GiD Report#176 — DeFi needs self-sovereign identity

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GlobaliD

5 min readSep 8, 2021

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This week:

SEC chief Gary Gensler closes in on crypto
Tweet of the week
Stuff happens

1. SEC chief Gary Gensler closes in on crypto

Gary Gensler, center, answers questions during a June 18, 2018, hearing of the House Committee on Agriculture on potential federal oversight of cryptocurrencies. Photo: House Committee on Agriculture

With the world’s decision makers chilling at their summer homes, the last week of August before Labor Day weekend is typically one of the quietest of the year.

But new SEC boss Gary Gensler has been burning the midnight oil.

First, there was this ominous interview w/the FT:

“At about $2tn of value worldwide, it’s at the level and the nature that if it’s going to have any relevance five and 10 years from now, it’s going to be within a public policy framework,” he said. “History just tells you, it doesn’t last long outside. Finance is about trust, ultimately.”
Gensler expressed disappointment with the industry’s response to his suggestion that trading platforms register with the SEC on the grounds that a sufficient number of cryptocurrencies qualify as securities.
“Talk to us, come in,” he said. “There are a lot of platforms that are in operation today that would do better engaging and instead there is a bit of . . . begging for forgiveness rather than asking for permission.”

Now, there’s nothing actually wrong with that statement — aside from hints of a potential threat. For crypto to grow up and truly be relevant and useful, it does indeed need to work symbiotically within a public policy framework. Part of the issue here is that, rather than presenting a clear framework, the SEC has so far regulated via enforcement.

For Gensler and the SEC, it’s a bit of a pickle. If you’ve ever played chess, you’d know that a classic rookie error is to overcommit your pawns too early. Better to let the game play out so you can better assess your structure. The thing with pawns is that, once you move them forward, you can never move them back. Overcommitted pawns create weaknesses in your set up that your opponent can then target.

That’s why even answering basic questions such as — Is Ethereum a security? — proves challenging to impossible at the moment. It’s one pawn move too far at this stage of the game. Leaving those questions unanswered leaves more leeway for the SEC’s future enforcement actions.

Now, it’s easy to put all the blame here on Gensler’s SEC. The reality is that the sort of clarity required will eventually have to come from Congress.

The crypto space operated for years with little oversight. It’s too big for that now.

Speaking of enforcement, the SEC is now going after DeFi in the form of Uniswap, one of the largest DeFi exchanges.

Here’s the WSJ:

The Securities and Exchange Commission is investigating the startup behind one of the biggest cryptocurrency exchanges, as regulators probe further into parts of the digital-asset market that have resisted oversight, according to people familiar with the matter.
Regulators are examining Uniswap Labs, the main developer of the world’s largest decentralized exchange, called Uniswap, the people said. Enforcement attorneys are seeking information about how investors use Uniswap and how it is marketed, the people said.

Gensler had spoken about DeFi at Aspen earlier in August. The WSJ again:

But Mr. Gensler, who took over in April, said projects that reward participants with valuable digital tokens or similar incentives could cross a line into activity that should be regulated, no matter how “decentralized” they say they are.
“There’s still a core group of folks that are not only writing the software, like the open source software, but they often have governance and fees,” Mr. Gensler said. “There’s some incentive structure for those promoters and sponsors in the middle of this.”

With how DeFi currently works, with users holding and trading assets through a non-custodial wallet, exchanges such as Uniswap don’t have proper AML/KYC procedures in place.

During this next period of evolution for the DeFi space, various initiatives will start looking toward digital identity solutions in order to comply with existing regulatory frameworks. For the crypto space, where the value of ownership, control, and privacy are put at a premium, expect self-sovereign identity to take a more commanding role going forward.

Relevant:

2. Tweet of the week

Justin Sun’s new NFT — via /easwee:

GiD Report#176 — DeFi needs self-sovereign identity

This week:

1. SEC chief Gary Gensler closes in on crypto

Relevant:

2. Tweet of the week

Relevant:

3. Stuff happens

Written by GlobaliD