Defi, TradFi: same risk, same regulation?

Transcript

hello everyone welcome to the first panel of the of the of the lcc legal track um this panel will be on the g5 same resume regulation so we will mainly talk about defy and if d5 should be regulated how it could be regulated what is the right level of regulation and so on um we are pleased to welcome uh maybe i will let you introduce yourself because uh it's really welcome so we welcome james bernie robert carretting and colin belton i'll let you introduce yourself hi i'm james bernie i'm a partner at law firm gonna cook hi i'm rebecca reddig i'm the general counsel of the ave companies hey i'm collins belton i'm managing

partner at brookwood pc okay thank you for this introduction so i'm william o'rourke from norwegian and i will uh i will moderate this uh this panel so maybe let's start by the basics for the people who will listen this uh this panel and that maybe uh maybe not so like like fluent with with the d5 maybe could you introduce what g5 is uh in a simple way rebecca if you want to start okay um so the way i explained defy or decentralized finance is that it is an economic system where users can engage in different types of transactions without the need for intermediaries and all transactions are facilitated by

technology i don't know if you want to fix that in any way you want something you don't know if you want by the idiot terms it's basically people who haven't watched star wars star wars many galaxies d5 is only on earth is only of those people involved in crypto and it's only about blockchain so there's an element of centralization everything but the thing about d5 is whether if you make across multiple participants rather single participant how that might change the existing centralized structure so don't sort of go for the puritanical it is everywhere it can't be touched stuff because star wars shows that isn't true um

go for these sort of it's across multiple churches across multiple players and never becoming more complicated that's near where d5 is at okay colin you want to add something perfect so yeah we can understand the fire it's uh it's a yeah it's a it's a financial it's a financial it's a bunch of financial services actually quite similar from the like what what the traditional financial services are offering but without intermediaries it's mainly or exclusively non-custodial obviously and it's like it's a it's a finance made for the crypto asset and with the technology the underlying technology or the technology of the crypto asset

okay very interesting so um could you give us maybe some figures about the the defy how big it is and uh and and what is maybe the main uh the main activity uh because i think it will be interesting to jump into the regulations in the regulation part of this panel after all colin maybe um so it's hard to i guess talk about precise figures obviously we could talk about like tvl or total value lot i don't know if that's always the best metric but i think you know at its height probably in 2021 we were looking at something like 100 to 150 billion tvl across some of the larger protocols um obviously bigger than a couple of like small countries gdps but even now i think um you know even at the height of this kind of bear

market or hopefully the height of this bear market um you know we're still looking at some of the protocols i think ave is still at you know 10 to 15 billion plus so it's pro still pretty significant um in terms of i think you said figures and then uh i mean it's 1.5 the size of it actually though is 1.5 percent of the us equity markets i think in terms of yeah i just i've heard that it's going around a lot i know all i was saying is numbers-wise you know whatever it may be today is that it's about 1.5 to 2 of the size of the u.s equity markets which is very interesting because since we're going to get to talk about regulation and i've actually just thought about this a lot lately because i do do a lot of work on regulation is

i've never for something so small that has no real systemic risk yet um and can't affect things in such a way yet there is such an interest in regulating this new technology that it's pretty wild yeah maybe because also like i mean all the cryptos into the stream raising a lot of interest it's new it's maybe the new trend and uh it's uh magical maybe if i sure if you don't understand how it works okay so this this figures is very interesting because we have uh we have an idea but to compare with uh like a traditional stock market um you talking about the the systemic risk we have witnessed i mean especially for

the last i don't know maybe because d5 exists for several years now i mean in the fcc we we were always on the d5 summer maybe three years ago so but maybe what i've recently changed and we saw that with sales use with all the all these companies that the g5 product is more and more accessible to the to the people through maybe the visp what is your feeling about this because it's it's not really non-custodial anymore i mean the access to d5 is becoming is becoming much more easy you know [Music] i'll just say one thing if it's custodial it's not defy it is only if it is non-custodial that is one of the hallmarks of making a d5

but if it's anything else then it is c phi because there is a centralized actor taking control of people's assets yeah i mean i i definitely agree with that i think i've been kind of like dogmatic over that over the years it's interesting recently i i've come to realize that i think there's there's kind of a stark realization we all have to make which is that there's going to be a number of people that access these services through these centralized intermediaries and i think obviously as we talk about regulation that's often the first point that you know i'm turning to which is to say i think distinguishing between something like a protocol and an intermediary is one of the first threshold issues that you get to before you can start looking about you know like sensible regulation so in this case

i don't think you know it's necessarily fatal for defy itself that there are going to be intermediaries but i do think that there's a recognition that those are the the on-ramps that are likely the the most apt to target now unfortunately that's not necessarily the narrative that we have going with some of the regulators globally but i do think we're starting to see some of that shift you know we've seen mikko in in some ways you know a softening with respect to unhosted wallets we're starting to see you know i wouldn't say capitulation but at least some understanding in the states that if not an acceptance and inevitability that you can either try to regulate effectively or you can try to regulate you know philosophically and fail and so i think as they're starting to come to that realization these intermediaries are

starting to become the appropriate targets there and to be frank i mean with celsius and everything else that's probably the right target at least from my perspective i think the one i would just say is you know lawyers regulators to tell copy and paste as the starting point for most people you look at mica it looks at traditional securities it copy and paste yes it tweets but it copy and paste you look at the bridges the bridge is an intermediary which means we love because they're something we used to we stick in the middle and we get it to work however you don't want it to stop innovation and actual thinking one of my bug bears is for kyc and aml that entire

thought process is based on an old-fashioned world where you meet your client you get given this password you find all sorts of things you never realize you didn't want to know like their age where they were born all things you just don't care about all you want to know is am i actually bin laden or not and if i'm not out from bin laden i am good to go now if you take something like that and you take something like dfi you can create projects where someone has done all that paperwork and all i need is a green yellow amber whatever bloody color system you like can i go ahead or not is all i care about the problem with the bridges is it is very much easy to come back and go we need to bring these people in as an intermediary and all you do is you shift

all the old regulation from the defined pulse call onto the bridge and go the bridge is going to cure all you make the bridges life hell and that's the way the things are currently moving but it is not getting at the core point which is our better ways of doing some of the existing regulation and those need to be thought through properly and in term and the big advantage and the excuse that dfi gives us the ability to properly rethink where we're at and find a way forward and i'm not saying we don't have regulation i'm not saying we don't do things compliantly it's about you know the obsession at the moment is should crypto follow the existing financial services system flick it around other things in the traditional financial services system which should follow solutions in crypto

because there's better ways of doing things i actually i was meeting with a french regulator yesterday afternoon and we had a very nice discussion about defy and it is what everyone is interested in and people are slowly especially regulators all over the world are coming around to understanding that defy is different but one of the things i said at the end was i was like just philosophically do you really think the the current banking system is as safe as we think it is right like because there are millions of things that can happen with cash outside of the current banking system that really undercut this whole concept of kyc and stuff like that and so i do push a lot when i speak to regulators that digital identity is very different than kyc but is a good proxy depending

on what types of transactions you're engaging in and what you're doing so so just a small story just to terrify some of you um when i was in college i actually worked in the back end of like a credit union right after dodd-frank passed and like there was a big like kyc and aml push and at the time like i had no interest in crypt i didn't think it would be relevant to my career but i will say past me was probably not like the california stoner you wanted like observing all of your personal information and making decisions as to whether you might access your bank account but sure enough there's like 20 year old me a close friend of mine hector two or two other people and it was very stereotypical like southern california

college kids and it kind of shocked me years later thinking about it where i'm like wow they they really just led a bunch of 19 to 22 year olds kind of look through not just americans information but it's like all of the information that would pass through those electronic funds and so i hope over the years it's gotten better i still have an account at my credit union um but if not there's there's probably another version of me still looking at a lot of our information so it's one of those things where i think there's a lot of perception about what this edifice is achieving and then what's actually happening in reality and there's like such a huge gap in practice that it's kind of insane that there is like this level of confidence from a number of regulators that believe that these are catching as much as they should and

obviously like it wasn't like we were all skiving off and did nothing but again like it's a 19 to 20 year old like they're not going to catch all these things that you know you're intending for them to catch there so i think it's one of those other things that that needs to be recognized as well that story is highlights two things one this is why we need regulation for centralized actors where but but in all honesty you do need to meet uh to regulate centralized extras because you have humans with subjective judgment and your subjective judgment and mine may be different and so they need to be honed into a central space when you're gonna affect user funds uh for sure and then i had another funny point but now i can't remember it i think the the other i i don't know if

i should do a millennial question no i mean i think the other thing is kind of dancing curtains should as well i mean the one i love is if you take bitcoin the origin of bitcoin was to some people at least let's all get is an alternative to traditional fiat money that is an act of treason everything moving on from the original bitcoin therefore is the process of crime everyone who's ever held a bitcoin has committed a criminal offence and everyone therefore who's ever touched held stored or played with any bitcoin should probably go to jail on that logic because it's all from the original genesis block which you can prove was potentially choosing this offense so i

asked the regulator once whether we're going to lock up everyone in the uk who'd ever held a bitcoin because i could be very busy suddenly one afternoon and they loosened me blankly and told me just to be quiet and stop being a nuisance and then but we still talk about haina how many transactions do you go back and all the rest of it and then you look at cash now in the uk and this is not probably the world's greatest advert for the uk but in the uk 82 percent of 20 pound notes have chased like a keen on them that means when you go and buy your prayer sandwich you're probably holding something which at one point was involved in a drug deal do we therefore go to every 20 pound notes do a spiritual analysis work if it's got cocaine and then lock up anyone

who buys it with it because it is technically against the proceeds of crime and that's where people look at you blankly when you start talking like that but it's the huge differential between codes and shirts and what you have with defining blockchain technology is far greater power to look back on transactions and to do things far greater than we had in the old system with cash where people had to physically turn up and look at stuff and give us subjective views and because you can do more doesn't necessarily mean you should but it means you think about what you could what you should be doing just because you've got greater powers let's uh let's maybe continue on the on the on the program uh before before talking about if g5 should be regulation

and what level of regulation maybe riga will be have you identify some some risk that is maybe similar to the traditional financial one and that can can be i don't know uh then can be draw to a kind of regulation or maybe you can explain us the opposite if maybe defy is just a technical technical software that that should not be regulated i don't know what can you tell us about this so the question is really about the risks and benefits that can draw some kind of regulation sure so there are definitely risks i'm not sure yeah the d5 level just in terms of how the technology works so it does

eliminate certain types of risk that we're used to in traditional financial uh transactions like counterparty risk and the like um it uh it definitely eliminates uh certain types of what types of risks does it bring do you say i mean the the real types of risks are security risks right so uh are there hacks uh are there different types of um i think probably the security ones are the greatest uh on a day-to-day basis but there are also things that it brings that we all sort of know and talk about like transparency that i think is very different than in the traditional financial system but i think uh you know you don't have the counterparty i'm just trying to

think through the general risk it's just the risk of loss uh and the inability potentially to you know retrieve your funds uh when the time comes um yeah i think that definitely technical risks are something that we're cognizant of one thing that i find interesting is that despite the fact that you know d5 is ostensibly something that we're not supposed to have inherent trust in folks in there is at least some initial period perhaps it may be like some transitory period where you've got a weird relationship with the initial developers where there's at least some semblance of trust for some systems now like i think the best design systems ideally you know ridge yourself of the need to to kind of depend on that as as soon as possible but there is probably

like interestingly there's been recent issues that i've been thinking about where it's like if you've got audits or something out there right at least in that you know like first step there is you know the potential for like regular just human fraud like somebody could change code after an audit is done and unless everybody suddenly becomes a coder there is that level of trust i think um in some ways you know looking at other appendages might end up being a more interesting question like auditors and things like that um in general right like i don't think auditors can be held responsible for like breaches of like code that they just maybe inadvertently didn't catch but there probably is going to be a world where if we do want to see defy adopted at scale and almost take on an independent life of its own then

these other ancillary features you know the auditors um you know on-chain accountants on-chain salutes things like that there's probably going to need to be some framework for them to operate that doesn't necessarily mean i think it constrains a t5 but a lot of times we're focused on like do we regulate intermediaries or do we regulate devs but there's probably other folks in the ecosystem that might actually be better if you wanted to give people assurance that they didn't essentially need regulation specific to the technology but rather than the players because i think again like again auditors are probably the easiest example just on the top of my head but if you really think about it there's probably going to be a world where eventually people are going to say okay look like an auditor intentionally missed a bug or intentionally didn't disclose something

there's no way that we can just be like oh it's cool like they just lied and committed fraud and everybody lost 30 billion dollars otherwise the system itself isn't really feasible without reintroducing trusted third parties which would kind of undermine the purpose there so that's been something i've been thinking about i don't think there's a good answer right now or who those people are but i do think probably thinking about a broader scope of people to involve in this type of framework might actually be more useful than just going to devs or just going to like the intermediaries that we normally think about auditors is actually what i use all the time when i'm talking to regulators is like the first way that we can think about ensuring that there's this safety and security in the system to the point of consumer protection that they're used

to so i agree on that i don't think you mean seb i can put these in idiot terms so i'm curiosity anyone in the room have you only bought shares in a company equity do you feel you know what to share in a company is nope you don't own anything you know anything in the company nope it's not right to dividend anyone else want to give no no governance you can have non-voting shares shares don't give you governance right in the share i'm afraid it's a right to a percentage of the proceeds on the liquidation of a company that's right if the company goes bust you might

get oh seven percent of what's left in the company really exciting stuff not exactly what they lead for when they sell you your share plan when you speak to your financial advisors but you know you get what you get now everyone's buying saying shares freely not understanding clue what they're talking about now we take d5 now d5 versus shares let's go back to the 18 uh 1880s when shares first came out shares were no one understood them what are they about there's lots of scams there's dishonesty there's money disappearing it's really a feel we can't touch it who on earth would buy shares in fact in the uk they actually banned shares and made them illegal because they were just this really dodgy thing

and we would go nowhere and destroy the country now we're pretending chairs to kids going let's ping a junior isa d5 is like shares were back in the day when you got the press if you took the old prayers articles you delete the word shares and you stuck in the word dfi you can't really tell the difference in the press then the person are around us the issue therefore fundamentally define at the moment is the fact it's very early stage and therefore we rely on you know we're going to be in an auditor great do you all know what they're doing who knows if you just mean i saw one author it was brilliant unfortunately he called himself gandalf which is not great when we started talking to investors but the quality was there if you serious i mean and it so it's question of trying

to pick your right people how do you make it come together but bear in mind that you know shares have been around for 100 years and still you know if you take something like they're in brothers for example you know if lemon brothers had held all of its assets on chain the redemptors didn't go bust around our money all banks are intrinsically passed i don't mean to break the bad news people but all banks are intrinsically passed they just the ability to move finances longer and that's how bank works if leon brothers had held its money on chain such as a regulator could have turned up and said yep then brothers can satisfy that that that and that it's only those two departments those you need to worry about to my mind it's an open question where the limb brothers would still be here today because the name brothers could

have step because they're excepting giving people that confidence that is the opportunity which things like dfi give you the ability to do things better than it was before but the disadvantage of dfi is the fact it's so new and therefore you're having to work out all the time where it's how it's going to work and you know again putting in idiot terms this is basically all i can cope with um you see d5 bit like a car you drive cars you probably don't know how to make a car from scratch but you do know when there's smoke billing out the front engine that's usually not a good sign where we need to get to a dfi is getting people to the point where they can spot that and also and again this goes back to its very nature

the other reason why it's so distinct for people at the moment is with most new innovation starts professional first i.e a small number of big institutions can accidents let into retail what d fight is dfi is the massive game changer it starts with retail and the question is now whether it gets pushed just for a professional and that's the other challenge here it's not only trying to work out how it goes it goes along but you've stopped the fact that by its very nature anyone can use it and therefore the idea of testing small group and opening up is not how it's working it's happening the other way and that's what causes fear among the regulators because you're letting ordering people in so if you want to get dfi to work it's about getting the level of understanding when you know the engines caught fire

acknowledging where strengths and weaknesses are trying to do what you can to make it work as solid as you can given what you've got and then just accepting the fact that absolutely nothing in the entire world has ever been or ever will be absolutely 100 perfect and that's not what you're going for you just could be slightly less dodgy than the other last thing we've just been dealing with and the last dodgy thing you're going to do it's all been all the seafire stuff thank you james um maybe we will uh because we are we are arriving at the end of this panel um we didn't talk but that's perfect to have a legal legal track and not talk about the legal stuff i hope the technical tracks talk a lot about the legal um now but maybe a last word from you you too uh collins

and rebecca uh do you expect regulation defy and maybe what is your view on the on the coming regulation if even if for instance in europe michael do not target g5 itself so and after i will ask you a piece of advice for the default project to anticipate the regulation on to comply yeah i mean i i think there's definitely going to be attempts um to be frank i think the direction we'll see places go you know may depend on some foundational principles i think i've said this for a few years now despite the fact that the us is definitely sometimes viewed as super draconian and and despite the fact that there may be maybe you know confidence rattled and interpretations of the constitution the like i do think generally between both

parties right now there are still a significant number of politicians that do have kind of a almost uniquely like american libertarian streak and i think to see some of the legislation that's been proposed that would need to be effectuated to i think wrangle define the way that u.s politicians expect i don't think that will necessarily last certain appeals on themselves for things like um that seek to constrain expression in ways that likely go against our first and fourth amendment those i actually think i've got pretty decent confidence that those won't pass at least in the form that they're currently contemplated i do i do think that you're going to see a lot from especially like the msb fencing type of thing even to the extent it doesn't necessarily impact devs directly i do

think that there are a lot of like centralized players that you know rightly or wrongly d5 players are getting a little incestuous with and it's becoming really important to them so one big thing for instance is like i don't know if it's big out here but you know there are a number of u.s companies that are essentially using some businesses as licenses as a service um i think you know for those businesses that get targeted that may end up impacting certain d5 models so those folks will have to start thinking about how to adjust to that um but otherwise while i do think there's going to be a lot of legislation coming down the pipes i'm actually starting to become pretty skeptical that we're going to see something significant before something like late 2023 or 2024 in part because of like u.s political flows but also because there's

so many other macroeconomic things that people are now more enamored with that by the time they do turn back to crypto even if it's you know midway through 2023 you kind of get to like the same like hey we've gotten like a year before we can process something so i really did think you know if you asked me this four months ago i'd probably say like it's eminent by the end of the year at this point it's pretty clear at least in the states i wouldn't expect something too major with our midterms and everything coming until at least like late next year um and being frank here even with with micah and everything i'm not sure it's going to translate to as much as i initially thought you know when it was first percolating in 2021 or 2022. um i'll let rebecca go before you know if we have

time for advice in d5 startups yeah um so i generally agree with collins there are lots of attempts going on right now behind the scenes in the u.s to regulate different parts of the crypto space in terms of when they will be enacted and when they will actually be operational that people have to comply with i would agree is pretty far out amica is not even going to be operational for people to comply with until 2024 yeah something like that so um and look they carved d5 out of mika at least in name um and i do think dg fisma believes that uh d5 has been carved out and they're going to do their report and make their

recommendation um but and i talked about this on tuesday when i did my talk on d5 regulation but like it's coming i agree it's not imminent it's not happening in 2022 but they are tr all regulators everywhere around the globe are trying to figure this out and where it works and so my piece of i mean i can give a piece of advice for like what to do as a project but my piece of advice if you want to keep building is to be out there advocating and thinking of ways that you can continue to innovate while also making sure that there are appropriate consumer guard rails the long hour just says all the regulators are looking all the other regulators and advertisements is the other thing which is going to become

quite a big battleground um you in the uk they're going to start regulating advertising we've just been working with the mauritius fsc drafting their rules they're also going to look at regulating advertising that's going to be a core focus so it's advertising and regulators are looking at each other and working together the fca have announced it's going to work alongside the us regulators mike is not on people looking at they're all watching each other so if you use something somewhere other people looking at it thank you very much for all this information we are we have tried to talk a little bit about the legal stuff at the end so congratulations you can upload them if you if you want and

we if if there is a one or two questions we will be i'm sure you will be glad to answer to answer some questions oh yeah sorry maybe i jumped the gun uh so i i wanted to you guys didn't touch upon the uh possibility of doing some hybrid architecture with off chain and on-chain components all right uh i'm a big fan of rwas which is real world assets uh how do you see that playing out do you

think that there are architectures where you can use ricardian contracts or maybe even something written on a smart contract where if it goes to the courts it's found to be legal uh contract right so and also like yeah like when recording contracts right this thing was invented in the 1950s and i don't see anybody any developers or founders implementing them so yeah i just want to hear your thoughts on that and especially the office chain on chain bringing real estate into on chain and stuff like that yeah so on the ricardian thing there actually is uh somebody working on this i know um vinay gupta at materium i think uh was exploring this like way back in like 2017 or 2018. now i know they've changed

some um and i don't know you know what he's been doing since kind of going off on people on twitter but um i think that like you can still check it out and they did have some good research there on rwas that's definitely that's something i've been working on since like 2017 with a variety of people whether it's like securities equities like various types like pipe deals or like looking at assets themselves i do think there's a world where i think crypto or i shouldn't say crypto but like web3 tech will be used i don't necessarily know if we'll still call it d5 and to be frank i don't really know if it really matters that much like the the nomenclature there probably matters a lot less because to be frank at least for another i don't know probably 30 50 100 years there's going to be some real world next

i mean one that's in the name obviously real world assets but there's a real world nexus where people want to have certain things tied to identity or tied to you know recreation systems that aren't just inherently decentralized right like you want you know land like like like plots of land to be arc mapped onto some traditional systems so in that sense yeah i do think we'll start to see a lot of web 3 tech adopted there i don't necessarily know if it's going to look like necessarily what roon initially thought it might look like in maker i do think they're starting to get to a more realistic model that at least for now works on a hybrid basis long term i know that's like not the ideal system like i know what they're working with like monitalis and everything else with some of the maker forums like

obviously that's not like an idealization but i do think in terms of direction that's probably closer than what i think a lot of people have promised early on that were very very premature in the types of systems that are actually possible today just given the fact that there are like historical and practical limitations in our current legal systems that unfortunately you just can't architect around and i mean things like like weirdly wonky things like what's the like the rule against perpetuities and things that you have to follow where it's like you actually do have to go to like a like a secretary of state or something and they have to physically do something there's just no way to architect you know around that like in a fully decentralized way so i mean from what we've seen today what

do you call them mark not real world asset tangible assets or something like that off chain assets so that makes much more sense because mark who works at ave as well says no crypto's a real world asset too it's just not tangible so um but in terms of off-chain assets i think columns point is right i mean what we've seen today is centrifuge is probably one of the biggest is one of the biggest architects of these off-chain asset markets and they have taken a centrifuge market and they have built it on top of ave so that you can use these off-chain assets that have been tokenized as collateral to borrow and things like that so i think whether we call it defy or not i think these types of markets can be built on top but precisely because of what

collins was saying they're off chain assets there has to be a centralized intermediary somewhere and so that's at least at the point where the regulation will intersect with that kind of stuff but i do think we're going to see a serious proliferation of these real-world off-chain asset markets uh and much more tokenization of real-world assets and not just things like securities and equities but if we actually want to build out the system to include more people then building out you know more tokenite if we're going to tokenize more off-chain assets we will be able to bring more people into the system so we're doing loads of stuff with off-chain assets um [Music] look english all works well here the american stuff sounds quite complicated

but anyway you use law works well here because bluntly you know when you buy a sweetie bar from a chop from a shop you don't sign a contract there if you see what i mean you have certainty of intent you need to have an agreement the purpose of the documentation is proportional liability um the biggest issues are on offstage assets are twofold one proving it's actually there that's not a legal question but bluntly does the thing actually exist it's usually the first so things and that's where you'll have your custodian or your vault or your whatever and then the second if you're going to give a return linked to the off chain asset that's where it gets slightly more complicated because you do not want to form the definitive collection investment scheme just take a step back you put a lump of gold in a volt gold

system fault token represents gold absolutely fine that works for silver that works for that kind of stuff you take a property do you maintain the property when you look after it how do you market it how do you run it those are all questions revolving discretion if you then have return linked to that discretion then you start to feel a lot like a fund very very quickly so real estate is going to be one of the last bastions to go in this and this is none of your blockchain no no d5 this is simply the old laws and collector investment schemes which are broad and they've been capturing things like farms and these sorts of models for a long time so if you stick with assets which are kind of physical they just sit there the short answer is it works i'm sorry we are running out of time if

you have any questions but uh maybe if you want to ask them to ask them other questions you will be there this morning okay great so thank you very much for your participation and we're moving forward with the roman from paledo thank you everyone [Applause]