Thread by @boironattorney

1. I respectfully, strongly disagree with this take on permissioned DeFi, which is plain wrong in many respects. Permissioned DeFi is not required under law or desirable as a policy matter. A thread.

https://twitter.com/Brett_FTXUS/status/1473731796307173387

2. Let’s start with the benefits of DeFi:
- Permissionless
- Censorship-resistant
- Trust minimized
- Transparent
- Composable
- Efficient
- Secure personal data

3. Permissioned DeFi strips away each of those benefits:
- Permissionless -> permissioned
- Censorship-resistant -> censorable
- Trust minimized -> trust necessary
- Transparent -> opaque
- Composable -> siloed
- Efficient -> inefficient
- Secure personal data -> honeypot of data

4. Clearly, all benefits of DeFi get stripped away. Why is this bad? Let’s go through each point regarding the goals @Brett_FTXUS contemplates:

5. (a) Market oversight: manipulative behavior is not preventable; instead, that behavior is addressed after it has already occurred. In DeFi, a record of the behavior is forever recorded and tied to a wallet address controlled by an identifiable person (more on this below).

6. In permissioned DeFi, the name of the person behind a wallet is known, making it easy to identify that person. To be clear, in permissioned DeFi, unless it is centralized (which is no longer permissioned DeFi but CeFi), preventing the behavior still would be impossible.

7. (b) Financial crime prevention: FinCEN guidance on AML has been very clear on non-custodial, peer-to-peer transactions, like in DeFi protocols. No KYC for AML purposes is required. Why would we ever voluntarily insert KYC for AML purposes?

8. In DeFi, a transparent record exists, allowing for tracking all onchain transactions, which FinCEN has relied on successfully. In permissioned DeFi, we’d get the same result, but faster and easier, while losing significant benefits. It’s a bad tradeoff.

9. As for sanctions, nobody facilitates financial transactions in DeFi protocols; thus, DeFi protocol devs have no KYC obligation for OFAC. Whether users of the DeFi protocol have OFAC obligations depends on many factors, including whether OFAC has jurisdiction over them.

10. It gets trickier with UIs but those will consistently be decentralized soon too and the same rationale will apply. So, again, why would we ever voluntarily insert KYC for OFAC purposes on a global user base?

11. (c) Risk controls: controls to ensure systemic risk doesn’t exist for protocol participants and the broader financial markets does not require permissioned DeFi. Identify the risk, control it in the protocol parameters and the issue is solved. Permissioned DeFi adds nothing.

12. (d) Tax laws: All DeFi transactions are transparent, which means all taxes owed can be traced. It requires IRS to impose reporting obligations on CeFi (which I don’t advocate for but is no worse than permissioned DeFi) and trace flows out of CeFi into DeFi. Pretty simple.

13. To some other points:
It is as true that DeFi is a tax evasion vehicle as it is that bitcoin is a tax evasion vehicle. Both are terrible tools for tax evasion. Blackbox CeFi with no tax reporting obligations results in a much more manual and difficult task for regulators.

14. @Brett_FTXUS says DeFi protocols will need to comply “once regulations are in place.” They already are in place, and properly developed DeFi protocols comply with those regulations as outlined above. So, DeFi protocols absolutely do not operate outside regulations.

15. CeFi cannot understand how DeFi would be regulated differently. It’s simple: policy makers will realize that permissionless DeFi offers inherently better protections to consumers and investors. Imposing additional, centralizing regulations would harm their constituents.

16. It’s absolutely not desirable for a centralized entity to be DeFi gatekeepers. It reintroduces, among other things: (i) personal information honeypots, which privacy laws seek to address but become unnecessary when those honeypots don’t exist due to permissionless DeFi;

17. (ii) discrimination (as @Brett_FTXUS acknowledges), which banking, consumer protection and lending laws seek to address but become unnecessary when that discrimination is impossible due to permissionless and censorship-resistant DeFi; and

18. (iii) inefficiency resulting from cost and time involved with KYC. In CeFi, you want those inefficiencies to exist to ensure trusted activities hard handled properly, preference isn't given, etc., but those concerns don't exist in DeFi.

19. In addition, it is untrue that once you get past the KYC gatekeepers, DeFi is just as good as it would have been without gatekeepers. Why is that?
(A) less liquidity b/c capital pools are split between KYC’d and non-KYC’d pools, which increases costs;

20. (B) less composability because only KYC’d protocols and pools can interact with other KYC’d protocols and pools;
(C) less efficiency because of the human resources, capital and time involved with interacting with other KYC’d protocols;

21. (D) less censorship-resistance or permissionless use because once you get past the KYC’d gatekeepers, they can decide your risk profile is no longer satisfactory for them and revoke access; and

22. (E) centralized market risk because KYC gatekeepers can remove users in a manner that can impact market conditions in the protocol/pool for all users based on the centralized KYC gatekeepers’ decisions.

23. Nobody should want a fundamentally worse system that neuters the benefits of DeFi. Instead, consider the policy objectives that DeFi technology solves at the outset so that centralized infrastructure isn’t needed to try to address on the backend deficiencies they create.

24. This thread may seem like a harsh response to @Brett_FTXUS. It shouldn't be interpreted that way as I understand where he comes from in his thread. But propagating (unintentionally) falsehoods that destroy DeFi benefits can't be allowed to stand. We need permissionless DeFi.