Is decentralization the best solution for DeFi to respond to SEC regulation?


-Both DeFi agreements have adopted decentralization measures this week;

-Lawyers believe that in order to appease regulators, decentralization is necessary, because many DeFi projects are currently at risk of being damaged by regulators;

-The leaders of these two DeFi protocols-Aave and Synthetix said they are not worried about it.

Synthetix and Aave, the third and fourth largest DeFi protocols, took measures this week to further transfer network control to token holders, ending the project’s dominance over the networks established in the past few years.

Network decentralization is a card often played by DeFi projects, which is to give control to users, so that users can use this right to vote on the future of the network without having to rely on a centralized organization.

At the same time, decentralization can also keep regulators away from protocol creators. They usually do not have a license to operate the network, but if no one controls the network, the government authorities will not hold anyone accountable, including securities violations. This is also the reason why crypto startups financing through ICOs have failed.

Lawyers said that the DeFi project is destined to attract the attention of regulators, who are beginning to pay more attention to this booming industry with a market value of 4 billion US dollars . Since June 1st, Synthetix’s total value of locked assets (TVL) has quadrupled to reach 496 million US dollars; Aave reached a peak of 600 million US dollars, an increase of 9 times.

Josh Garcia, a partner at the Ketsal law firm in New York, admitted: “The developers who created the market for synthetic securities are playing with fire.”

But the founders of Aave and Synthetix said that there was no risk from the beginning. What if the regulator finds a way to sue them? Faced with such questions, Aave founder Stani Kulechov said: “This is unstoppable.”

Decentralized control

The first is a statement from the Synthetix Foundation, which has so far been the non-profit “steward” of its decentralized exchange that provides tokenized stocks, fiat currencies and commodities. On Tuesday, July 28, Synthetix announced that the Synthetix Foundation has officially withdrawn from management. As of today, the Synthetix protocol is controlled by three decentralized autonomous organizations (DAO), namely protocolDAO, which is used to control protocol upgrades and variable configuration, GrantsDAO, which accepts community donations and allocates funds, and manages and deploys funds to respond to donors and SynthetixDAO for other project requirements. This means that Synthetix has transitioned from the foundation governance model to the DAO governance model.

According to previous news, Synthetix plans to transition from the foundation governance model to the DAO governance model in 2020. In February this year, it established GrantsDAO, a five-member decentralized autonomous organization, and began accepting project proposals. GrantsDAO will be responsible for reviewing project proposals that contribute to the Synthetix ecosystem. After approval, they will be funded with SNX tokens. All proposals will be published on the website.

A few days later, the decentralized lending agreement Aave followed up. Kulechov proposed that “Aavenomics” will be the latest milestone on “the road to more decentralized governance.” Aavenomics has introduced an enhanced governance system that allows token holders to vote on future network upgrades. “In fact, we do what the community decides to do.” Kulechov said.

Another aspect that needs to be mentioned here is that regulators are beginning to pay more attention to DeFi. Earlier this month, the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC) jointly announced that they had reached a settlement with crypto wallet provider Abra over the allegations. In the SEC case, the agency accused Abra of selling securities-based swap products to retail investors without registration. The CFTC accused Abra of illegally conducting over-the-counter swaps of Crypto assets and foreign currencies with overseas customers and violating registration regulations. According to court documents, Abra will pay a total of US$300,000 in fines (US$150,000 to each agency).

Kain Warwick, former director of the Synthetix Foundation, said that this is similar to the product provided by Synthetix, except that the product is traded between users of Synthetix and the owner of the agreement does not charge fees. Abra is a for-profit entity that represents customers Perform transactions on its platform.

Both Kulechov and Warwick stated that their statement this week has nothing to do with the Abra case. Kulechov said that since the day after Aave was launched on January 8, he has been working on Aavenomics, and he announced the proposal when the agreement was funded. He said: “We believe that the team should not control the future of things that are essentially public goods.”

Warwick added that his statement was made after Australia started a new tax year, not Abra. He posted on Tuesday that he has been working hard for the dissolution of the foundation since 2018-creating a foundation is a “mistake”; hiding behind non-profit institutions is a “net of decentralization” Negative impact”.

But having said that, perhaps their statement came at the right time. Abra’s case makes things very clear: regulators are quickly working on crypto finance.

Preston Bryne, an encryption expert at the law firm Anderson Kill, stated that he is not familiar with Synthetix or Aavenomics, but “you don’t need to name and know that DeFi has many obvious (regulatory) violations, but the regulator has not yet cracked down on it. “And those who promote the DeFi project “acting in a non-compliant way are actually playing a very big gamble.”

Projects that are not sufficiently decentralized may soon be uncovered. Kulechov has previously stated that he is strengthening legal preparations: “We must increase our own legal resources and ensure that our agreements are fully decentralized.”

But neither Warwick nor Kulechov will cause great concern to regulators. Warwick said his company has been careful to avoid the mistakes of previous encryption projects. “We have been very careful to ensure that we do not cross any clear boundaries set by the regulators,” he added. “In fact, there has never been a regulator contacted and raised any questions or concerns about our actions.”

Garcia added that the SEC may still deal with DeFi like ICOs. Kik, Telegram, Gladius and Block.One have all been involved in litigation disputes and suffered heavy losses. He pointed out: “The SEC is likely (and has always been) to pinch those developers responsible for launching unregistered stock exchanges.”

Kulechov stated that his plan is to become sufficiently decentralized, that is, the regulator does not have a central point of accountability: “For example, from a regulatory perspective, Ethereum is considered sufficiently decentralized (because of ) It has no entity behind it.”

The term “sufficiently decentralized” was coined by William Hinman of the SEC in his 2018 speech on Ethereum and Howey testing. He said that if a network is “sufficiently decentralized”, that is, “buyers no longer reasonably expect a person or a group to carry out the necessary management or business development efforts”, then “there may be no need to use the network as a security The effective token or cryptocurrency is regulated.”

Kulechov believes that it is difficult to say whether Aave is currently in danger. “I think this is difficult to evaluate because there is no framework for decentralized finance, but I think all agreements need to be aware that if they are not fully decentralized, some regulation may be applied. The’full’ point is very challenging Sex.”

He further stated that this is a gray area and an area that is “uncomfortable for regulators”, because Kulechov does not actually operate the agreement and does not charge any fees, and that it is a bit exaggerated by the regulator to call it an undocumented currency transmitter. “This is a peer-to-peer smart contract system.”

Attorney Garcia said that “decentralization” is a vague term. “When people say’decentralization’, it can mean a lot of different things. For example, a project can centrally manage and govern the core protocol, but it claims’decentralization’.”

“An undefined term cannot be a reliable shield,” he said. “The regulatory authorities will make enforcement decisions based on the facts and circumstances of each case, rather than relying on the company’s marketing rhetoric.”

For those who question their views, you can actually think about the cemetery where various so-called “decentralized” ICO projects are buried-you know, these projects were buried because of litigation disputes with the SEC.

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