Uniswap's delisting of some tokens has caused huge controversy, which may mean the beginning of "DeFi regulation"

Wu Shuo Author | Tan Shu

Editor of this issue | Colin Wu

On July 23, the famous Defi platform Uniswap issued an announcement stating that it would impose restrictions on some tokens. This move caused great controversy on Twitter, and some users accused Uniswap of no longer being a decentralized platform. In response, Hayden Adams, the founder of Uniswap, tweeted that the Uniswap protocol is a fully 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 the intensified KYC and supervision of centralized exchanges, most of the money laundering after hacker attacks is carried out on decentralized exchanges. Uniswap's move may mean the beginning of regulation in the Defi field.

1. The DeFi field was indeed a regulatory “blind spot” before

Cryptocurrency is already a new thing, and Defi is a new thing in this field. It was not until a year ago that it began to become really popular. For such a new thing, it is obvious that the regulatory attention cannot be focused all at once.

The early cryptocurrency sector also lacked regulation. Take Shapeshift, a centralized cryptocurrency self-service trading website founded in Colorado in 2014, for example. Users can trade cryptocurrencies through it without registration. In the first few years of its establishment, it could be used anonymously. It was not until 2018, after the cryptocurrency bull market, that Shapeshift was noticed by regulators and had to start requiring users to conduct KYC. At the beginning of this year, it began to transform into a Defi platform and no longer required users to conduct KYC. It can be seen that Defi is still in the blind spot of regulation.

2. In the eyes of regulators, “decentralization” is not an excuse

Fred Wilson from Union Square Ventures, a venture capitalist who has made multiple investments in the cryptocurrency field, published a blog post saying that blockchain, smart contracts and decentralized platforms are just software. Even if they are separated from the company, they are not running. Therefore, regulating them is equivalent to regulating software.

As a venture capitalist, Fred Wilson has huge interests in the field of cryptocurrency, so his statement can only represent one person's opinion. Regulators have begun to pay attention to Defi. In a speech on May 26 this year, SEC Chairman Gary Gensler mentioned Defi, saying, "Cryptocurrency lending platforms and so-called Defi platforms pose certain challenges for the SEC to protect investors." In addition, since most Defi platforms issue governance tokens, referring to past experience, according to SEC standards, these tokens are also unregistered securities. Dan M. Berkowitz, a member of the U.S. Commodity Futures Trading Commission, was even more sharp: 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, former president of the Bank of China, pointed out in his latest speech that in the application of decentralized financial protocols, open networks have no access restrictions, transparent capital flows are easy for trading parties to track, and non-centrally controlled transactions refuse to be controlled and reviewed by regulators. Therefore, it can be said that decentralized financial transactions can be anonymous, cross-border, and difficult to regulate, and 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 contracts do not provide services to any US residents", which is also contrary to the decentralized spirit of Defi. Similar to Uniswap, most Defi platforms have operating entities, and these operating entities must comply with regulatory rules.

3 Where will Defi regulation go in the future?

When it comes to supervision, we have to mention an organization, FATF, which stands for Financial Action Task Force. It is an international organization that can be regarded as International Criminal Police in the field of anti-money laundering. It has always formulated guiding policies for anti-money laundering and coordinated relevant departments of various countries to combat money laundering.

FATF started drafting a detailed working draft for anti-money laundering in the cryptocurrency field a few years ago, but due to the rapid development of this field, the draft has been updated. In the 2019 version, Defi was not clearly explained, but in the version released this year, the content about Defi has been updated. The draft reads:

To determine whether an organization is a virtual asset service provider (VASP), it is necessary to consider the entire life cycle of its product. If a service provides virtual asset services, then even if this service can operate independently from the organization in the future, the organization still belongs to the virtual asset service provider and needs to be subject to supervision.

This means that even if an organization only creates the code of a smart contract, it should be regulated as a virtual asset service provider. Specifically for Defi, KYC is required for every user participating in Defi transactions.

As you can imagine, the FATF working draft is very controversial and is still soliciting opinions. The final version will be released in October this year. Even if the draft is officially released, it is very difficult to implement from a technical perspective, and it is difficult for countries to coordinate their pace. Therefore, although the supervision of Defi is tightening, it will probably take many years to actually implement it. (Head picture from cryptoslate)