Hot FUD: A landmark regulatory decision for #DeFi is likely coming that will serve as its DAO Report.

A few players are more vulnerable to regulatory action IMO: (1) Decentralization Flirts, (2) Permissioned Stablecoins and (3) wrapper/offchain custodians.

Thread (1/lot):

First, some history & context.

Realize #DeFi projects pose some different legal issues for regulators compared to ICOs. One difference I'll focus on a lack of clearly identifiable issuer/operator, or relatedly, issuers/operators that intentionally relinquish control post-launch.

This is important to understand, because regulators often have at least two key considerations driving their activity: 1) actual law enforcement and 2) deterrence.

On 1, pretty obvious: regulators usually need identifiable issuers/operators to hold liable and force disclosures.

On 2, the distinction is impt b/c regulators don’t have budgets to pursue every legal violation.

Instead, they take selective action against visible targets with hopes of “making examples” and preemptively deterring future violations. This lets them "leverage up" so to speak.

Also, realize that US regulators desperately want to avoid setting “bad precedent.”

This is because we are a common law system, and prior court decisions are given significant deference in later actions. "Bad" precedent can make pursuing later violations extremely difficult.

So, w/ ICOs, we saw a pattern play out highlighting the above. E.g., SEC first pursued obvious frauds, then intermediaries/platforms, and finally legit but flawed projects. Each time they further defined regulatory ambit and expanded precedent. Regulation through enforcement.

#DeFi hasn't had its "regulatory debut", but when it does, I suspect the types of players I mentioned above are more vulnerable than some "YOLO" projects b/c they are easier targets or can indirectly curtail the rest of #DeFi without regulators having to risk bad precedent.

How? Well consider the three:

Decentralization Flirts - I think of them as projects that flirt w/ decentralization but maintain critical infrastructure off chain or whose founding team (+/- affiliates) control majority of voting power on a noncumulative, majority vote network.

These are much “easier” targets than not for profit, clearly disclaimed and noncommittal "YOLO" projects, if for no other reason than there is someone identifiable operating things on an ongoing basis to serve a lawsuit to. They are also less likely to set bad precedent.

E.g. arguments for normally regulated acts in #DeFi are often “we don’t control this system,” but offchain infra gives regulators potential counters.

Here, they also avoid setting bad precedent for esoteric legal issues they might lose w/ single devs like "what is an issuer."

While many engaged in “decentralization theatre” need to do some introspecting, there are legitimate reasons for some of these approaches.

But, fact remains that many enable things that are traditionally very regulated using similar language, and regulators like what they know.

Permissioned stablecoins are also much easier for regulators to attack, especially where many custody funds in banks.

People worried about $MKR adding USDC because of individual blacklists should be asking what happens when USG demands a Curve smart contract blacklist Curve.

Similarly, the wrappers/offchain custodians that custody $BTC and other alts are another player that is more vulnerable and a potential #DeFi attack vector. Not difficult to imagine Treasury having Bitgo et al freeze unwrapping ops and the effect that could have.

In comparison, it should start to be obvious why "truly decentralized" projects aren't ideal targets and often aren't regulators' primary focus. E.g., purpose of securities laws is to ensure material disclosures and information are made for investors to make informed decisions.

Asking @AndreCronjeTech if he's bankrupt might be salacious and interesting to some, but $YFI will continue working in its current form regardless of his finances.

Disclosure from him is far less useful than a #DeFi company whose bankruptcy might mean funds are locked forever.

So, while I could be wrong, I think people expecting regulatory action against some of these experimental, no premine, no upgradeable style projects are probably going to be waiting for a while.

I'm expecting the catalytic shock to be a large player for maximum "shock and awe."

That said, a lot of these projects are much better funded and and have real businesses with vested interests in fighting compared to the ICO days.

Plus, we haven't even seen what happens when communities that can pool hundreds of millions in days self funds a legal defense.

Finally, I don't say this to discourage builders. If anything, I think it should encourage people.

If you want to stack $$, you should be subject to laws applied to all commercial speech. Regulations have a role in good markets, and we shouldn't bemoan application wholesale.

But, if you want to operate nimbly and experiment, I believe there are compliant paths forward that align with our legal principles.

Yes, it means your ability to profit and manage the enterprise will be limited. That's how it should be. But it doesn't mean you can't get weird.

Final addendum since I’ve gotten a lot of DMs:

There is NO specific imminent action motivating this thread. I wouldn’t tweet what I knew anyway.

Sorry for any unintended heart attacks. Please also don’t reach out for business, not an ad or looking, love (most) of my clients.