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Ep 45: DeFi’s Big Questions Answered
142 Plays1 month ago
Is DeFi truly decentralized? Is it more than just finance? Join Yvette Valdez (Latham & Watkins), Diana Barrero Zalles (GBBC), Joe Cutler (Perkins Coie), and Lee Schneider (Ava Labs) as they discuss DeFi’s opportunities, risks, and more.
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Transcript
Introduction to the Podcast Series
00:00:06
Speaker
Hello and welcome to this Owl Explains Hootenanny, our podcast series where you can wise up on blockchain and Web3 as we talk to the people seeking to build a better internet.
00:00:17
Speaker
Owl Explains is powered by Avalabs, a blockchain software company and participant in the Avalanche ecosystem. My name is Silvia Sanchez, project manager of Owl Explains, and with that, I'll hand it over to today's amazing speakers.
Cutting Through DeFi Hype
00:00:42
Speaker
Hi everybody, let's talk about DeFi today. I know you've heard about DeFi, you have seen the headlines, and there seems to be hype and fear, or sometimes it feels like things are happening too fast.
00:00:54
Speaker
But Araúl Explains, we're all about more hoot, less hype. And we're cutting through the noise with today's four brilliant guests. Yvette Valdez from Latham & Watkins, Diana Barrero-Sales from the Global Blockchain Business Council, also known as the GBBC,
00:01:10
Speaker
Joe Cutler from Perkins Cooey, and Lee Schneider from Ava Labs. So welcome, everybody. Thanks for having us. Thank you. Thank you, Sylvia. Awesome. Great. No, we're super excited to have you here. And the four of them have written a report on DeFi for the GBBC, who is also doing a lot of work on taxonomy and blockchain policy.
00:01:29
Speaker
But today we're going to focus more on
Defining True DeFi Characteristics
00:01:31
Speaker
DeFi. For the next 30 minutes or so, we're getting into the real stuff, like what's actually working on DeFi, where are the real risks, what regulation might look like, and so much more.
00:01:42
Speaker
So before we get into the tough questions, let's set the stage. I always like to start with off with a little of Explanation some context. So you have mapped out DeFi's opportunities Risks and where it fits in the broader financial landscape.
00:01:56
Speaker
Can you walk us through the biggest takeaways from the report? What should people understand about DeFi today? Well, I can I can start um um i I Think that One of the things that we learned early on in convening a working group of people from various backgrounds was how little work has been done on the core defining terms of what we even mean when we talk about DeFi.
00:02:24
Speaker
um And I think that it's a colloquial term that has been broadened to apply to more than just decentralized finance. it It often refers to anyone who's trying to do activity without an intermediary in it in the truest sense of the word, where um blockchain technology or decentralized ledger technology is combined with some kind of formal transaction where the intermediaries are truly removed.
00:02:52
Speaker
um And there's been ah trend in blockchain where there are a lot of fairly centralized actors within the blockchain industry.
00:03:03
Speaker
You have centralized exchanges and centralized wallets and custodied and hosted wallet structures. You have layer two protocols that take the responsibility back in a centralized fashion from the participants.
00:03:17
Speaker
and And so one of the things that we did in the working group was really talk amongst the various participants about what they really mean when they say DeFi and what are the characteristics of DeFi versus other participants in a blockchain and decentralized ecosystem.
Revolutionizing Global Finance with DeFi
00:03:35
Speaker
Yeah, maybe I would just layer on to that. um There's really enormous opportunity across not only finance, um but generally the value proposition of the technology, right, can reduce transaction fees by cutting out intermediaries.
00:03:53
Speaker
And that itself sort of becomes a concern and an issue from a regulatory framework that that we can obviously discuss later. But there's inherent transparency and security in DeFi protocols um as well, which can really enhance the security of any type of transaction, not just financial transactions.
00:04:16
Speaker
um And you know these are based on open and permissionless systems. that are, from a growing point of view, become much more interoperable and can really reduce a lot of noise and create frictionless systems.
00:04:33
Speaker
You know, we talk a lot about straight through processing in financial transactions, but that actually becomes ah reality when we start incorporating these protocols just in regular traditional finance, but in other means of exchanging value.
DeFi's Impact on Traditional Finance
00:04:50
Speaker
So I think the, you know, the end goal really is just understanding that decentralized finance is not just a way for retailers to have, you know, peer-to-peer transactions, although there's inherent value in that, but rather it's really
00:05:07
Speaker
revolutionizing the way that we do business generally in financial markets and outside to help sort of make our systems much more efficient, decrease intermediaries where we really don't need them, and to create more transparent and secure networks.
00:05:25
Speaker
And if I can build to that, I think one very important implication to to the points raised thus far has been, what does it mean when financial institutions and services are in a way decomposed to become truly global, truly open source, and truly peer-to-peer?
00:05:44
Speaker
And as as the working group, we've we've collaborated to really explore the technical ways that that ah attempts have been made to mitigate the risks and vulnerabilities that we all agree are there. Nobody wants there to be fraud. Nobody wants to be there to be AML and KYC and sanctions violations.
00:06:04
Speaker
And how has the community and the industry come together to resolve some of those key issues and risks?
Regulatory Standards and Risks in DeFi
00:06:12
Speaker
and And how have chains specifically focused to to add functionality to help with ah regulatory requirements like KYC, AML, and and address obligations to to customers. and And this is where our wonderful co-chairs of the working group, Lee, Joe, and Yvette, have done a wonderful job of guiding the group in in coming together to talk about where do we actually have existing standards and where
00:06:44
Speaker
are ah examples of of DeFi activities where there are generalized notions of ah risk assessment approach by by DeFi activity and in specific, ranging from traditional entities that are regulated offering DeFi access to DeFi protocols or legal entities that are traditionally offering access to digital assets and as such are also offering access to DeFi protocols And then the DeFi protocols themselves, what activities do they offer?
00:07:16
Speaker
What are the inherent risks? And what are the ah risk mitigations and and obligations to consumers? And and I think that um rhetoric and that framing of of a risk assessment approach can be very, very useful to engage in in regulatory conversations.
00:07:35
Speaker
Awesome. Yeah, thank you. Thank you for that. And I love the point that Yvette raised that decentralized finance is more than peer-to-peer. It's a shift in how we do business in a way that increases efficiency, transparency.
00:07:47
Speaker
But I think it's also important to separate real DeFi innovation from centralized projects that are just using using the word DeFi as a marketing tool. So that's why I'd like us to make that distinction to get started. So in a very brief way, what constitutes ah a true DeFi activity?
00:08:05
Speaker
So maybe since I haven't spoken yet, I'll i'll kick this one off. ah We actually came to pretty ah quick agreement on on this. And we came to a definition that's in the report that basically says that if there's no single source of truth, no single point of failure, and no single authority that can change the data or the transactions,
00:08:30
Speaker
that we felt that that was decentralized. And people, we we we all had a ah discussion about this. People look at decentralization at sort of different layers of the of the tech stack.
00:08:45
Speaker
And we thought it was most appropriate to focus on the base layer of the tech stack. because it was that immutability of the transaction, right? You know that your transaction is done.
00:08:57
Speaker
You know that you have transferred it to somebody else or that somebody else has transferred the asset to you. That is the core thing in DeFi. And when people talk about peer-to-peer in DeFi, what I think they really mean is peer-to-protocol, because your transaction is not necessarily with one other individual, but really more with the protocol, which has the assets of lots of different individuals locked into it as part of the transacting.
00:09:35
Speaker
And so it's that that kind of peer-to-protocol with immutability of transactions that we felt was the most important thing.
00:09:46
Speaker
Now, you could have a situation where you have DAO that can vote a particular way and roll back transactions. If that's the case, then we would say that's probably not decentralized, but depends on the exact facts and circumstances.
00:10:04
Speaker
But again, the key for us was that immutability of the transactions.
Tokenization Beyond Finance
00:10:08
Speaker
Nobody is able to roll back transactions. no No single person is able to add a transaction without there being consensus at the blockchain level.
00:10:19
Speaker
I also think it's worth pulling Yvette's thoughtful first comment here. I really i ah really agree strongly with what she said, which is we tend to put all of our focus when we say, what is DeFi?
00:10:35
Speaker
People tend to reduce it just to peer-to-peer transactions that that we think of in almost like a DeFi retail context. But I wholeheartedly agree that some of the most exciting innovation that's happening to finance is happening under the hood where um pretty non-controversial DeFi transactions happen that are similar to those that Lee just described are used to grease the skid, so to speak, between endpoints within a financial transaction.
00:11:09
Speaker
um you know One example would be putting into place a DeFi alternative to the Swift messaging network. which which is a really good example of something that no one would ever see.
00:11:22
Speaker
it wouldn't be branded. It wouldn't be on the side of a bus. It wouldn't be something, you know, it wouldn't be an entity who who advertises at a conference and the and the people who create it, um you know, probably wouldn't be rich and famous in Lamborghinis, but they would have contributed an incredible...
00:11:37
Speaker
Improvement on the movement of a large amount of data in a trustless environment where there's no single point of and you know Lee said single point of truth, but also I would add no single point of failure where you can have reliability in a network that is global that is Agnostic as to nation-state agnostic as to participant agnostic as to value It is literally concerned with one role only which is the perfection of the data set so that people can rely on it for other things and And that, i I think that's a really thoughtful comment that I think is worth repeating in answer to your question.
00:12:13
Speaker
And just to follow up with you, Joe, there, you know, the last point you made about data integrity my words not yours i i think you know that's what we focused on when we were trying to make sure we're trying to come up with a definition of decentralized we wanted that there are the ability to have integrity of the data so that people could rely on it uh for purposes of their transactions for for whatever the purpose of the d5 protocol was
00:12:44
Speaker
And also probably the importance of tokenization, because with tokenization, you can represent any asset on the blockchain and be able to exchange any any form of information on on a blockchain in a way that ah takes the form ah of a financial transaction, but it could also open the doors to...
00:13:05
Speaker
peer-to-peer or peer-to-protocol interactions beyond traditional finance. So that opens up a whole world of opportunities. Yeah, i I actually, I want to sort of piggyback on on all these great points.
00:13:17
Speaker
um You know, DeFi in many ways sometimes gets ah this bad rap, but DeFi allows people the tokenization of all of these various real world assets that we're looking at right now, that that really is the cornerstone and and the low hanging fruit of of the evolving traditional markets, traditional financial markets. Like we've seen really the value to be able to take these open, transparent, immutable ledgers and move value
00:13:48
Speaker
um which will have enormous benefits for our financial markets. and And I feel as though the messaging, you know, and I think Joe really underscored it, the messaging gets lost at times as to the inherent value of of these decentralized protocols and and their ability to really move value in a way that will ultimately change
DeFi's Role in Tokenizing Assets
00:14:11
Speaker
our markets. Because in addition to the inherent value of of the protocol itself,
00:14:18
Speaker
you know, we are now in an administration that is very much supporting this, you know, the development of this technology. And so we've got, you know, acting, acting chair, commissioner Pham,
00:14:34
Speaker
um spearheading the subcommittee on digital assets for GMAC, which provided recommendations for CFTC markets to be able to ah utilize um tokenized non-cash collateral, ah effectively non-cash collateral through distributed ledger technology.
00:14:58
Speaker
Again, this is really the crux of this is decentralized finance and utilizing these tools and incorporating it into what we know as traditional finance in order to allow different types of value that are really hard to move because cash is what can move quicker.
00:15:18
Speaker
but allowing and giving flexibility to market participants to actually post different forms of value, whether it be real estate or secured tokenized securities or other, and actually do it in almost in a 24-7 format. So I think in addition to the inherent value of the technology that we've seen, we're also in at this inflection point that is really going to be able to further and boost along and support the development of of the technology because of the support that generally the market is receiving from the new administration.
00:15:55
Speaker
Yes, Yvette, I couldn't highlight that more. And it's a very, very interesting opportunity. i want to say also that the GMAC has had several different work streams. In addition, GVC has co-chaired a taxonomy work stream.
00:16:08
Speaker
and And that work will continue. We've said, for example, in the report, a lot of the um Definitions, the main concepts of DeFi are still evolving. It's it's a work in progress. and And that kind of analysis is essential and it will continue. The initial taxonomy that was proposed to the GMAC is is more general on digital assets and kinds of digital assets.
00:16:30
Speaker
but where where the conversations will eventually develop into into more areas that are more specific to DeFi. There's another work stream also that has focus on infrastructure, and and we've ah put together a survey for Web3 blockchains and and gone out to over 80 blockchains, and we're currently...
00:16:50
Speaker
um and analyzing the results and it is an attempt to harmonize best practices to scale and and set standards for areas like DeFi and I do want to say that even though as Lee had pointed out before in in many ways some of the regulatory developments are more general to digital assets and blockchain but the areas where they may still impact DeFi are still very important, especially also in the context of the executive order. For example, allowing access to to public blockchain solutions.
00:17:24
Speaker
We need standards and and that much of that can later apply to DeFi. The preference for privately issued stablecoins, in many ways, stablecoins are the currency used in DeFi. So say they might be conversations for for later on, but they still impact and will shape the the DeFi space.
00:17:42
Speaker
I think all of these are great points. And just to add to it, Diana, your point about tokenization of assets, and and Yvette touched on this and Joe touched on this as well, is we're entering a world where talking about DeFi as if it's all about financial instruments and financial services is sort of becoming out outdated um because the it if it was ever correct in the first place, I guess I should say.
00:18:10
Speaker
because the different types of tokens that are tradable on d5 protocols uh it spans a wide variety it's not just financial instruments and you know as real estate comes uh becomes tokenized as art becomes tokenized as event tickets become tokenized as in-game assets become tokenized as um as all different kinds of things become tokenized we're going to see DeFi protocols just have the ability to trade all of those things and markets springing up in all of these different asset classes.
Regulating Multi-Asset Markets
00:18:51
Speaker
So this idea that DeFi is just about the trading of financial instruments or just about the provision of financial services, I think is going to fade.
00:19:03
Speaker
And that's going to pose huge challenges around for developing regulation and enforcing regulation. Figuring out what we do with markets where multiple asset classes trade at the same time and often trade in pairs ah is a challenge that that no regulator, to my knowledge, has really tackled yet.
00:19:29
Speaker
ah So when I'm trading my Apple stock to you, Diana, to buy your apartment and you're trading and then you're taking my Apple stock and trading it to Yvette to buy her apartment.
00:19:44
Speaker
And she then takes that Apple stock and trades it to Joe to buy you know some land in the middle of Washington so she can build a house, right?
00:19:55
Speaker
That's this kind of weird thing that nobody really thinks about. Right now, I have to take my Apple stock, sell it, get the cash, give it to Diana. Diana then takes that cash and...
00:20:08
Speaker
sells it, gives it to Yvette, right? And it's all it's all turned into cash. Whereas if all of us like the Apple stock and value it in a way that's comparable to the real estate or to the apartment, then we have a whole new setup rather than having everything intermediated with fiat currency.
00:20:31
Speaker
So I think this poses a ah whole bunch of really interesting questions. ah for markets and market integrity and market structure and things like that. It's an incredible opportunity to expand the concept of what a market is, right?
00:20:47
Speaker
Truly interoperable, the representations of value that can be accepted across anything through tokenization and and with much, much less
Non-Financial Applications of DeFi
00:20:59
Speaker
friction.
00:20:59
Speaker
Yeah. And and these these all of these ideas that we're talking about on on this podcast so far are things that we discussed with the larger group over the course of the six or or eight months of of our meetings and everything, because these issues are are live issues. They're issues that that people are thinking about ah all the time. And so that's why ultimately with the report, rather than making recommendations about what that we think the regulation should be,
00:21:29
Speaker
we tried to do a little bit of a taxonomy of what we thought the who we thought the participants are and what the associated risks were of those participants and of of DeFi more generally to ah try to use that maybe as a base for people to think about what regulation should look like. I know that every time I try to bang my head against that wall, it just hurts a lot and there's no dent in that wall. So Excellent. Yeah, I think those are all great points. And to just synthesize all of those explanations, it was the peer-to-protocol instead of the peer-to-peer, just limiting to that, but also the immutability of the transactions. And you also have the right reliability component, data integrity, inter interoperability, and of course, the tokenization of assets. And there's no denying that DeFi is scaling beyond finance into things like
00:22:24
Speaker
the tokenized real world real worldl real world assets and infrastructure. I really liked Lee's example of the Apple stock and buying an apartment. So building on this point, what's the most exciting non-financial use case that you've seen? What else is worth highlighting? Because I think it's really important to also get into this practical side to get people outside of of the industry to really gauge the the power of DeFi.
00:22:50
Speaker
It's interesting because we, we rest, it's an interesting question because we wrestled with whether those non-financial use cases were sort of in scope or whether we needed it from a taxonomy perspective, whether we needed a new term like DeFi for the decentral, the full true and the real sense decentralization of real world assets or value propositions like identity.
00:23:15
Speaker
or KYC information. um As a privacy lawyer, I i often say that i didn't enter I didn't enter the world of blockchain and decentralized ledgers from an interest in the financial laws or the financial plays.
00:23:31
Speaker
as a privacy lawyer, I was most enamored with the idea of being able to compute on the internet and provide services that we take for granted, like email, social media, delivery of content, without having to entrust my information, my my my history, my my activity, with a centralized authority who has a profit interest interest in that activity.
00:23:57
Speaker
and and is interested in leveraging who I am for profit. And so for me, some of the most exciting non-financial use cases for decentralized ledger technology and de that that follows this taxonomy we've been talking about are things like being able to perform KYC or identity verifications without the need of a centralized authority to verify them, to self sort of self-sovereign identity.
00:24:26
Speaker
I think about how much money is being spent by the big tech companies to own the digital driver's license market or the digital passports market, and and so that you can have an easier time going through an airport or getting a loan or signing up for a bank account.
00:24:42
Speaker
But it's all a little bit of smoke and mirrors. All that all they're doing is making it more physically convenient for them to centralize your data and vouch for you wherever you go. And you so you're wholly dependent, again, on them.
00:24:58
Speaker
the ability to decentralize and disrupt that... is identical to the value proposition that Yvette talked about in the beginning. I know I keep coming back to the comment, but like the ability to rewire the infrastructure of many value proposition transactions that aren't necessarily money, know, dollars and cents in nature is what excites me.
00:25:20
Speaker
And the idea that as people begin to understand the value of this and trust it, it will grow into, I think, a much more efficient and much more honest version of what we are all trying to do by moving our lives online.
00:25:38
Speaker
I think to me, I can say a little bit of a preview from my pre-blockchain days. I used to work in international development in Bolivia and then in Washington, DC and in some of the big development banks. And the frustration of moving money across borders, except especially when it required currency conversions, is one thing that took me into ah FinTech and then eventually blockchain and a decentralized version of of financial infrastructure.
00:26:07
Speaker
Moving broadly, ah moving back and and forgetting about finance in the first place, I'm very excited about the ability to provide just access. Access to networks, access to opportunities, access to markets is included and in a way that is safe and secure and and can provide um developing nations or or underrepresented communities an equal say in in the mainstream culture.
00:26:37
Speaker
activities of of the world, ah whatever form that may take. And if if we see the data of where DeFi is growing the most right now, we're seeing a boom in Latin America, a big boom, not as big as in Latin America, but it's followed by sub-Saharan Africa and Eastern Europe.
00:26:56
Speaker
And those are all places where where there's a lot of activity. There's a lot of entrepreneurial activities ah creativity and and a great potential, but it's just not necessarily connected to the mainstream um international world activities. so So that's one thing that excites me.
00:27:14
Speaker
I think those both are are really good ones. and And both are reasons that I got into blockchain, got involved in in working on with blockchain projects and everything.
00:27:27
Speaker
um Because I see the way that the flow is moving towards a more globally connected world And I think the ability to but the ability of people to experiment with open infrastructure ah for whatever they want to build, ah be it centralized or decentralized, um is is really important.
00:27:55
Speaker
ah and And having this access to a network that's available you know It's the size of the internet, right? So this is just sitting on the internet's existing infrastructure and building out that infrastructure in ah in a firmer way.
Blockchain in Event Ticketing
00:28:17
Speaker
um you know I'm going to throw out a boring one. It's not that boring, but it's not as world-changing as what Joe and Diana said.
00:28:27
Speaker
ah the The one that I like right now is event tickets. you know We're seeing all kinds of ah really cool applications for tickets to concerts and sporting events and all kinds of things.
00:28:43
Speaker
and NFT technology allows that to be ah to to be there. And I think that we'll be able to do, the people who are starting those projects will be able to do some really cool things along the lines of the ideas that Joe and Diana mentioned, but sort of on a smaller scale and and hopefully take advantage of the data integrity and and everything like that.
00:29:12
Speaker
um And NFT technology makes that possible. And DeFi marketplace technology is going to make the trading of those tickets. So up i can't I bought tickets, but I can't go.
00:29:26
Speaker
And I've asked 10 friends and none of them can take the tickets. Now, instead of going, you know, to some centralized place to sell my tickets,
00:29:38
Speaker
and and pay the commission and and rely on their infrastructure, i can go to a decentralized place where I get to keep more of the proceeds of the tickets and I can rely on the decentralized infrastructure ah and and find somebody else somewhere else in the world who wants to buy those tickets. I think that stuff is is going to be cool and and I think live events are a very human thing to do, and especially in the time of work from home and and all of the other stuff that that people do.
00:30:15
Speaker
ah The ability to get out and be with other human beings is something that I i treasure. um So more of that's good from my perspective. Well, and and the the technology you're talking about is identical to the technology that's also being used to revolution to to make that not a niche at all, and that is in airline tickets.
00:30:39
Speaker
um the airline The airline industry has long been accused of just terrible, terrible infrastructure where there's that famous SNL skit where a person's trying to have a conversation with a ticket agent and there's the clackety-clack on the keyboard for about 15 seconds between each question and answer because the agent can't answer any question without going through some terrible you know experience on her terminal.
00:31:04
Speaker
And, you know, every one of us knows that the bottom of your physical ticket, if you print off ah an airline ticket, it's in big black, it says non-transferable. Well, the reason it's that way is that that none of the systems between airlines and even within airlines between planes talk to each other.
00:31:21
Speaker
And they have to be so perfectly accurate and they have to be aligned and, you know, they have to be done in such a way ah that that none of the airlines have been willing to sort of go off of their proprietary systems.
00:31:37
Speaker
And so you imagine if you get to a data integrity perspective that is so trustworthy and fast and interoperable between parties where the the the token represents a ticket attached to a certain airline on a seat, on a flight, on a day at a time,
00:31:58
Speaker
it's suddenly agnostic as to those things. It does not matter whether it is today's ticket or tomorrow's ticket, you know, Delta or United. And the opportunity to improve a critical piece of infrastructure is going to be leveraged off the same technology that people going use to sell tickets to live venues. It's it's the same operation.
00:32:21
Speaker
And um I find that incredibly compelling for the future.
DeFi in Governance and Data Control
00:32:26
Speaker
And they become tradable too. And DeFi protocols allow people to trade those those airline tickets.
00:32:33
Speaker
ah Although that that's that that is interesting because if you've ever tried to change the name on an airline ticket, it is virtually impossible to do for security reasons. So I wonder if ah wonder how that's going to get solved. but oh this is why well But this is why I love the – we just talked about all the things necessary in one conversation. You have self-sovereign identity combined with tickets, and you solve the security problem.
00:33:03
Speaker
i If I may, and and I really, i all great ideas, right? And I think the opportunities are are frankly limitless, but but maybe one, to offer one additional example that is really leveraging sort of a different value proposition from from the the decentralized protocols would be decentralized voting systems, right? Are where the votes are recorded on a blockchain, which which really is leveraging the transparency, the i immune immutability and security, preventing tampering and fraud.
00:33:38
Speaker
you know Like I said, like I think the opportunities here are are limitless, but we also have this this governance um and a system of of voting that can be incorporated into decentralized protocols to effectively ensure that the votes are completely transparent um and you know and to be leveraged from presidential elections to you know homeowners association organizational voting.
00:34:06
Speaker
um And so I do think there's there' is just so much we could revolutionize. and and in addition to sort of the self-sovereign identity, just layering onto that, which is really an extension of this, is owning your own healthcare data, right? Owning your own educational credentials the ability to really share that with whom you would like, but always to have ownership of it.
00:34:29
Speaker
And the monetization structures that can come with that. It's really fascinating. Well, and it's funny that you mentioned that, and I couldn't agree more. um i i have a vivid memory ah the first time that ah Trump ran for president and won, and then the second time that he ran and lost,
00:34:55
Speaker
both times i raised in a local state working group on blockchain the prospect of pitching lawmakers ah the opportunity to propose bills to study how to integrate blockchain into voting and improve voting reliability and transparency and trust And I mean, I was almost shouted out of the room before I could even finish my sentence because there was so much hysteria and fear. i mean, blockchain was analogous to danger, risk, um criminality, fraud. Like that that was the name of the game both four and eight years ago in this space.
00:35:37
Speaker
And, you know, you made a point earlier that like this administration is kind of wrapping its arms around the crypto industry. it's It's not a long throw of a stone. You know, this is also administration obsessed with election results.
00:35:51
Speaker
and And, you know, it would be really cool to have someone with the right ear of the right people whisper the words, if you really want to know, right, go go look at how this could do that for you. And you would never again have to argue on on public TV who won an election. You could just know.
00:36:12
Speaker
and And so i I agree that that might be, it might rise to the top actually of of interesting value propositions that were once thought to be the end of the train. They seem to be much closer to the locomotive now.
00:36:26
Speaker
I would say here disposition is also very important. On the complete other side of the spectrum, I've heard anecdotes from from conversations with regulators and some emerging economies that are known for corruption, that when presented with a blockchain-based voting system or ah blockchain-based system to encourage more transparency on budget systems or anything else, the reaction was that it was too much transparency and they didn't want it because it was too transparent.
00:36:55
Speaker
so So I think to my point here is really echoing all the points that have been raised in in the working group and and beyond. We need more collaboration. We need more standards. We need more harmonization and continued engagement to get this to happen.
Future of DeFi Regulation
00:37:12
Speaker
And i know there will be more. And I think those are all excellent examples and we're almost out of time. I think that they were all very diverse from the event tickets, the airline tickets.
00:37:23
Speaker
I like the example of the voting systems to prevent fraud, but I think it also can make it more accessible and increase political participation if you had it on the blockchain, if there was also this way to authenticate it.
00:37:35
Speaker
Um... And also what Joe mentioned about the the self-sovereign identity. And I think that all of this shows us that the applications are way more than what is out there. DeFi is evolving fast.
00:37:49
Speaker
But to wrap it up, if you were to rewrite this report a year from now, what's one major update that you think you'd have to include? Like what's developing that could change the conversation around risk, regulation, or even adoption?
00:38:04
Speaker
i would say... that one of the advances that is happening right now in scholarship that I think is going to have a ah significant effect on the development of regulation and policy, if it's played correctly, is ah sorting between the participants in a decentralized environment between intermediaries and non-intermediaries and then approaching them from a regulatory perspective differently.
00:38:36
Speaker
ah There's a professor ah at SMU, Carla Reyes, who has been um deeply involved in this research. And she's written, she wrote a paper ah couple years ago basically alleging that the government has been lazy in just designating every participant in the blockchain ecosystem as an intermediary of sorts. And then trying to apply regulations and laws that are meant for intermediaries upon the participants that sometimes are not fulfilling an intermediary role.
00:39:05
Speaker
And so she advanced that argument in a paper. and then um And then recently, I actually got to work with her on on a follow-up to that paper that argues that we should designate certain participants in the ecosystem as some form of digital public infrastructure.
00:39:25
Speaker
And then that totally changes the way that a regulator would think about from a a law taxonomy perspective, where is the source of regulating that and where are its limits? So layer one protocols, for example, miners, node operators, for people who participate in true staking for consensus purposes, they're they're fulfilling more of a digital public infrastructure support role and provision role, so are the developers who develop this code, then they are a participant in any transaction happening on it.
00:40:00
Speaker
And that's why I like what Lee said earlier, that you're you're really, it's ah it's ah it's a user to protocol transaction, and that reinforces that but concept, but there is that there is a a layer of this that is infrastructure in nature, and when you're regulating it, you should think about it more like people who regulate power.
00:40:20
Speaker
and ISPs and people who develop TCP IP protocol improvements as opposed to regulating them as banks or payment providers or payment processors.
00:40:32
Speaker
and And I think that if that scholarship evolves into lobbying and evolves into discussions on the floors of government and in regulators' houses, that to me will greatly advance the quality of regulation because it will focus the regulations that need to happen that are that are restrictive on the participants that pose the risk. And it will free up the developers and participants in the infrastructure that just makes the trains run on time to do their job without the fear of restrictive regulation.
00:41:11
Speaker
Joe, please send me a copy of that paper. I mean, this is an issue that we've been advocating on for the last several years, and it's one of our two critical pillars for this year.
00:41:21
Speaker
ah Because we see what's going to happen with the stablecoin bill in the U.S., what's going to happen with a new version of a market structure bill in the U.S. And we worry about this issue and whether or not um infrastructure is going to get swept up into intermediary when that is definitely not the way the world should work.
00:41:44
Speaker
And so please send me that paper if it's out already. i'd I'd love to read it. I'd love for us to publicize it. pa it ah Because ultimately the nuanced discussion, and I agree with with everything that you're saying, Joe, is that these conversations and the lobbying needs to occur and more knowledge transfer to the lawmakers needs to occur so that they can really suss out. Ultimately, we have to decide, do we still need an intermediary for consumer protection reasons? Because our financial regulatory framework is there to regulate the markets, but also
00:42:20
Speaker
there's a strong policy interest with respect to um protecting the market participants, in particular, the retail. And so if we don't suss that out and get to a conclusion as to where the risks are for the consumers and the retail participants, we won't be able to solve the problem on infrastructure. If we decide where the protection needs to be for the retail participants,
00:42:44
Speaker
participants or the sophisticated investors that maybe don't need as much protection, then the lawmakers will be able to make decisions about the non-regulation of digital infrastructure, right? Or to the extent that they want to regulate it.
00:42:58
Speaker
Because that's ultimately why we have intermediaries and that's how our financial regulatory system was set up. And that's a conversation that needs to continue to be had, but we've got to get to a place of decision making with respect to consumer protection and how much is needed in these new technologies to be able to then, you know, have the right laws passed, if you will, the the balanced approach as to where the digital infrastructure is or isn't going to be regulated.
Final Thoughts and Resources
00:43:27
Speaker
I agree with you 1,000.
00:43:31
Speaker
I agree with you 1,000%, Yvette. And the only thing I would add is that's also going to be where the AML KYC rubber meets the road. because the the to Because it's not just about consumer protection. It's about you know these national security issues and and anti-money laundering and terrorist financing and sanctions and all that other stuff is going to get wrapped up in here.
00:43:59
Speaker
And hopefully we can get so the consumer protection and the what I will loosely call AML stuff and probably the tax stuff all to align so that we're not running around with different definitions depending on which issue we're looking at and just making you know more work for us lawyers instead of making things user-friendly for everybody who's doing the real work.
00:44:27
Speaker
Great. Well, i we're we're was already out of time. I think we can continue talking about DeFi and keep coming back to this. But I wanted to thank you all once again for the great examples, the definitions. And of course, I think it's quite clear that DeFi is opening the door to ah global financial system that looks very different from what most people have been used to.
00:44:49
Speaker
And it's definitely an exciting ride. And i think we'll continue to see how it plays out. So once again, thank you all for for joining us. i'm really happy we were able to do this podcast. And also for our listeners, we have added the report that we were talking about in the description of the podcast. It's also on the Owl Explains website in case you want to check it out and continue exploring the exciting world of DeFi. So once again, thank you all.
00:45:17
Speaker
We hope you enjoyed our Hootenanny. Thank you for listening. For more hootful and hype-free resources, visit owlexplains.com. There, you will find articles, quizzes, practical explainers, suggested reading materials, and lots more.
00:45:32
Speaker
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