Hacks, regulation, front-running, impermanent loss…is the jig up for DeFi? The US Securities and Exchange Commission (SEC) seems to be stepping up their efforts to regulate the Decentralized Finance (DeFi) Industry and has even gone as far as entering into a partnership with a Blockchain Analytics Firm. Does this spell Doom for DeFi? Or is it just another ham-fisted attempt by authorities to put a muzzle on Blockchain?
‘War is Peace, Freedom is Slavery, Ignorance is Strength’
For those of you who don’t know, George Orwell ‘s prescient novel Nineteen Eighty Four was written several decades ago and first published on June 8th 1949, about four years after the end of World War II. The narrative outlines a dystopian world in which surveillance, subservience and suppression are the order of the day. Individual behavior and critical thought are violently discouraged, and what constitutes ‘The Truth’ is horribly (and deliberately) convoluted to say the very least. Winston Smith, the novel’s protagonist, despises ‘The Party’ and their tyrannical Thought Police and dreams of breaking free from the chains of the stifling world in which he finds himself.
The cover of the first edition of Orwell’s Nineteen Eighty Four
Despite being several decades old, Orwell’s novel is still regarded as one of the greatest written in the past century, and possibly ever. This is because the Indian-born writer based the totalitarian world of Nineteen Eighty Four on Soviet Russia under Joseph Stalin and Nazi Germany under Adolf Hitler . In other words, Nineteen Eighty Four is only fictional insomuch as its characters and course of events, but the attitudes, ideologies and values reflected therein are very much part of our modern reality.
And if you look at our world today, it’s populated by all kinds of organizations that serve to ‘safeguard’ and ‘protect’ us from our own thoughts, interests and behaviors. Social media sites like Twitter , YouTube and Facebook are quick to deplatform anyone deemed guilty of wrongthink (a term coined by Orwell in Nineteen Eighty Four) and punish any dissenters in increasingly bizarre and invasive ways (such as sending users messages for engaging with certain kinds of content or using words that are ‘troublesome’). Whether we like it or not, our activity is monitored, recorded and even used to manipulate our behavior.
This is reminiscent of Philip K. Dick ’s 1977 novel A Scanner Darkly in which a large portion of society is addicted to a drug known as ‘Substance D’ and citizens are constantly monitored by ‘holo scanners.’
The 2006 cinematic version of A Scanner Darkly employs interpolated rotoscoping which, when combined with live camera footage, results in an animated aesthetic
The SEC’s Eye of Providence
On August 12th 1986, former US President Ronald Reagan said:
The nine most terrifying words in the English language are ‘I’m from the Government, and I’m here to help.’
Those words probably ring in the ears of crypto and DeFi enthusiasts like the aftershock of a shotgun shell in an empty cellar. And the resulting tinnitus doesn’t ever seem to dissipate either. Government agencies exist in order to protect us from various threats, and there’s no bigger threat in this universe than your own damn decisions citizen! Put down the smartphone and stop trading sir! DeFi is risky and you could lose all your funds! says the officer as he draws his taser with both hands. Now, unless you were born yesterday, it’s no secret that there are risks in DeFi and that anything that goes wrong is pretty much your problem and your problem alone (at least this stage).
But have no fear! The SEC is here to make sure that you are abundantly aware of the risks associated with DeFi trading, but moreover, that they are able to keep tabs on DeFi transactions in a much more ‘intimate’ way. Lacking the technical knowledge and know-how of the space themselves (surprise surprise!), the SEC has called on the assistance of Blockchain Analytics Firm AnChain.AI. According to The Daily Hodl , AnChain has entered into a deal with the SEC so that they can better understand and regulate the world of DeFi. And as we know, regulation is always a bad thing…or is it?
A brief video outlining AnChain.AI and their forensics platform
Now I don’t know about you, but this doesn’t exactly scream surveillance and spying to me. I’m not entirely sure the SEC is looking to track every transaction or punish people using crypto and DeFi across the board. I’m also not saying their intentions are entirely ‘honorable,’ and while it’s good to be wary of anyone from a government institution, it’s also foolish to assume they’re going to do their utmost to scuttle an entire industry worth billions of dollars. Having said this, there’s no doubt that the SEC is looking to protect their interests as well as the interests of other entities. What exactly this entails I can only guess, but it is something of a concern. As for AnChain’s decision to work with the SEC? Well, let’s just say most people seem to think they’re, uh…traitors.
https://t.co/KssYwDPJ1l is committed to a safe, transparent, and fully accessible #DeFi ecosystem.— AnChain.AI (@AnChainAI) August 27, 2021
We're proud to work with the SEC to protect all #Crypto stakeholders in the virtual asset economy, and to contribute our technology to critical regulatory oversight efforts. https://t.co/rfdomzXspr
And you sold your soul to the great satan. Good luck with that.— EDON (@EvanDonoghue5) August 29, 2021
Indeed it seems like AnChain.AI have sold their soul to ‘The Great Satan.’ Come on guys, if it wasn’t them, it would just be someone else, right? Also, not to be funny or anything, but there have been a couple of DeFi hacks in the past few months and it’s unsettling to say the least.
I don’t think it’s bad that there’s some kind of watchdog in the DeFi space. Do I want that watchdog to be AnChain.AI under the auspices of the SEC? Not really. I would much prefer it that protocols work to secure and govern themselves responsibly rather than be subject to scrutiny from centralized entities, regardless of how good their intentions allegedly are. So we’re at a bit of an impasse in some ways: either we hope that DeFi evolves naturally and that truly robust protocols come into being sooner than later, meaning there will undoubtedly be some collateral damage along the way, or concede to some regulatory oversight from centralized agencies, detracting from the whole point of crypto and DeFi, but protecting investors to a lesser or greater degree.
In all honesty, while both scenarios have their downsides, I think I would still prefer the former to the latter. However, the reality is that both will happen simultaneously. It’s not really a choice, you see. As I’ve said in the past, regulation doesn’t necessarily stifle innovation. In many respects, it actually encourages it, allowing for more inventive solutions to problems to be found. The fact is, you can’t protect everyone from every single threat that’s out there, whether you’re a DeFi protocol or the SEC themselves. However, you can have an influence on the space, and the degree of that influence also depends on the other actors operating within that space and how they deal with your actions.
Good Cop, Bad Cop
I get the feeling this is kinda what the SEC are doing in the cryptosphere. In fact, in a very recent interview with CoinDesk , Hester Peirce , the Commissioner of the SEC, has said that she and SEC Chair Gary Gensler ‘don’t see eye to eye’ on what exactly constitutes a security when considering these ‘token offerings.’
"One area where the chair [Gary Gensler] and I don't see eye to eye is the lack of clarity around when something is or is not a security," @SECGov commissioner @HesterPeirce says.— CoinDesk (@CoinDesk) September 2, 2021
She unpacks the Token Safe Harbor Proposal 2.0, DeFi regulation and more: https://t.co/fwaQe28lgY pic.twitter.com/DdYxi3M3dx
Peirce states that she and Gensler don’t necessarily agree on what makes a cryptoasset a security
It’s a sensitive issue and one that I think the SEC is trying to approach carefully without rocking the boat too much, believe it or not. That doesn’t mean that I don’t wonder about it and ask myself when there will actually be more clarity on these issues, because there always seems to be talk of regulation and providing more clarity, but very little follow through. It’s annoying, but government organizations playing games is hardly a new thing. In fact, they quite literally make a career out of it, toying with policies and laws but only fully committing when there’s enough cause for it, meaning money to be made or interests to be protected.
But even listening to Peirce, who seems eloquent and nice enough, makes me believe that these officials really have little to no clue about crypto, let alone DeFi and the protocols and smart contracts maintaining the ever-growing ecosystem. It feels a little desperate and futile to me, and to a large extent, ham-fisted.
SEC be like…
Instead of trying to understand the industry more and educating themselves, the SEC is outsourcing parts of it to take a not so hands-on approach to regulation. That’s not how you build rapport with a community, and it’s certainly no way to handle policy. There’s a certain lexicon within the cryptosphere that has to be used intelligently, and until we start hearing some information that demonstrates an actual understanding of crypto and DeFi, my thoughts are that attempts at regulation will be ill-informed at worst and completely ineffective at best.
The SEC are pulling at straws and trying their best to understand something using methods that just don’t make any sense. They might want to be Big Brother and pull all the strings, but people in DeFi have read Nineteen Eighty Four and have prepared for this eventuality. If US regulators aren’t careful, they’ll only serve to exacerbate the nation’s current economic crisis and send a lot of money and innovation offshore, and that’s not something any good American would want.