The Defiant

Ethereum Developers in Conference at the “Wild West” are Warming to Compliance

“Compliance” would seem like an unlikely buzzword at ETHDenver, one of Ethereum’s  largest conferences, set literally in the “Wild West.” 

By: Owen Fernau Loading...

Ethereum Developers in Conference at the “Wild West” are Warming to Compliance

“Compliance” would seem like an unlikely buzzword at ETHDenver, one of Ethereum’s largest conferences, set literally in the “Wild West.”

But developers and founders have warmed up to the idea that crypto projects will need to comply with rules and regulations in order to survive.

At least seven projects participating in the event were directly involved in compliance solutions with at least five presentations addressing policy and regulation issues.

Orlando Cosme, a former lawyer in the startup and venture capital space who is building a compliance solution called Lexproof, noted a change in attitude toward regulation at the conference.

“I think there’s definitely a tone shift at ETHDenver compared to other events I went to last year,” he told The Defiant. “I think a lot of people are now accepting that there will probably have to be, for a lot of different applications, especially if the founders are in the U.S., some type of compromise.”

Cosme named the know-your-customer (KYC) process and accredited investor verification as examples of traditional financial designations which may need to be more deeply accounted for in the crypto space.

Indeed, it’s clear that, amidst a flurry of regulatory actions taken against crypto, compliance has moved from a sign of betrayal of crypto’s self-regulating ethos to something closer to a value proposition.

And it makes sense — many in the crypto space are on edge after the US’s Securities and Exchange Commision (SEC) took perhaps one of its strongest actions yet last month alleging that the stablecoin UST, and its sister token LUNA, are securities.

Some of those who bet early on tackling the hard problems around compliance say their work is paying off.

“People laughed at us because it’s f*cking hard to bring things from the real world in a legally compliant way on-chain,” Maex Ament, co-founder and current board member of Centrifuge, a project built to put debt products on blockchains, told The Defiant at ETHDenver.

Centrifuge started in 2017 and is seeing traction as the so-called “real world asset” space has shown signs of taking off — the project has facilitated over $300M in loans, according to a data dashboard by RWA.xyz.

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Originating a loan using Centrifuge necessitates creating a Special Purpose Vehicle (SPV), an independent legal entity, according to the project’s documentation. And those looking to invest in the financing opportunities must go through a KYC and Anti-Money Laundering process.

To raise money, Centrifuge also did a traditional equity round 2017, said Ament. That was a time when the dominant funding mechanism in crypto was an initial coin offerings (ICO), a simple process whereby investorssent a major crypto asset like ETH to a project in exchange for its tokens.

The SEC’s website states that some ICOs may constitute securities offerings.

Other projects involved with regulatory compliance at ETHDenver included Yug Network, kycDAO, both of which are working to bring off-chain credentials like KYC, on-chain. Others like Opolis, are focusing on enabling crypto’s swath of freelancers to remain or become tax compliant.

Ament said the team didn’t think it could fight the regulation battle around ICOs. Despite the traditional raise, Centrifuge is deep into the decentralization process and is giving control of its platform over to token holders, Ament added.

David Liebowitz, who hosts a podcast called Flywheel DeFi, thinks that stablecoins are the most important area to watch in terms of regulation in the digital asset space.

“Stablecoins are really the first and last line of defense when it comes to regulation of all of crypto,” he told The Defiant at ETHDenver. Liebowitz gave a talk on stablecoin regulation at the event and cited guidance issued by the state of New York, and also legislation drafted by the former senator Pat Toomey, as guiding lights for U.S. dollar-pegged assets.

Lexproof’s Cosme, too, said that he thought that the stablecoin space had a higher chance of seeing new legislation drafted into law, rather than the digital asset industry as a whole.

Cosme isn’t optimistic that the United States’ legislative branch will pass new laws for the digital asset industry in the near term. “Congress can pass legislation to make registration easy, in a way that makes sense for crypto companies and their business models and for their value proposition,” Cosme said, but he added that, given the legislative body’s current constituents, it is unlikely to push forward any laws of the sort.

Both Liebowitz and Cosme acknowledged the SEC’s aggressive stance taken in regards to the crypto space — Cosme said that the general outlook among lawyers is that the federal agency isn’t going to let up anytime soon.

Liebowitz echoed a similar sentiment. “The SEC isn’t playing around,” he said. “They’re really taking the mandate of protecting investors to the widest possible conclusion.”

If ETHDenver is an accurate barometer, the crypto space as a whole is adapting to a more adversarial regulatory environemnt — and some are even looking to build products for it.

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