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Here are our key findings:
- Decentralised Finance (DeFi) is an important financial market development with high innovation potential.
- The fundamental conditions and mechanisms of DeFi are entirely different from Centralised Finance (CeFi), which provide a new view and a new paradigm.
- Subordinating DeFi applications to financial market regulation designed for CeFi is neither sensible nor practical. DeFi applications must be clearly distinguished from the traditional financial market and the scope of its application.
- It is not sensible to regulate the technology nor the protocol layers.
It is to be expected that even in ideal DeFi-applications, intermediaries will be present to support and service users. DeFi regulation should primarily focus on regulating those service providers.
DeFi-regulation triggers two fundamental paradigm shifts in policy:
- We must improve the education of retail-investors about DeFi — and CeFi.
- We should change the paradigm from a 100% investors protection to a system of choice for the investors, whether they want to use the services of a regulated entity, a non-regulated entity or directly use a protocol.
Notes on article
regulators or supervisors are often faced with the choice of whether an application is regulated by an extensive interpretation of the scope or is otherwise not subject to any regulation at all.
global distribution, the multitude of potential users, and the lack of organisation (software instead of people) make applying centralised financial market regulation to DeFi practically impossible. ( or global regulations and compliance services required )
DeFi applications can harbor completely different types of risks and few are subsequently well addressed.
DeFi regulation: how financial market regulation has to change in order to achieve these goals: to effectively limit the risks and at the same time not hinder innovation?
Regulation - role vs rule basis ( opposite of security trends )
an innovation-open regulation in the DeFi environment must be functionally oriented or (even more granular) “role-based” and must not regulate a specific set of functions as a business model. Business model regulation is hostile to innovation. EU-MiCAR also follows a role-based approach
Rule-based regulation has lower risk of misinterpretation
Rule-based regulation thus also creates legal certainty for all participants in a mature and established system and cannot been seen as negative per se.
Rule-based systems limit innovation because of fast obsolescence with implementation specifications
Principles-based regulation is innovation friendly but less certain leaving legal authorities large room for interpretation ( see GDPR regs etc )
Innovation-friendly regulation must therefore be principles-based and, as far as possible, technology-neutral and needs processes based on the rule of law to give the authorities and market participants sufficient orientation as to how the principles are to be seen or applied in concrete applications
TVCN - Trusted VCN using VC creds and SSI
The DeFi application could thus refer to a combination of several DeFi licence holders and thus more easily gain the trust of users. This regulatory approach could, in principle, also be applied to semi-DeFi applications
DeFi supervision: In the case of central supervision of DeFi applications, a distinction must be made between the preventive and the reactive approach
there is no possibility for users of DeFi platforms in the typical setup to reduce their risks via service providers
<<jem DeFi DAOs have varying levels of credibility, governance and compliance with related regulations
<<jem how to define criticality and related governance activities that need to apply to a given app??
Open source consortiums best for specification, compliance reviews? see OWASP etc
The verification of software code and hidden risks probably works most efficiently with open-source software through the community. Therefore, one viable approach would also be for the users of a DeFi application to pay a particular contribution to the technical experts who take over the technical review of the code and the people involved.
<<jem conclusions
- the problems with current traditional regulatory governance of DeFi solutions is well defined
- the market segmentation on DeFi solutions and related risk models not well defined
- both traditional and DeFi solutions have many losses for investors but DeFi losses are relatively higher now
- the need for KYC, AML, OFAC regs is not addressed in the DeFi market
- DAOs vary clearly in governance, risks, penalties, enforcement, definition of rules
- RTE - Real Trust engineering needed for any DLT solution ( DeFi or not )
- q>>> is community governance adequate replacement for legal governments ? probably not
Comments on Dunser article
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2> transparency
3> accountability
does a DAO implemented in smart contracts solve all of the issues on:
- economics
- privacy
- transparency
- compliance
- information asymmetry
- accountability
- guarantees
- recovery
- resilience
- control
- consent
- communication
- operations management
- migrations
- maintenance
Utah Act on DAO support
https://cointelegraph.com/news/dao-gets-legal-recognition-in-the-us-as-the-utah-dao-act-passes
Regulation Jurisdiction Concepts for Blockchain
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The general principle of the Regulation is that individuals should only be sued in their member state of domicile. Domicile under the Regulation is not equivalent to the common law doctrine of domicile, but rather refers to a person's habitual or ordinary residence.
Article 2(2) of the Regulation embodies the "principle of equality of treatment"[3] by stating that 'persons who are not nationals of the Member State in which they are domiciled shall be governed by the rules of jurisdiction applicable to nationals of that State'.
ICMA Finech Roadmap - 2023 5 years
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