The Future of DeFi: From the Trenches and the Law, a Guide for Web3 Projects

Transcript

Good afternoon everybody. Okay. Will the presentation work? Okay. Okay. So, uh I will show you why hyper why hyperlquid either goes fully compliant or goes to zero in value. I am study. I am a lawyer focusing on crypto and I'm also one of few a full DJ. Uh so what is the current state of DeFi? Sometimes it's fun, sometimes it isn't. Sometimes the projects are operated legally, but mostly they aren't. And please, this picture is just illustrative. I'm not saying that any of these uh any of these projects uh are engaging in elicit

activity. Nevertheless, the current state of DeFi is that uh most of what we call D5 today uh somehow operates outside of the regulatory frameworks that applies to it. So therefore many of the D5 project have some similarities or similar features with shadow banks, shadow funds, shadow funds, uh unregistered investment investment firms, unlicensed service providers. The projects usually know it. The investors know it too. But it has been somehow normalized. Many of the projects are also shield shield themselves behind the concept of decentralization meaning that oh there is no person responsible for

anything. So no regulations apply on us. Nevertheless, the regulators uh are starting to challenge this view saying that um you know they actually released a report the the e- regulators saying that many of the D5 projects are not really decentralized meaning there is no reason for them to be outside of the regulation. Let's have two case studies. One of them is Hyperlquid. It's a project everybody in crypto loves now. uh mainly the people who have received a nice airdrop from them and it's like this project is a huge success. Uh it's one of the top venues for trading crypto derivatives.

Uh it has like billions in daily volumes. And how does Hyperlit operates? Well, there's a Hyperlquid Foundation based in Cayman Islands and they run the interface for trading. There is a small team that ships all the ships and implements all the uh upgrades. I'm not aware of any license that hyperlquid holds uh and it mostly doesn't comply with any of the regulation that u normal trading venues need to comply with. They also claim that they are decentralized but the level of decentralization is questionable based for example uh the jelly incident from the last year and what is the regulatory reality where the other venues that

would engage with similar activities as hyperlquid they would need to hold a license uh and even if hyperlquid claims successfully that it's that it's fully decentralized uh it wouldn't matter at all because in this regulatory framework there is no exception for decentralized platforms to comply with these regulations. So, Hyperlid just need a license and the trading venues that allow users to to trade crypto derivatives. They need to really comply with hard uh hard obligations like reporting customer u like segmentation and and uh you know caps for leverages, AML regulations, data data data uh compliance and

operation resilience. And since Hyperlquid didn't uh geoblock the e users, they should really comply with those regulations. Let's say the uh other case study. Let's see the other case study. On the finance, they took a completely different approach. Onto finance offers um tokenized real world assets mainly the US treasuries and stocks on chain. They have received regulations from both the EU and the US regulators. if you want to interact with with their platforms uh you need to pass a KYC and pretty strict AML checks and they have also partnered with the big players in the traditional finance like Black

Rockck. So on the they took the the strategy that they they built on uh blockchain but they really play by the rules of the traditional finance even on the the project itself says that they are building the thread fine blockchain. Now let me take you in time uh back in time a little bit. Uh what's happening now in DeFi? There is this structure regulatory gap. It is already happened several times throughout the history. For example, in the 19th century, there was this so-called wild era. It was the 30-year gap when uh in in in the in in in the US the banking laws were very lenient which resulted in everybody basically setting up a bank

and issuing their own paper notes their own paper notes and this one uh it it it was a terrible consequence that like basically everybody lost money and the majority of the banks went bankrupt. So it was resolved by regulation and what I'm saying is that there are many times happens that there is this regulation gap but it always closes and with D5 it's going to be pretty much the same. Uh most likely uh the gap will likely close in time and everybody building in D5 should prepare for that. For example, let's let's uh talk about the ICOs of security tokens. It was a huge um a huge topic five years ago and even before if

EU can uh issue to public security tokens, it has been now basically settled in the European Union and and the big question now is what about DeFi? Uh is it is it legal? How should be regulated? Is it just unregulated vehicle? And in five years it will most likely also also be settled. Um currently the the view at least of the e- regulators is that the project needs to be fully and truly decentralized to be exempted out of regulation. Uh if we have if we keep this mind then what is the future of defy there there is more likely there are most likely two futures that will exist simultaneously.

The first one is basically threadfy on blockchain. So when we enter the D5 space there will be many projects like Onondo that will be licensed. They will offer um regulated regulated products. You will have to pass the KYC checks if you want to interact with them. There will probably also be some kind of measures against hacks and and frauds meaning for example that you will be only able to sell the assets to to another KYC wallets. uh the European Union already started to squeeze the this bridge between regulated and unregulated for example uh by making it harder for the crypto asset service providers to interact with self-hosted no nonkyc wallets and and yeah future

with this pad is that uh there will be this world garden when where everybody can enter the the defy space and it'll be safe it will be probably much more boring than the today space But uh hopefully it will be also fun. And then the the the other track the second part that will also exist is real defi. Um I call it real defi because it will most likely differ from what defi is now. Now usually the defi projects are something between the first track and the second track. Uh because they are not fully decentralized. they just don't hold the licenses and they are hiding behind behind the

decentralization and uh the real D5 projects they will have to be truly decentralized the there will be no team that will be able to extract the value from the projects that will control it that will decide about what will happen to the project the token issuance will have to be widely distributed uh the front ends will most likely be distributed um and yeah so it It just need to be truly decentralized in order to pass the test of full decentralization.

And the topic of this talk of uh the the thought of this uh talk is for the builders to encourage them to start thinking what ways they want to go because this middle way will likely not be a solution in the next few years. So if you if you want to go the regulated way, you should start preparing for that. Uh you should be prepared at once you will have to obtain a license to to operate um to operate legally. you have to comply with a lot of obligations, KYC uh and uh yeah and just this is this is probably the path where the money will

be and then there is the permissionless path and if you want to build in that you have to be prepared that um it's going to be more like building a public good because it will be very hard to extract some some value for you as a founder founder of the protocol and you should start thinking from the very beginning about how you want to structure the uh the next steps because you know from the very beginning it would be very useful if you start with the decentralization.

Uh so the the token should be very widely spread uh to to to fall to this decentralized ex exceptions otherwise we will keep building against something in the middle and it will just not work. That's that's all from my side and I'm open to any questions.