Will multiple projects restrict IP, front-end compliance, and open protocols become the new normal for DeFi supervision?

BlockBeats reported that on November 1, the Web3 communication protocol WalletConnect officially announced that it has restricted the availability of the WalletConnect protocol in Russia in accordance with the latest laws and U.S. Treasury Department Office of Foreign Assets Control (OFAC) guidelines.

Many DeFi projects choose IP restrictions and other means to avoid violations

BlockBeats previously reported, on October 23, Solana Ecosystem’s leading DeFi protocol Marinade Finance blocked British users from accessing the website due to “compliance concerns” about the FCA regulations of the British regulatory agency. The landing page for UK users displays a warning message and states that users can withdraw liquidity, claim delayed notes or delay unstaking through our SDK. In addition, Solana ecological DEX Orca Finance has also added geo-blocking functionality for UK users.

Although Marinade Finance has yet to make an official statement, the move to block access to UK users has a lot to do with the FCA’s new regulations aimed at regulating the marketing of crypto-related products or services.

This isnt the only recent instance in the crypto space of being restricted based on a users IP address. Previously, modular blockchain network Celestia announced in September that US users were prohibited from receiving TIA token airdrops, and dApps such as 1inch had already imposed geographical restrictions on US users as early as 2021.

In addition to restricting the use of users in specific countries or regions, VPN use may also be prohibited. On May 9, the decentralized stablecoin protocol MakerDAO announced the launch of Spark Protocol, a DeFi lending protocol centered on the stablecoin DAI. However, the US region or IP address is not available, and its terms of service also prohibit US users from using VPNs to hide their US residence. users in other non-US regions are also prohibited from using VPN.

In September, according to BlockBeatsreportAfter the U.S. CFTC filed charges against Opyn, Inc., ZeroEx, Inc. and Deridex, Inc., information on the official website of the decentralized options platform Opyn showed that Opyn has restricted the use of users in the United States. The regulations they are accused of violating are Commodity Exchange Act (CEA) and CFTC regulations, including failure to register as a Swap Execution Facility (SEF) or Designated Contract Market (DCM), failure to register as a Futures Commission Merchant (FCM), and failure to register as a Futures Commission Merchant (FCM). Can adopt customer identification plan, etc.

The decentralization of DeFi may only be protocol decentralization in the future, and the front-end of DeFi will choose to accept supervision to achieve compliance development.

How do governments plan for DeFi regulation?

The new UK crypto regulations mentioned at the beginning of the article refer to the UK Financial Conduct Authority (FCA) cryptocurrency marketing rules that came into effect on October 8. The regulations say that from October 8, cryptocurrency services will be classified as a high-risk investment category for UK marketing materials, and all platforms globally will need to display clear risk warnings to UK customers and have any public promotions approved by authorized companies. . Failure to comply with the rules by continuing to market crypto assets to UK customers may constitute a criminal offense punishable by an unlimited fine or/and imprisonment of up to 2 years.

This year, UK crypto policy regulationContinue to tighten, causing many CEX to announce the suspension of cryptocurrency trading services in the UK. The supervision of the encryption field in the United States is also in dire straits. Every piece of news involving the SEC or CFTC is eye-catching, and the encryption supervision of the United States has always been merciless to DeFi.

In the United States, various aspects of DeFi may be regulated by multiple federal agencies, including the United States Securities and Exchange Commission (SEC), the U.S. Commodity Futures Trading Commission (CFTC), and the U.S. Financial Crimes Enforcement Agency (Financial Crimes Enforcement Network, FinCEN), the Office of Foreign Assets Control of the US Department of the Treasury (OFAC), and the Internal Revenue Service.

The applicable scope of regulations issued by these regulatory platforms is not limited to the DeFi field, so more and more encryption companies have compliance directors or positions dedicated to policy departments.

Related reading: The United States launches a whole-of-government crackdown on the encryption industry, are encryption resources fleeing? 》

In order to prepare for encryption legislation, the U.S. House of Representatives Financial Services Committee created the Digital Assets Subcommittee (subcommittee). This is the first time in the history of Congress to establish a dedicated agency for digital assets; secondly, there is currently a strong hostility towards encryption among Washington regulators. A group of politicians are turning the crackdown on crypto into a form of political correctness, and this atmosphere makes regulatory pioneers like SEC Chairman Gary Gensler feel comfortable in implementing policies.

U.S. Senator Elizabeth Warren wants to build an anti-encryption army in the United States

In addition to various countries promulgating regulatory bills, the International Financial Action Task Force (FATF) has also issued new guidelines for virtual asset service providers (VASPs), focusing on DeFi. FATF recommends that its members do not KYC and proper AML monitoring can combat DeFi. FATF released a report on June 27 urging countries to quickly implement FATF recommendations on virtual assets and VASPs, including travel rules, and also emphasized the financial risks of DeFi and peer-to-peer transactions.

Maybe you think that IP address blocking is too one-size-fits-all, but because we are still on the road to exploring compliance, projects such as Marinade Finance have set risk tolerance within the risk tolerance based on many factors such as location, products and services provided, and the location of front-end users. blockade plan. In the traditional world with centralized supervision, financial decentralization cannot be achieved by just a few words in a white paper. It requires step-by-step exploration of the compliance path in the crypto world.

Abandoning the front-end guarantee agreement, Uniswap explores the Web3 entrepreneurial outlet

Uniswap, the leader in DeFi, has also suffered a lot in terms of compliance, but it is indeed a leader in exploring DeFi compliance.

Last week, Uniswap announced a 0.15% exchange fee for certain tokens in its web application and wallet. This decision caused dissatisfaction among Uniswap token holders and also aroused community concerns about the future development of Uniswap Labs. Lots of speculation.

Crypto researcher Haotian (@tme l0 211)expressThe Uniswap protocol and Uniswap labs are two different things. Uniswap is trying to inform the majority of Uni community users through this extremely controversial unilateral decision that only the Uniswap protocol is decentralized. Both the Web and mobile terminals are owned by Uniswap. The additional charges are probably just the beginning of centralized measures. It will also be inevitable for these channels to implement KYC supervision strategies, because no company can develop without compliance issues. There is no vote on the 0.15 fee rate, it is directly announced, which already explains the problem. The vote is only valid for changes in the Uniswap protocol itself.

Uniswap update logo in 2021, the Uniswap protocol logo is on the left, and the Uniswap Labs Logo is on the right. The image source is from Uniswap.org

The practice of front-end charging and open source protocols has also brought new revelations to other DeFi projects on how to make profits and comply with regulations. Previously, BlockBeats wrote an article that conducted a comprehensive analysis of Uniswap. Uniswap labs has a very clear idea in this regard. They are going to take such a path-splitting the team (front-end) and the protocol.

Related Reading:Uniswap, the most successful American Internet Fintech company under the Web3 dividend》

The Uniswap protocol is the largest decentralized exchange and automated market making protocol on Ethereum... The Uniswap Labs team is a major contributor to the Uniswap protocol and is now focused on building a set of products to support the Uniswap ecosystem. This Uniswap official websiteRecruitment interfaceThe words indicate that the goal of divesting the team and the agreement has been on the agenda as early as the founding of the company.

One of the main purposes of Uniswap’s divestment of the protocol and team is to gain more room for maneuver and even advantages in terms of regulatory compliance.

Will front-end compliance and protocol openness become the new normal for DeFi supervision?

WalletConnects decision to ban its use in Russia puzzled some people in the community. It does not hold an MSB (US Money Services Business Registration License), does not hold funds, does not manage payments, and does not issue transactions. It only sends signed messages from A point is sent to point B. Well-known KOL and CEHV partner Adam CochranexpressI cant find any OFAC order that attempts to extend its applicability in such a way that WalletConnect should even think they would fall into it.

But within the broader context of the U.S. sanctions bill, OFACs resolution may apply to technology providers who may not even have access to any funds in the transaction.

Marinade Finance and Orca Finance of the Solana ecosystem impose restrictions on British IPs, or Spark Protocol restricts access to VPN users, which are just compliance explorations of DeFi projects under todays policy background.

Recently, Uniswap was able to enable the front-end charging function, which is also due to the operation method of team and protocol separation. As a trading protocol that provides tokens or unregistered securities, Uniswap cannot directly bring revenue to the team by charging fees due to regulatory reasons. However, Uniswap Labs can build compliant front-end user products based on this open protocol and create revenue through this product.

If a certain token is sued by the SEC or other regulatory authorities like HEX, its front-end trading can be stopped immediately, so that the team and the product itself are freed from the regulatory risks they may face.

It can be predicted that in the future, more DeFi projects will join the front-end and protocol stripping queue, using a compromise approach to realize the original decentralized vision of encryption. However, the strategy of front-end compliance and protocol openness satisfies the desire for control of regulatory authorities. Whether it will affect encryption users confidence in products is a question worthy of attention.

Note: Part of this article is from an old draft and will be re-posted after updating project dynamics.