Uniswap's removal of some tokens sparked huge controversy or meant the beginning of “DeFi regulation”
Wu said the author | Talk to Uncle
Editor of this issue | Colin Wu
On July 23, the famous Defi platform Uniswap issued an announcement saying that it would restrict some tokens. This move caused huge controversy on Twitter. Some users criticized Uniswap as no longer a decentralized platform. In response, Hayden Adams, founder of Uniswap, tweeted that the Uniswap protocol is a completely decentralized smart contract based on Ethereum, and app.uniswap.org is a website owned by Uniswap Labs. The Uniswap protocol has always been decentralized, but as a company, Uniswap Labs cannot allow users to do anything on the website it owns.
In fact, we have seen that due to increased KYC and regulation of centralized exchanges, the vast majority of money laundering activities after hacking are carried out on decentralized exchanges. Uniswap's move may mark the beginning of regulation in the Defi sector.
1The Defi sector was indeed a regulatory “blind spot” before
Cryptocurrency is already a new thing, and Defi is a new thing in this field. It wasn't until a year ago that it really became popular, and it's clear that regulatory attention could not be focused on something so fresh all of a sudden.
The early cryptocurrency sector also lacked regulation. Take the Shapeshift website, founded in 2014 in Colorado, USA. This is a centralized cryptocurrency self-service trading site. Users can trade cryptocurrencies through it without registration. In the first few years of its establishment, it was possible to use it anonymously. Until 2018, after experiencing a bull market in cryptocurrencies, Shapeshift was noticed by the regulatory authorities and had to start requiring users to do KYC. At the beginning of this year, it began to transform into a Defi platform, and as a result, users are no longer required to do KYC. It can be seen that Defi is still in a blind spot of regulation.
2According to regulators, “decentralization” is no excuse
A venture capitalist who has invested too much in the cryptocurrency sector, Fred Wilson from Union Square Ventures posted a blog saying that blockchain, smart contracts, and decentralized platforms are all just software, and even if they break away from the company, they don't operate, so regulating them is tantamount to regulating software.
As a venture capitalist, Fred Wilson has huge interests in the cryptocurrency space, so his statement is just one word. Regulators have begun to pay attention to Defi. In a speech on May 26 this year, SEC Chairman Gary Gensler already mentioned Defi. He said, “Cryptocurrency lending platforms and so-called DeFi platforms present a certain challenge for the SEC to protect investors.” Furthermore, since most Defi platforms issue governance tokens, based on past experience, these tokens are also unregistered securities according to SEC standards. US Commodity Futures Trading Commission member Dan M. Berkwitz's rhetoric is even sharper: not only do I think unlicensed DeFi derivatives markets are a 'bad idea', I even think they are illegal under (the Commodity Exchange Act).
In China, Li Lihui, the former governor of the Bank of China, recently stated that in the application of decentralized finance agreements, open networks have no access restrictions, transparent capital flows are easy for traders to track, and transactions that are not centrally controlled refuse control and scrutiny by regulators. Therefore, it can be said that decentralized finance transactions can be anonymous, can cross borders, and are difficult to control. It may become a tool for illegal capital flows and speculative transactions.
In the user terms of the derivatives DeFi platform dYdX, the first sentence is “Our perpetual contract does not provide services to any US resident”, which also contradicts Defi's decentralized spirit. Like Uniswap, most Defi platforms have operating entities, and these operating entities must comply with the rules of regulation.
3Where will Defi regulation go in the future
Speaking of regulation, I have to mention an organization, FATF, whose full name is the Financial Action Task Force, or Financial Action Task Force. This is an international organization that can be viewed as Interpol in the field of anti-money laundering. It has always formulated anti-money laundering guiding policies and coordinates relevant departments to combat money laundering in various countries.
Regarding anti-money laundering work in the cryptocurrency field, the FATF began drafting a detailed working draft a few years ago, but since this field is developing so fast, this draft has been updated. In the 2019 version, Defi has not been clearly explained, but in the version released this year, the content on Defi has been updated. The draft says:
Determining whether an organization is a virtual asset service provider (VASP) needs to be considered from the full life cycle of its products. If a service provides virtual asset services, then even if this service can operate independently of the organization in the future, the organization is still a virtual asset service provider and needs to be regulated.
This means that even if an organization only creates code for smart contracts, it should be regulated as a virtual asset service provider. Specifically, when it comes to Defi, every user participating in DeFi transactions is required to KYC.
As you can imagine, the FATF working draft is highly controversial. Comments are still being collected, and the final version will be released in October of this year. Even if the draft is officially released, it is very difficult to implement from a technical point of view, and it is also difficult to coordinate the pace of each country. Therefore, although regulations on Defi are being tightened, it will probably take many years to actually implement it. (header image from Cryptoslate)
