Author: Chen Mo Source: X, @cmDeFi

Core point: Understand under what circumstances DeFi will be Identify as a "broker", explore the underlying logic and living space in decentralization and regulatory attitudes, and find the perfect exit.

Expanding the definition of broker: Regulations believe that DeFi transactions are very similar to the securities trading process. DeFi brokers need to submit information reports to the IRS and help customers Accurately declare taxes and ensure compliance (KYC, anti-money laundering, etc.).

Determined DeFi broker: provides services to facilitate transactions and has the ability to obtain customer information.

Impact on DeFi: Choose to accept broker recognition or decentralize the project. The higher the degree of decentralization, the lower the possibility of being recognized as a broker. .

The perfect future exit for DeFi: decentralized front-end, non-upgradeable contracts, on-chain autonomy, and token functionality to build your own network.

1/4 · Background and Reasons

This regulation is sponsored by the U.S. Department of the Treasury and The IRS initiated that due to decentralization and anonymity, digital asset transactions often lack the information transparency in the traditional financial system, resulting in huge challenges for tax supervision. The regulations list the similarities between the securities industry and the DeFi industry in terms of operational processes:

Trading instructions -> Transaction matching and execution -> Transaction settlement

In the securities industry, brokers send clients’ trading instructions to trading centers (such as the New York Stock Exchange or Nasdaq). These platforms are responsible for matching buyers and sellers. Order. In the DeFi industry, regulations believe that there is also such a "broker" role, and the broker needs to submit information reports to the IRS, help customers accurately declare taxes, and ensure compliance (KYC, anti-money laundering, etc.).

So, we mainly discuss under what conditions which roles in DeFi will be recognized as "brokers". Regardless of whether the regulation will be approved for implementation and in what form, our main analysis goal is the underlying logic and living space of decentralization and regulatory attitudes.

2/4 · Expanding the definition of "broker"

Traditionally, "broker" ” is limited to trading agents in the securities industry or intermediaries that directly hold client assets. The main content of this regulation is to expand this definition to apply to the field of digital assets. The new regulations require brokers to file returns with the Internal Revenue Service (IRS) detailing their clients' trading information, including gains and transaction details, in an effort to improve tax compliance, meaning the potential for tax payments.

The regulatory tendency that can be interpreted here is that although ETH When the ETF was passed, there was a preliminary definition and distinction between "securities" and "commodities". Digital assets that meet the conditions are more likely to be defined as commodities and cannot be directly classified as securities. However, the "broker" proposed by this regulation "Extended, its core goal is to establish an information reporting mechanism similar to securities trading, so in essence it can still return to the issue of how to define DeFi protocols and assets.

The regulations expand the definition of "broker" to explicitly include the following types of participants:

Digital asset intermediary: An individual or entity that provides services to customers to complete digital asset transactions, including exchanges, custodial wallet service providers, etc.

DeFi platform participants: including non-custodial platforms that do not hold customer private keys but provide transaction services through protocols or smart contracts.

The core here lies in the word "intermediary". Needless to say, individuals or entities that provide services to customers. Exchanges and custodial wallets are not particularly big. Controversy, the controversy lies in how to define the "intermediary role" in DeFi activities. In summary, the following two key factors are:

Provide services to facilitate transactions

Have Customer information acquisition ability

Remembering these two judgment factors, let’s further break down the roles of all parties in a DeFi project:

Front-end service provider: Provide users with friendlyA good interactive interface enables them to interact or trade conveniently.

Protocol operator: Provides core protocols or smart contracts for executing transactions (such as Uniswap, Curve and other AMMs).

Verifier or settler: Responsible for recording transactions on the distributed ledger (blockchain).

The regulations pay special attention to front-end service providers and protocol operators because their services directly "facilitate" the completion of transactions. For validators or settlers, if a participant only provides verification services for the distributed ledger (such as a blockchain node or miner) and does not directly participate in or facilitate transactions, it will not be considered a broker. So just discuss 1 and 2.

The entire analysis process will run through Uniswap as an example, because it is the only one where each situation accounts for some case.

1 It is basically uncontroversial. Front-end service providers must belong to the "intermediary" role of brokers, especially front-ends like Uniswap currently. The status of charging fees will strengthen the tendency to be identified as a broker.

2 The protocol operator is more controversial because, strictly speaking, a non-upgradeable smart contract is not controlled by any individual or entity. It does not require permission and cannot be tampered with. characteristics, will the project party/developer that provides this smart contract be defined as a broker?

Back to two key defining factors: providing services to facilitate transactions + having the ability to obtain customer information

If we take the current Uniswap as an example, the front-end service is provided and maintained by the project party. It provides 100% services to facilitate transactions and charges for this service. At the same time, it has the ability to record and obtain user information. (For example, adding KYC or transaction terms on the front end, etc.)

Then we assume a situation. If the Uniswap team gives up providing all services and completely withdraws from the project, then in theory users can still complete the transaction purpose by directly accessing the AMM smart contract deployed by Uniswap. This is because once the smart contract is deployed, it will always exist on the chain. At this time, AMM becomes a decentralized tool.In a centralized environment, project parties cannot obtain user information, which does not meet the second defining factor. Although Uniswap has deployed an AMM contract to allow users to trade, it no longer has the ability to "actively" promote transactions and obtain user information. ability, the regulations may not be able to find applicable broker objects.

So, the conclusion is that the higher the degree of decentralization of the project, the lower the possibility of being recognized as a broker.

Summary, several core features of decentralized projects:

Automation of smart contracts Operability: The core transaction functions are implemented through smart contracts deployed on the blockchain. The contracts are immutable and anyone can interact with them without permission.

No centralized management: If the project side exits (for example, stops maintaining the front-end interface), the smart contract can still run and does not rely on any centralized entity.

Front-end service independence: Even if the official front-end (such as Uniswap's official website) goes offline, third-party developers can build their own front-end to interact with smart contracts.

Unable to control customer information: Since on-chain interactions are completely trustless, project parties usually cannot obtain customers’ identity information or transaction data.

3/4 · Impact on DeFi

In the early days of DeFi, most projects The ultimate end point is to move towards decentralization, and ultimately hand over the project to the community for self-governance and run completely on the chain. However, with the development of the times, everyone has discovered that realizing this ideal is not as simple as imagined. Most projects gradually disappear from the market after leaving the project side. The main reasons are as follows:

The project party itself left a lot of mess, soft Rug in the name of decentralization

The overall market awareness is not enough, and there needs to be Centralized guidance and promotion

The project itself has no problems, but it is not mature enough and the community does not have the ability to govern itself and promote project development

(1) DeFi that requires centralized participation< /p>

So in this cycle, many ceDeFi projects have begun to rise. Since pure DeFi projects are currently unable to achieve the goal of "decentralized finance", it is better to directly introduce relatively professional and compliant centralized entities and strategies. Here In this case, it is very likely that these centralized entities will be recognized as "brokers". If this regulation is approved and implemented, it means that these projects may

Require users to provide KYC

Under the burden of compliance, open front-end charges or service charges

But it also means that the "broker" can carry out activities reasonably and legally, and the cost is Under the burden of compliance, it is necessary to increase its own revenue capabilities, such as charging customers, etc.

(2) DeFi with the ability to decentralize

Smart contracts are solidified and cannot be upgraded

On-chain autonomy

It is difficult to be judged as a "broker" if you achieve the above points. Therefore, from this perspective, even if this regulation is implemented, it will mainly target projects that rely more on centralized leadership. Although such projects It accounts for the majority of the current market, but in the long term it will also be a push for the decentralization of DeFi, and the requirements for centralized entities entering this industry are becoming increasingly high.

4/4 · DeFi Exit

First of all, it is only a matter of time before supervision and compliance are clarified for DeFi. Of course, this clarification may be advantageous during Trump’s term. What the market expects is a looser supervision. Here we have based The emerging bill or draft discusses the optimal solution for a DeFi project to face supervision and compliance, and is a perfect export.

(1) Broker determination< /p>

This aspect is the focus of this discussion. The conclusion is to either turn this matter into a formal business, comply with the reporting requirements of the IRS and accept the identification of the broker, or gradually decentralize the project.

In the context of the approval of the ETH spot ETF application, coupled with the previous FIT-21st century financial innovation and The content in the technical bill provides a basic basis for determining how project tokens define securities and commodities.

Currently for ETH. The definition is more inclined to functional use, and the nature of its pledge and governance is more to maintain the operation of the network rather than economic returns. In this case, it is more inclined to be defined as a commodity rather than a security.

From this perspective, for DeFi protocols, if the governance direction is closer to obtaining economic returns or dividends, its positioning is more likely to be defined as a security. If it is more functional, , technological upgrades, etc., the probability of being defined as a commodity is greater

Let’s take Uniswap as an example. If you want to avoid the “broker” judgment and at the same time ensure that its token is defined as Commodities rather than securities, should we get out of this perfect exit?

Remove the front-end and charge fees, rely on third-party front-ends for transactions, or educate users to interact directly with Smart contract interaction

Issuing the chain yourself, gradually "Ethereumizing" the token as a functional use and network maintenance, avoiding the identification of securities.

Regardless of whether these regulations will be approved and promoted, DeFi will not be affected if it always keeps moving towards the goal of decentralization. Of course, in this process, some projects still require the participation and leadership of centralized entities. , and currently they are the majority. They may need to face choices and balances. This is the need to adapt to the development of the times. Decentralization cannot be completed in a day.