Is a DEX truly distributed if its community can be sanctioned by a central authority?
In the very core of distributed ledger technology lies the idea of trustless and perpetual interaction. The U.S. Securities and Exchange Commission (SEC) made an official press release [1] whereby a disclosure was made about a person related to EtherDelta was to pay fines totaling nearly US $400,000. They note:
“The order found that Coburn caused EtherDelta to operate as an unregistered national securities exchange.”
Regardless of the fact that this is not the first such action [2] on the side of the U.S. watchdog, it is by far the only one addressing specifically distributed applications business (Initial Coin Offerings and the like are not businesses that provide their clients with a good or service). In other words, a completely independent of any jurisdiction organization/community/company was sanctioned by a central authority. EhterDelta by design cannot be considered “completely” distributed as evidenced by the hack [3] of December 2017. However, the bigger questions are even if it were and if there was a public person who would benefit in some form from its operations would that person be sanctioned? Naturally, this question is a neighbor to “Why Satoshi Nakamoto never revealed his/her/their identity(ies)?”, therefore attempting to answer it would be trivial and is not the topic of this issue.
- What we want to focus on, and engage communities as well, is whether the exchange of digital assets should be subject to any regulatory oversight?
- If yes or no, why?
- Even if communities have no voice, would they benefit from a completely anonymous system or that would render these communities outcasts?
We believe that there should be regulatory oversight as many market systems are either created or prevented from “market failure” — i.e. market efficiency and effectiveness are facilitated through the well-functioning legal system which has been extensively documented [4], [5].
However, it is of vital importance to note that regulation should be anticipatory rather than ex-post and should, beyond all, not stymie innovation — especially in the digital space where it is yet the primal driving force.
Evidently, we have not decided to create a completely anonymous system, nonetheless, create one such system would be the decision of communities to take the initiative in their own hands, given that they have the appropriate tools to do so.
We believe that central authorities should consider to what extent distributed systems impact the society in good and bad ways — similar to production and tax on the resulting pollution.
And then make the decision when, how, and what to regulate, whether this regulation would affect the industry and the society in the intended ways.
Finally, we encourage the reader to think whether the regulation, in this case, would, in fact, have the desired long-run economic benefits and perhaps read the brilliant paper by the winner of the Nobel Memorial Prize in Economic Sciences — Robert Merton Solow [6].
Ask yourselves the question: “How blockchain will change the life of my grand-grand-grand kids?” and decide for yourself whether any exchange mechanism needs a single ruler rather than an autonomous community.
[1] https://www.sec.gov/news/press-release/2018-258
[2] https://www.sec.gov/spotlight/cybersecurity-enforcement-actions
[3] https://news.bitcoin.com/one-week-etherdelta-hack-funds-still-stolen/
[4] https://scholar.google.com/citations?user=XizBm0kAAAAJ&hl=en&oi=sra
[5] https://scholar.google.com/citations?user=c0ZgYWAAAAAJ&hl=en&oi=sra
[6] https://www.econ.nyu.edu/user/debraj/Courses/Readings/Solow.pdf
