The Universal Synthetics project gives utmost attention to law and regulation issues. Considering that the regulatory framework for DeFi regulation is still only at the development stage, the focus lies on the practice and comments of the regulator’s officials, alongside the readiness to cooperate as the regulatory framework improves.
Generally speaking, the problem of many crypto projects, as well as projects related to the issuing of synthetic digital assets, is the ambiguous attitude of market regulators. It is further compounded by the fact that regulators themselves are faced with disruptive innovation in decentralized finance and do not have ready-made solutions for their regulation. Thereby, they are trying to apply to DeFi the principles tested for years from the fiat world (for example Howey test).
All of this together creates a toxic atmosphere in the DeFi segment, forcing market players to make unpopular and sometimes unreasonable decisions to avoid possible claims from regulators. An example of such a solution may be the termination of the support of securities-like tokens by the UNISWAP decentralized exchange: in July 2021, a large number of Synthetix protocol tokens were affected, alongside Mirror Protocol.
There is no doubt about the regulator’s role in protecting clients from fraudulent schemes and unreliable mediators. However, many regulatory issues are solved in DeFi simply due to the technology and protocols used. Therefore, the panic moods of some market participants about a possible conflict with the law are not always justified.
It is possible to formulate several requirements that the DeFi service must meet so that the regulator does not make claims against it:
The instrument’s design: the project token should be designed in such a way that it does not represent a “digital copy” of securities existing on the market, or it is not an analogue of a security subject to registration and does not have a centralized issuer.
Decentralization: according to SEC Commissioner Hester Pierce, known as “Cryptomama”:
Full decentralization from the launch is the only hope for DeFi projects to avoid financial regulation. If the regulator can find an element of centralization, it will definitely seize on it.
Transparent management structure: Hester Pierce also noted the danger of “shadow centralization” in the DeFi sector when groups of developers or investors control the protocol due to the opacity of the management structure. Thus, a translucent and understandable service management structure is a prerequisite for ensuring the decentralization of the project.
The Universal Synthetics was developed initially with these requirements in mind:
- Synthetic tokens of the project are indexes and do not have a single issuer. Furthermore, it should be noted that according to the Howey test, the overall score of the project’s synthetic tokens is 0 points and hence, they cannot be recognized as a security.
- The project is wholly decentralized using the UMA protocol, has no centralization elements and does not use external centralized services similar to centralized cryptocurrency exchanges.
- Project management is carried out with the help of DAO and voting mechanisms by project users — an absolutely transparent structure that does not allow the possibility of abuse by the founders.
Based on the listed above, the project’s future certainly seems to be optimistic from the regulatory point of view, and it is ready to cooperate with the regulator as the regulatory framework for DeFi improves.
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