Urging DeFi to slow down — Comments on The Defiant article, Vitalik and more

In case you missed it, we were in The Defiant again with Director, Nick Bishop providing some commentary to this article by Samuel Haig — https://thedefiant.io/vitalik-urges-defi-to-slow-down-integration-with-traditional-finance

This was all about the original Tweet thread where Vitalik Buterin (founder of Ethereum) put his thoughts on the regulation of crypto where Sam Bankman-Fried received a lot of backlash from Crypto Twitter, especially from folks like Erik Voorhees. Original tweet thread here — https://twitter.com/VitalikButerin/status/1586557896351186944

We thought we’d share more of Nick and our thoughts on this so please check out the following:

Vitalik makes a good point about the futility of KYC into Defi. Insisting on this step for some users puts them at an even greater disadvantage vs hackers, who will never be KYC’d and will always be present in some form, in web2 and web3.

Vitalik is effectively saying — by all means fence us in until we mature, but behind that fence, we do what we want. Don’t bust through our fence, onto our turf, and start telling us what to do. Let us grow first, then engage. Having created the most prominent smart contract platform, Vitalik is conscious that ethereum is at risk of intense scrutiny, if big capital comes wading in too early. Because regulators will follow in behind institutional investors, who are putting retail (consumer) money to work.

With respect to ZKPs and reg compliance, we are also fans of the technology. We know Vitalik sees ZKs as the key to Eth scaling, so his endorsement is no surprise. Finally, his suggestion of knowledge-based tests is exceptionally difficult to administer at scale, hence the web2 default to net worth tests as a determinant of “sophisticated” or not.

We think a better way to approach regulatory considerations is by acknowledging a single, global approach to Defi and crypto is practically impossible. Therefore, better to consider embedding regulatory compliance into each jurisdiction, via a token wrapper which imbues any underlying token with regulatory compliant restrictions. When a user wishes to move their token to another regulatory domicile, you burn the old wrapper and mint a new one. We call this Layer-C.

Overall then, it’s hard to side with Vitalik and those pushing for non-engagement with regulators. Zero engagement means greater danger of regulations that cannot be undone, and thus more stifling of innovation. Here in Australia, policy makers engage through consultation papers, soliciting developer and user community feedback. Often responses begin simply, by correcting definitions or by mapping the space thoroughly, such as the work done by the Australian Treasury on token mapping. We applaud this collaborative approach, which should attract more capital and builders into Australian web3.

It’s certainly an interesting time to be around the crypto space given that many want to things to go mainstream and many want crypto to be left alone. There’s lines in the sand being drawn so it’ll be interesting to see how this all plays out.