De-Fi Regulation

[Abiky]

I've read somewhere that the US proposed regulating "De-Fi" protocols. It wants to treat them as "Ce-Fi" by requiring developers to implement KYC/AML rules. This means you as a user will be forced to verify your ID to use a decentralized lending protocol, staking service, or even an exchange such as Uniswap or Pancakeswap. Would you imagine this becoming a reality in the near future? It would be disastrous! This would greatly defeat "De-Fi's" true value proposition which is eliminating the middleman from the system.

With the way "De-Fi" was designed, I hardly doubt the US government will be able to succeed in its efforts to regulate it for good. But knowing that they did sanction a decentralized mixing software like Tornado.Cash, tells me that we should not underestimate the government.

What are your thoughts?

[jrrsparkles]

I doubt there is any way to implement KYC on decentralized exchange like Uniswap but definitely possible to implement on projects because it happened in the era of ICO and defi is just the similar version of it I mean those defi projects which are mostly relying on the ethereum network which switched to PoS already so the decentralization is already a big question when it comes to Dapps so it can be added to the list as well.

Why I feel it is not possible to implement on exchanges because it doesn't operate under any countries guidelines since its completely the trades are actually peer to peer based on smart contracts unlike the traditional exchanges so if governments wants to regulate then they need to restructure their entire regulations.

[avikz]

I've read somewhere that the US proposed regulating "De-Fi" protocols. It wants to treat them as "Ce-Fi" by requiring developers to implement KYC/AML rules. This means you as a user will be forced to verify your ID to use a decentralized lending protocol, staking service, or even an exchange such as Uniswap or Pancakeswap. Would you imagine this becoming a reality in the near future? It would be disastrous! This would greatly defeat "De-Fi's" true value proposition which is eliminating the middleman from the system.

With the way "De-Fi" was designed, I hardly doubt the US government will be able to succeed in its efforts to regulate it for good. But knowing that they did sanction a decentralized mixing software like Tornado.Cash, tells me that we should not underestimate the government.

What are your thoughts?

The way De-fi protocols are designed, it will be extremely hard to regulate it. But while it's hard, it's not impossible. But my fear is different. If US government cannot technically regulate it, they will do everything they can to block it from functioning in US.

https://www.coindesk.com/policy/2023/07/19/new-us-senate-bill-wants-to-regulate-defi-like-banks/

This one talks about this matter in details. Just not sure how it will be implemented.

[cryptoaddictchie]

With the way "De-Fi" was designed, I hardly doubt the US government will be able to succeed in its efforts to regulate it for good. But knowing that they did sanction a decentralized mixing software like Tornado.Cash, tells me that we should not underestimate the government.

Government would likely less trust defi due to its nature. We can say its work like traditional banking finance but with the help of blockchain this could be done on their own as the platform served as your easy to go access while banks used personnel to do it for you while this one gives you the freedom to manage it well and monitor it anytime. But the exploit and breach is inevitable since codes might give ulterior problems when a hacker crack some flaws.

[hugeblack]

Is De-Fi really Decentralized finance? I doubt it. These cryptocurrencies are highly centralized, or at least they have one or more points of failure. The government could easily go after them and force them to comply with the regulations.
I do not know whether these rumors are true or not, but they are possible and there are many alternative financial options instead of staking or lending DeFi coins.

[o48o]

I've read somewhere that the US proposed regulating "De-Fi" protocols. It wants to treat them as "Ce-Fi" by requiring developers to implement KYC/AML rules. This means you as a user will be forced to verify your ID to use a decentralized lending protocol, staking service, or even an exchange such as Uniswap or Pancakeswap. Would you imagine this becoming a reality in the near future? It would be disastrous! This would greatly defeat "De-Fi's" true value proposition which is eliminating the middleman from the system.

With the way "De-Fi" was designed, I hardly doubt the US government will be able to succeed in its efforts to regulate it for good. But knowing that they did sanction a decentralized mixing software like Tornado.Cash, tells me that we should not underestimate the government.

What are your thoughts?

It's unavoidable, but it isn't going to be as simple as everyone seems to think, where regulators control everything. Regulated Decentralized Finance can be build on even on decentralized permissionless ZK blockchain where we don't have to share everything with regulators. All they need is that we need to prove something they require. And with zero knowledge proofs we can provide the proof without revealing anything we want to keep secret.

Assets can be issued on top of that blockchain and while native coin itself can be permissionless, assets can be issued on L2 and have some qualities that regulators want, like transactions being reversable, private and instant.

[Abiky]

The way De-fi protocols are designed, it will be extremely hard to regulate it. But while it's hard, it's not impossible. But my fear is different. If US government cannot technically regulate it, they will do everything they can to block it from functioning in US.

https://www.coindesk.com/policy/2023/07/19/new-us-senate-bill-wants-to-regulate-defi-like-banks/

This one talks about this matter in details. Just not sure how it will be implemented.

That's exactly the same article I've read online. I really hope the bill is rejected by Congress in the long run. Otherwise, it'll be the end of crypto in the US for good. Developers wouldn't want to join the crypto train in a country with tightening regulations. We could say the Biden administration has been aggresive against crypto/Blockchain tech since the very beginning. Especially SEC chairman Gary Gensler.

I know "De-Fi" will stand the test of time, but it's likely we won't see innovations across the US if the industry is regulated for good. A regulated "De-Fi" platform would become no different than regular banking. Isn't KYC/AML the single point of failure? By fighting against such absurd regulations, the US government will have no choice but to step back and let crypto run its course. No one can predict the future, so lets hope for the best. Just my opinion

[zasad@]

I doubt there is any way to implement KYC on decentralized exchange like Uniswap but definitely possible to implement on projects because it happened in the era of ICO and defi is just the similar version of it I mean those defi projects which are mostly relying on the ethereum network which switched to PoS already so the decentralization is already a big question when it comes to Dapps so it can be added to the list as well.

Why I feel it is not possible to implement on exchanges because it doesn't operate under any countries guidelines since its completely the trades are actually peer to peer based on smart contracts unlike the traditional exchanges so if governments wants to regulate then they need to restructure their entire regulations.

This is very easy to do on uniswap if there is legislation, but so far there is none. The MICA law in Europe does not regulate the DeFi sector at all and in the US also only bills, but this issue will most likely be resolved in a few years either by introducing whitelists or by introducing digital identifiers. And the laws of other countries will not contradict the rules of the USA and Europe.

[vv181]

This will be horrendous since we talking on the protocol level, not on the front end. By comparison with Tornado Cash sanctions, it only happens on the front end, but the contract itself is still running and accessible. Given that, that is why I say it is horrendous, a protocol level regulation would force the developer to comply to make the identity verification tied directly to the system. Which completely obliterate the goals decentralized finance trying to achieve.

I believe most defi protocols, instead of complying will simply make a different alternative that creates specifically to satisfy US regulation in case the bill is enforced. Forcing all of their users to comply with this specific bill is truly a bad idea.

[hugeblack]

That's exactly the same article I've read online. I really hope the bill is rejected by Congress in the long run. Otherwise, it'll be the end of crypto in the US for good. Developers wouldn't want to join the crypto train in a country with tightening regulations. We could say the Biden administration has been aggresive against crypto/Blockchain tech since the very beginning. Especially SEC chairman Gary Gensler.

Or it could be an opportunity to test decentralization for real rather than being surprised that you won't be able to sell your tokens on uniswap unless you complete identity verification.
It is a good opportunity, the market is now low, and this news will not affect the next Bitcoin cycle, so if something bad happens, it is better that it happen now until next April, but betting that central funding will remain for a long time may not be wise.

Personally, I think De-Fi was a good opportunity when there was no return from lending and stimulus packages were easy, but now there is no real reason to use it.

[FanEagle]

I do not know if that's real or not, but there will not be any developer who would be willing to do that because after they release it, it's no longer their problem. It is purely ran by the people and there won't be any dev that can control it. That's why it's called defi, it's decentralized, so there can never be anyone who can ask us KYC in the logic of it, it's just not possible.

Of course you can try, but the simplest result would be people picking an non-American nation to build it, and just release it, then they will not care about what SEC or anyone else says about it, they do not even have to share their own KYC, which means that USA wouldn't even know who started it, could be an American as well and they wouldn't know.

[cabron]

The government will try regulating defi. Almost all platforms today can ask for KYC actually especially if they can identify the CEO of a Defi platform, the government will file a lawsuit against those guys and mandate them to KYC their users. There is no escape that's why it's best for platforms to have unknown CEOs.

The government will be able to get the data but when the people understand it already, the new Defi platforms that will come out after will be a lot harder for the government to control. This is already a revolution in action.

[abel1337]

If this is passed on the court and they implemented it, I wonder how can US developers implement it right or how can they attract users/customers to use their product if they will require them to submit KYC just to use their product. I'm sure these developers will have a hard time implementing it and to think that they will change the design of their project because of regulation like this. It would be a nightmare. The question is what would the developer choose? Will they bend their system or the law. It's a question for the future.

[Abiky]

This will be horrendous since we talking on the protocol level, not on the front end. By comparison with Tornado Cash sanctions, it only happens on the front end, but the contract itself is still running and accessible. Given that, that is why I say it is horrendous, a protocol level regulation would force the developer to comply to make the identity verification tied directly to the system. Which completely obliterate the goals decentralized finance trying to achieve.

I believe most defi protocols, instead of complying will simply make a different alternative that creates specifically to satisfy US regulation in case the bill is enforced. Forcing all of their users to comply with this specific bill is truly a bad idea.

Developers might change the code to require users to submit ID verification documents (KYC). Or they could simply block users from certain countries from accessing the front-end interface. But that won't stop tech-savvy users from accessing the smart contract directly. To make things difficult for the government, developers must remain anonymous. Otherwise, it'll be easy to regulate "De-Fi".

I'd say a "De-Fi" platform that complies with KYC/AML would no longer be decentralized. That's because a middleman is needed to collect the information and provide it to the government upon request. Isn't the whole point of crypto/Blockchain tech to "be your own bank"? I don't think the government will be successful at regulating "De-Fi" due to the way it was designed. Who knows if they ultimately give up and join the revolution? Just my opinion

[SUPERSAIAN]

These regulations work completely against the logic of De-Fi, it has no meaning. Defi's completely transform into Cefi. I believe there should be different regulations besides KYC but KYC/AML rules should be invalid for Defi protocols so people can trade easily. A balance between market centralized and decentralized is essential. I don't think much will come of these suggestions.

[Xal0lex]

The problems of regulation in the DeFi sphere were discussed by Andre Cronje several years ago. He argued that the DeFi industry is in dire need of regulators, otherwise it has no chance for serious development, for some kind of acceptance. This is because there are a lot of random and temporary people coming into the industry, who fill the market with temporary products, the purpose of which is to enrich themselves at the expense of investors. Then these people disappear and appear under new nicknames and new brands. They may be the same people, but because of the anonymity and lack of regulation in the DeFi sector, the sector is perceived by serious investors as something akin to a casino.

[Abiky]

These regulations work completely against the logic of De-Fi, it has no meaning. Defi's completely transform into Cefi. I believe there should be different regulations besides KYC but KYC/AML rules should be invalid for Defi protocols so people can trade easily. A balance between market centralized and decentralized is essential. I don't think much will come of these suggestions.

What could happen is a mass exodus of developers from the US to other crypto-friendly countries. The government can't stop the revolution no matter how hard it tries. Trying to stop "De-Fi" is like trying to stop people from using the Internet. Adding KYC to a "De-Fi" platform is simply not an option because that would make it centralized. This will introduce the "single points of failure" crypto was meant to avoid in the first place.

Either the government doesn't understand how crypto truly works, or it's doing this intentionally to scare away as much people from crypto as possible. We'll see how "De-Fi" developers will respond when regulations come into place. I'm certain governments' efforts will turn into a huge failure. Just my thoughts

[vv181]

This will be horrendous since we talking on the protocol level, not on the front end. By comparison with Tornado Cash sanctions, it only happens on the front end, but the contract itself is still running and accessible. Given that, that is why I say it is horrendous, a protocol level regulation would force the developer to comply to make the identity verification tied directly to the system. Which completely obliterate the goals decentralized finance trying to achieve.

I believe most defi protocols, instead of complying will simply make a different alternative that creates specifically to satisfy US regulation in case the bill is enforced. Forcing all of their users to comply with this specific bill is truly a bad idea.

Developers might change the code to require users to submit ID verification documents (KYC). Or they could simply block users from certain countries from accessing the front-end interface. But that won't stop tech-savvy users from accessing the smart contract directly. To make things difficult for the government, developers must remain anonymous. Otherwise, it'll be easy to regulate "De-Fi".

Based on the related article's wording, which is, decentralized finance protocols, I doubt it will only be on the frontend level. Protocol-level implementation means the identity verification system is a gatekeeper that is inherently developed within the smart contract. Although, I did not know whether it is possible, to implement such kind of case, user/IP detection, identity submission, etc. on the protocol, in one way or another, it would simply become a centralized product just like regular services/platform.

But that supposes it is truly on the protocol level. Back to the main assumption, I tried to read the bill, but have no luck accessing the file: https://www.congress.gov/bill/118th-congress/senate-bill/2355.

[Abiky]

Based on the related article's wording, which is, decentralized finance protocols, I doubt it will only be on the frontend level. Protocol-level implementation means the identity verification system is a gatekeeper that is inherently developed within the smart contract. Although, I did not know whether it is possible, to implement such kind of case, user/IP detection, identity submission, etc. on the protocol, in one way or another, it would simply become a centralized product just like regular services/platform.

But that supposes it is truly on the protocol level. Back to the main assumption, I tried to read the bill, but have no luck accessing the file: https://www.congress.gov/bill/118th-congress/senate-bill/2355.

I think developers might use something called "Oracles" to obtain personally-identifiable information and transfer the data to smart contracts. It's complex, but not impossible to achieve. That's if we're talking about adding KYC at the protocol level. But doing this will greatly defeat crypto/Blockchain tech's original purpose which is to eliminate the middleman for good. Bitcoin was created on the basis of decentralization in an era where centralized financial institutions (banks) were about to collapse. We should not repeat the same failures of banks by making the whole system centralized.

If "De-Fi" complies with KYC/AML, then it wouldn't be decentralized anymore. Hopefully, the US government will understand as it finds no viable way to properly regulate the industry. With greater flexibility in crypto regulations, the industry could grow without limitations. Who knows what the future holds for "De-Fi"? Just my thoughts

[profgates]

The purpose of Defi would not be accomplished, if the government view is in adherence. The government has always been against in the concept of decentralization and this is visible on the sanctions that has been levied against big players in the industry.