Weekly Interest Rate Roundup: Oct 18

The story of the past week has been regulation. SBF made waves with two particularly controversial assertions:

1. OFAC compliance should be enforced at the application layer through the use of blacklists.

2. Any UI that allows users to access DeFi should be made to register as a broker/dealer.

Like many on crypto twitter I think that these proposals would effectively kill DeFi. The first idea is, in my opinion, basically impossible to implement without blockchain-level censorship. Without blockchain-level censorship, I think that OFAC blacklists would wind up being trivially easy to circumvent.

If the Uniswap smart contracts checked every user against an on-chain black list, you could just transfer funds to a clean address directly prior to interacting with Uniswap and the protocol would be none the wiser. If you believe that regulators aren't total muppets, you would imagine that they wouldn't accept this.

In my opinion, the logical end state here would have to be that either regulators try and force ETH validators to enforce the blacklist. If they don't, regulators would have to accept that they're powerless to enforce sanctions. If you get to a place where OFAC censorship is baked into the base-layer you'd have to ask yourself, "what are we all even doing here?"

SBF's second point, that all DeFi frontends should be registered broker-dealers, is just flat out unbelievable. I think it's a gross attempt to destroy the innovation and industry that made him his money now that he views DeFi as a potential threat to his business.

Broker dealers are highly regulated entities because they take custody of your funds and are given the power to use them at their discretion. The existence of the broker dealer is a vestige of the traditional system. By the nature of this system it is impossible to execute transactions WITHOUT a trusted intermediary. And so naturally, within this system, you need these trusted intermediaries to act according to very strict regulations or all hell would break loose.

But the idea that you should subject DeFi frontends to these same regulations ignores the fundamental innovation of DeFi - this technology removes the need to trust anyone at all. DeFi protocols are non-custodial. They don't have discretionary control over your funds. They shouldn't be regulated as such. Particularly when doing so would snuff out such a promising industry so early in its life.

We'll see what happens with all this. I wish there was something I could do apart from yell on twitter. Alas, I am but a humble entrepreneur in search of product market fit. Let's hope yelling is enough.

Teddy