your opinion Angelica I'm slightly conflicted because I used to work at the sfc and a lot of the legislation that I wrote uh for ATS um is Incorporated in the current virtual asset uh licensing regime and I also help hashy get their licenses so for me it was easy because I've been a compliance officer a COO in those companies and I already knew how to immediately get hash key up and running now was it fun to try to convince a

bunch of mainlanders uh that compliance is important and and kyc is important um it was difficult but after a while they got it and it's very much like traditional Finance um so I find the FC rules quite simple I met with um esma um just recently Yan's um Peter Peters and I'm I'm quite impressed with how the EU has cobbled 27 countries together um because the one thing that we're seeing is all of these gigantic organizations have to be Cobble because they're Global if you don't have a regulation that fits these organizations

then it's going to be very difficult for those organiz organizations to further grow and I think um the esma U pan European rules are quite interesting also but is there no is there a perfect way of going no not yet but that's why it's so important for all of us who are here today to be vocal to be out there to work with Regulators um and to help them um and I've always been of the adage that if you help somebody they will help you long term so I think this is where to get better regulation we all have to work together with with regulators and in in Asia it's easy to work with

Regulators so you can call them and make have a meeting they are not because in Europe in Europe we have a different Regulators in Switzerland it's also quite open but in many countries try to get a meeting with regulator you will never succeed so we are are very open um I mean they can't like meet every day but they will accommodate um as necessary and I'm a market participant I'm here with invest Hong Kong today to help make Hong Kong uh a crypto Center that that is my goal and there are three of us that are Market participants helping Hong Kong government to do this because we really feel strongly about it and I think this is the same for Europe

with your crypto Valley you're coming to Asia hopefully work with your regulators and we can have collaboration and cooperation so well for me it really depends because we talk about Europe but this is also a lot of local regulation I was speaking a lot with the AMF in France uh that were quite reactive but if you compare with buffing or if you other any Regulators they can change right so when you're talking with the with a a new startup or a new project going into crypto in France or in Germany or or in Switzerland or anywhere else in Europe it can depend as well on their un logal regulation requirements even if they are targeting MAA so it depends on this sense but also we have a lot of feedback

from our own tool to know the best practices and um most of the time the risk scenarios are the same for transaction monitoring wallet monitoring velocity monitoring to be honest they don't really touch decks they don't really kind of try to set up anything regarding decentralized transactions and so on because they don't really know exactly they don't really know so they just get away from this yes but otherwise regarding all the other requirements from I guess centralized ways of doing because it also come from the traditional way right and this is why Banks today go into custody because there are more clarification in these regards with Bitcoin and ethereum as the main tokens today but when it comes to dexes they just don't do it it's like

it's like Anonymous coins they they won't accept it as Regulators because there is no no way to track everything so no clarification there so yeah Julian would you like to it this is going to be the toughest question to answer honestly because um at least from my role um legal counsel in in a CI works with crypto lending at some point look Switzerland was and maybe still is a very relevant player I say was because when we moved Swiss land I can say that it at the time when the mark when the industry was still very young it had a very

mature um uh very mature rules and very helpful rules unfortunately as everything happens not only with Switzerland but also as I explained before um in the EU everything happens late or happens slow so in the end if I have to answer a question right now I would say where I would not go and right now I would will never definitely not go to the US it's still it's still uncertain you agree only I'm American you do not want to go to us so that's where I do we have US representative here it's nothing against so it's nothing against the US please don't get me wrong it's I like nothing

against the persons it's just individuals it's just the regulation how the rules are interpreted which is what you're saying uh mik is too late you know they have to be a bit faster to be developing things and we still have this um grandfather period you know like it's it's all a bit U complicated I would say it's late because as I said it it's some episodes we had last year would have been saved but it's still incomplete and they they acknowledge that it is incomplete for our business model it is complete we have a relatively sound idea of where we need to go so it helps but I can't say that for the rest of the industry let's ask if audience has a

question because before we make official oh country right system in our world and if you look to highly regulated Industries like weapon industry and pharmaceutical industry what they done in the past they decentralized their setup they cut the cake which was regulated into the ingredients and then byul and I think as

long as regies will not provide us with the right then we are not a customer of them and that we stay in the rest of the world we have 8 billion people on this plan us we don't depend on EU I'm not voting against the people there but I'm voting against their view how they treat our industry so I can encourage everybody like you said also Asia Africa South America and decentralized have a company which is decentralized ink thank you so you want more work for Regulators yes they have structures which difficult to identify

just saying for for def actors completely agree um but what what about centralized actors what should they do sure that's maybe the main question here do they have to act as they don't hear they don't want the defi to to exist because they cannot comply in any way because they don't have the the requirements how they should react I guess I mean what he described is what binance does and works pretty well right well he just started his four month uh prison sent and he has less2 billion and but I have to tell you off still my boys um at bitmax um the one thing that one of the founders wanted to be is he wanted to be

a peer but guess what he's a criminal now so he'll never be able to get nigh hood or maybe one day the British government will give it to him and the others have criminal records so for me I would never pick that route because I don't want to take a risk of ever being arrested but there may be companies that do and in cz's case he's going to be in jail for four months um but he's had to pull out his licenses in Hong Kong because he he is a criminal now and as a ubo um he cannot get licensed now some countries will allow that to happen and some countries won't so it's a choice um and it's how much risk you will take I

have survived but me without any problem with my background and I hold a CPA license and I'm trying to get my law degree license so I would never do that but for those of you you have to choose yourself do you want to make a ton of money um maybe that is the right choice I'm not particularly wealthy but I'm happy um and you only have your reputation so okay talkes talking possibilities of0 countries world okay let let me summarize it I think that what you're saying that we can use

different jurisdictions for different purpose we can do things right but maybe when we see complicity with uh regulation why don't we go to different jurisdiction we have choice and we don't need to make a Consolidated Superion we can we don't need to do holding company we can separate it and make a different functionality or different company so let's just have one minute to conclude and uh each of you please give one advice to defy people to survive in the uh un uncertainty during we get the proper regulation in place Lucas make sure you're completely Anonymous nobody knows where you are and who you

are okay super I would agree and don't rip off any people to add on to that because somebody will come back to you and find you well I would say doing some analytics too um because if you see that your platform is used by many many um suspicious activities for this specific token maybe it's good to keep an analytics on this and even for reportings right so you are already covered in a way if regulation happens saying that yeah we have identified this activity this activity before the regulation happen agree I would say I would reassure they're not doing anything wrong they're innovating um just have a bare minimum to start working with something some as

as greo mentioned something small just keep it going and then see how it develops but I I reassured there is nothing wrong with defi it is the next natural step I think okay maybe one thing from me because just to summarize you uh that let's also look at best practice and try to use the maximum what industry already developed and Implement in uh your cases so let me thank you all participants and let's give a big round of applause for our panelist and for our moderator