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1/25
So far $OCEAN, $EOS and Tether have all frozen funds (or contracts) in light of the @kucoincom hack.
This is an interesting issue, and a major debate about how our industry, regulation and reaching the mainstream
So far $OCEAN, $EOS and Tether have all frozen funds (or contracts) in light of the @kucoincom hack.
This is an interesting issue, and a major debate about how our industry, regulation and reaching the mainstream
2/25
On the one hand, Iâm very much in favor of consumer protection. Despite being a minimal governance/government guy, I understand the critical need to be able to protect the general public.
Because letâs face it, there are a lot of sleeze-bags out there.
On the one hand, Iâm very much in favor of consumer protection. Despite being a minimal governance/government guy, I understand the critical need to be able to protect the general public.
Because letâs face it, there are a lot of sleeze-bags out there.
3/25
Further to that, our industry commonly touts âDYORâ but, letâs face it, research is actually hard.
Even if we are only talking about crypto, then to be able to fully do your own research takes not only significant time but also expertise in multiple disciplines.
Further to that, our industry commonly touts âDYORâ but, letâs face it, research is actually hard.
Even if we are only talking about crypto, then to be able to fully do your own research takes not only significant time but also expertise in multiple disciplines.
4/25
Economics, branding, solidity, security, community, product, etc â itâs not something we can expect a general consumer to have the ability for, let alone the time for.
So in classic finance we outsource some protections to the world of law and regulation
Economics, branding, solidity, security, community, product, etc â itâs not something we can expect a general consumer to have the ability for, let alone the time for.
So in classic finance we outsource some protections to the world of law and regulation
5/25
It makes sense then, that mainstream users, many of whom have much more conservative risk models than you and I, would in turn want protections in a new financial market before they enter into it.
Itâs a reasonable request.
It makes sense then, that mainstream users, many of whom have much more conservative risk models than you and I, would in turn want protections in a new financial market before they enter into it.
Itâs a reasonable request.
6/25
So when we see these protocols and exchanges locking, freezing or even reversing hacked funds, the bulk of users in the crypto space (who honestly are here for financial opportunity and not decentralization) are happy.
The bad guy lost, the consumer was protected.
So when we see these protocols and exchanges locking, freezing or even reversing hacked funds, the bulk of users in the crypto space (who honestly are here for financial opportunity and not decentralization) are happy.
The bad guy lost, the consumer was protected.
7/25
But there are two *huge* costs here - and the second one is a bit less obvious.
First, if your funds can be frozen, reversed or locked at the protocol level then they are *not* decentralized.
Thatâs a bigger problem than just a philosophical one though â
But there are two *huge* costs here - and the second one is a bit less obvious.
First, if your funds can be frozen, reversed or locked at the protocol level then they are *not* decentralized.
Thatâs a bigger problem than just a philosophical one though â
8/25
If, for example, $EOS is not decentralized (which it isnât) then any claim of them *not* being a âfinancial securityâ goes right out the window.
If they arenât sufficiently decentralized then protocols like $EOS engaged in illegal securities sales.
If, for example, $EOS is not decentralized (which it isnât) then any claim of them *not* being a âfinancial securityâ goes right out the window.
If they arenât sufficiently decentralized then protocols like $EOS engaged in illegal securities sales.
9/25
You may think âsucks to be $EOSâ then, but it actually sucks for consumers.
Because in the recent SEC case against @UnikrnCo and their âunikorn goldâ token, we saw the SEC is willing to apply fines and demand that businesses halt any operations in their reach.
You may think âsucks to be $EOSâ then, but it actually sucks for consumers.
Because in the recent SEC case against @UnikrnCo and their âunikorn goldâ token, we saw the SEC is willing to apply fines and demand that businesses halt any operations in their reach.
10/25
The @UnikrnCo case was the first major case in which the SEC levelled these aggressive and ultimately fatal cases against a crypto company that wasnât involved in fraud.
It was a young startup, that while the execution of the product wasnât great,
The @UnikrnCo case was the first major case in which the SEC levelled these aggressive and ultimately fatal cases against a crypto company that wasnât involved in fraud.
It was a young startup, that while the execution of the product wasnât great,
11/25
They had tried to follow the law and guidance that they had at the time, while innovating in a new sector.
The SEC showed they are willing to require a company implement any halt that is within their reach â
They had tried to follow the law and guidance that they had at the time, while innovating in a new sector.
The SEC showed they are willing to require a company implement any halt that is within their reach â
12/25
This means if a company like $EOS or $OCEAN had commands to lock funds, freeze funds or turn off the protocols contracts, they could be legally compelled to do so.
This is the first major practical issue that stems from adding in ânon-decentralized protectionsâ
This means if a company like $EOS or $OCEAN had commands to lock funds, freeze funds or turn off the protocols contracts, they could be legally compelled to do so.
This is the first major practical issue that stems from adding in ânon-decentralized protectionsâ
13/25
The second, far worse issue, that arises from these âfeaturesâ is how it shifts legal liability.
In a decentralized system, developers likely (under most reasonable circumstances) arenât going to be liable for uses of their protocol that they canât prevent
The second, far worse issue, that arises from these âfeaturesâ is how it shifts legal liability.
In a decentralized system, developers likely (under most reasonable circumstances) arenât going to be liable for uses of their protocol that they canât prevent
14/25
For example, itâd be hard to ever bring a copyright suit against ENS Protocol just because some user registered a domain with a trademarked name.
Since ENS can not reverse that purchase it is out of their scope to take action or responsibility.
For example, itâd be hard to ever bring a copyright suit against ENS Protocol just because some user registered a domain with a trademarked name.
Since ENS can not reverse that purchase it is out of their scope to take action or responsibility.
15/25
(At worst someone could push them to implement a front end that had âreasonable business effortsâ to prevent users from registering copyrighted domains in the first place)
(At worst someone could push them to implement a front end that had âreasonable business effortsâ to prevent users from registering copyrighted domains in the first place)
16/25
On the other hand, if the protocol did have the ability to recall domains it would likely be forced to do so frequently.
Why is this relevant to tokens that a consumer holds?
Because itâs actually what we call a âbroad exposure riskâ
On the other hand, if the protocol did have the ability to recall domains it would likely be forced to do so frequently.
Why is this relevant to tokens that a consumer holds?
Because itâs actually what we call a âbroad exposure riskâ
17/25
As an individual you have a ârisk modelâ that outlines what financial and legal risks you are comfortable with.
It ultimately boils down to following the laws of jurisdictions you live in, travel to and have citizenship exposure to.
As an individual you have a ârisk modelâ that outlines what financial and legal risks you are comfortable with.
It ultimately boils down to following the laws of jurisdictions you live in, travel to and have citizenship exposure to.
18/25
Companies however, are much more conservative in the amount of financial or legal risk they are willing to take on when itâs on behalf of a consumer.
They are also exposed to pressures in more jurisdictions than any one consumer, and that exposure gets passed on to you!
Companies however, are much more conservative in the amount of financial or legal risk they are willing to take on when itâs on behalf of a consumer.
They are also exposed to pressures in more jurisdictions than any one consumer, and that exposure gets passed on to you!
19/25
If you are an American, living in the US, and had offended the political regime in China, then China may want to take retaliatory action against you.
The US would never extradite you.
They canât freeze your US assets.
They canât freeze your decentralized assets.
If you are an American, living in the US, and had offended the political regime in China, then China may want to take retaliatory action against you.
The US would never extradite you.
They canât freeze your US assets.
They canât freeze your decentralized assets.
20/25
So as long as you didnât travel to China or a China-friendly (or occupied) country - then youâd likely be ok.
BUT, China has exerted occupational control in Hong-Kong and Taiwan which happen to be the head quarters and main banks for Tether.
So as long as you didnât travel to China or a China-friendly (or occupied) country - then youâd likely be ok.
BUT, China has exerted occupational control in Hong-Kong and Taiwan which happen to be the head quarters and main banks for Tether.
21/25
Imagine Tether a company with (a claimed) $15b in assets receives notice from their government that they have to freeze your Tether holdings or lose access to their banking in Taiwan.
Is Tether the kind of Apple-esque company that is going to take on that fight?
Imagine Tether a company with (a claimed) $15b in assets receives notice from their government that they have to freeze your Tether holdings or lose access to their banking in Taiwan.
Is Tether the kind of Apple-esque company that is going to take on that fight?
22/25
No. They will freeze your assets.
You, a US citizen, living in the US had your âdecentralizedâ assets frozen at the whim of a foreign government.
All because of âconsumer protection featuresâ
No. They will freeze your assets.
You, a US citizen, living in the US had your âdecentralizedâ assets frozen at the whim of a foreign government.
All because of âconsumer protection featuresâ
23/25
Having non-decentralized features in a protocol (rather than a platform) creates new legal liabilities, changes the narrative on securities and creates multi-jurisdictional legal exposure risks for the consumer.
Having non-decentralized features in a protocol (rather than a platform) creates new legal liabilities, changes the narrative on securities and creates multi-jurisdictional legal exposure risks for the consumer.
24/25
There is no time in which these consumer risk trade-offs are outweighed by the supposed protections these features provide.
While this industry jokes that regulators canât keep up with the fast moving engine, if you have the keys they can make you turn it off.
There is no time in which these consumer risk trade-offs are outweighed by the supposed protections these features provide.
While this industry jokes that regulators canât keep up with the fast moving engine, if you have the keys they can make you turn it off.
25/25
Next time someone says that admin key features matter in a protocol & debating their decentralization is âphilosophicalâ just drop this tweet thread on them so they can better understand the practical risks they are creating and dumping on unknowing consumers.
Next time someone says that admin key features matter in a protocol & debating their decentralization is âphilosophicalâ just drop this tweet thread on them so they can better understand the practical risks they are creating and dumping on unknowing consumers.
