[INFORMAL POLL] Should MakerDAO Require American Vault Owners To Also Stake Insurance Protection

Today SEC Chair Gary Gensler voiced his own personal remarks at the Aspen Security Forum. Mr. Gensler who is very familiar with crypto and is very familiar with commodity laws, focused on:

  • Investor protection in crypto: “Right now, we just don’t have enough investor protection in crypto.”
  • Emphasis on what might happen if folks turn a blind eye: “In many cases, investors aren’t able to get rigorous, balanced, and complete information. If we don’t address these issues, I worry a lot of people will be hurt.”
  • In his opinion, it sounds like he believes most tokens are “securities” and makes reference to former SEC Chair Clayton statement from 2018: “To the extent that digital assets like [initial coin offerings, or ICOs] are securities — and I believe every ICO I have seen is a security — we have jurisdiction, and our federal securities laws apply.”[7]
  1. I find myself agreeing with Chairman Clayton. You see, generally, folks buying these tokens are anticipating profits, and there’s a small group of entrepreneurs and technologists standing up and nurturing the projects. I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight.
  • Firmly opines his view of Decentralize Finance and how platforms listing multiple tokens are more than likely offering securities:
  1. Next, I’d like to discuss crypto trading platforms, lending platforms, and other “decentralized finance” (DeFi) platforms.

  2. The world of crypto finance now has platforms where people can trade tokens and other venues where people can lend tokens. I believe these platforms not only can implicate the securities laws; some platforms also can implicate the commodities laws and the banking laws.

  3. A typical trading platform has more than 50 tokens on it. In fact, many have well in excess of 100 tokens. While each token’s legal status depends on its own facts and circumstances, the probability is quite remote that, with 50 or 100 tokens, any given platform has zero securities.

  • Chair Gensler also provided his personal take on Stablecoins:
  1. How do you trade crypto-to-crypto? Usually, somebody uses stablecoins.

  2. In July, nearly three-quarters of trading on all crypto trading platforms occurred between a stablecoin and some other token.[11]

  3. Thus, the use of stablecoins on these platforms may facilitate those seeking to sidestep a host of public policy goals connected to our traditional banking and financial system: anti-money laundering, tax compliance, sanctions, and the like. This affects our national security, too.

  4. Further, these stablecoins also may be securities and investment companies. To the extent they are, we will apply the full investor protections of the Investment Company Act and the other federal securities laws to these products.

IMO, this is as close as clarity as we are going to get, for the moment. In POKER, you would call this a “TELL”.

Providing, or Requiring some type of Cover to All Vault Owners via a smart contract from a DeFi platform, like Nexus Mutual, or other Cover Protocols. Meaning:

  • It will be a requirement to first purchase Cover, and then Stake Cover when opening a Vault.
  • Or, use a portion of the collateral to automatically perform a transaction to acquire Cover before end-user is allow to draw DAI.

PROS: Vault Owners will have some protection. MakerDAO will take steps and can iterate on how to protect Vault Owners.

CONS: It will be costly, time-consuming for PE, and some might say that MakerDAO has the ability to mint MKR as an option for downside protection.

Should MakerDAO Require Vault Owners to Have “Insurance” Protection?
  • Yes
  • No
  • Abstain

0 voters

OPTIONAL: Should the Maker Community Start Talking to U.S. Regulators and Ask What Can Be Done To Comply With Regulatory Framework?
  • Yes
  • No
  • Too Early
  • Too Late
  • Abstain

0 voters

Please note–the last Optional Poll question was formulated based on Mr. Gensler stating that the writing of regulatory guidance has already been written on the wall:

"First, many of these tokens are offered and sold as securities.

There’s actually a lot of clarity on that front. In the 1930s, Congress established the definition of a security, which included about 20 items, like stock, bonds, and notes. One of the items is an investment contract."

I will let this Informal/Informative Poll run until 19-08-2021 and hope to hear you voice your opinion–or, Please let me know if you interpreted his statement differently.

Thank you!

2 Likes

Very interesting topic. I just have one point to make as a DAI user from South America.
It seems to me that all the points discussed here are expressed from an American POV in terms of applicable laws and regulations whilst no consideration is given to how this might impact users abroad.

I mean, if the token was built and meant to be used worldwide, it probably shouldn’t be subject to USA regulations.

Thanks

5 Likes

Your title refers to American vault owners. I don’t think there’s any reasonable way for us to know the geographic location of a vault owner.

Whatever system you put in place to determine that, there’s a way to circumvent it and mask your location.

4 Likes

Founder of Nexus here. As much as this would increase demand for coverage I don’t think it’s the right approach for MakerDAO.

  • There are many consumer protection rules around forced insurance add-on sales and it’s generally thought of as bad. eg Third Line Forcing.

  • Nexus and the entire DeFi insurance vertical likely doesn’t have enough coverage to meet all that demand, though this would likely change, you’d end up with price gouging issues.

  • Deciding who has to purchase based on location seems like a non-starter to me.

The best approach for mandatory coverage is to build it in at the protocol level, for example MakerDAO could buy backstop coverage from Nexus up to certain limits. This effectively socialises the cost through slightly higher interest rates. There are quite a few benefits here, and while our previous proposal on this topic didn’t make it through signalling late last year we have much higher capacity now so it may be worth revisiting.

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Thank you for the feedback Hugh. I’m no insurance/cover expert–but yes, I was thinking along the lines of MakerDAO somehow offering backstop coverage thru Stability Fees, or perhaps via Smart Contract language that provides proof of insurance protection with a protocol like Nexus Mutual. And yes, available to All vault owners (not just Americanos).

Indeed. But at least on the protocol level and in a “compliant” manner, MakerDAO has tried to offer Vault Owners the option of downside protection. And yes, I referred to only “Americans” bases on the personal thinking of SEC Chair Gensler.

Let’s hope his teammates, like Commissioner Hester Pierce, ( see her Tweet ) can convince Gensler to rethink on what I believe is an early indication of what could be the future SEC framework for crypto.

I’m with you man. But these regulators, they see it differently than you and I. It’s up to us, the community to convince them otherwise.

1 Like

I like that we are proposing creative ways to get in front of what is being signaled by the SEC. However, like others pointed out enforcing a geo-specific policy is likely challenging/infeasible.

I agree this is the way to go if we were to do something like this.

That said, I was looking back through the original proposal and @MakerMan, @Spidomo, @iammeeoh and others brought up some great points. One of which stood out to me in particular might be worth revisiting given our recent concerns surrounding stablecoins:

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1. Protocol-Level Coverage

I voted NO to mandatory coverage because it should be the users choice however if MakerDAO did choose to build in coverage at the protocol level, Armor has created a library and client to help DeFi protocols simply and independently integrate their external smart contracts to buy coverage from Nexus Mutual. Using this library, one can quickly (and entirely on-chain) determine the price of coverage, deposit funds, subscribe to a plan, submit proof-of-loss, and claim funds when a hack occurs. Review a demo smart contract showing a subscription flow here.

2. Regulatory Guidance

I voted YES to talking with Regulators because the Maker community is in a unique position due to a number of factors to help them actually understand DeFi in the first place and work with it.

They don’t even have to directly represent Maker if the DAO funded and supported LexDAO who is already working on it:

3. DeFi-Native FDIC-Style Coverage

Armor recently launched “DeFi-Native FDIC-Style Coverage” via Shield Vaults:

Right now a user of Yearn’s DAI vault may deposit their yvDAI into Armor’s Shield Vault and have their coverage paid for via yield, at lower rates than if the user went directly through Nexus Mutual.

This is in Beta at the moment and deposit caps may be unlocked soon.

Lower Rates?

Usually most smart contract exploits are resolved before they cause a major drain to the total value locked (TVL).

Shield Vaults provide partial coverage to users making maximal use of coverage capacity available, solving both capacity and cost issues while remaining suitable to the ecosystem.

How It Works
A user may deposit their yield-bearing tokens into a Shield Vault, and receive arTokens in return. This insured token provides user deposits in the Shield Vault with FDIC-style partial coverage.

For example, let’s say a Yearn Shield Vault contains $250m in assets and maintains $50m in FDIC-style partial coverage. A hack causes $10m in losses.

When a successful claim payout is made by Nexus Mutual, users are made whole. If a loss exceeds the $50m in active coverage, the payout will be equally distributed between users who lost funds.

4. Available Now in Gnosis Safe Multisig

As of this week, this is now also available via gnosis safe multisig so that DAOs and Institutional users can deposit their DAI to Yearn vaults via the Gnosis app, then deposit to Armor’s Shield Vaults to get coverage.

Just visit the Apps tab in your Gnosis Safe Multisig to try it.

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Hey @AzeemFi welcome to the Maker Community!! Thank you for providing some color and providing the details of your protocol.

FDIC-Style coverage was actually one of my first thoughts when thinking of ways DeFi can provide Coverage to end-users. So I am happy to see that your Team is staying ahead of the game by living in the future and not in the present.

Personally, I have looked at the requirements to be an FDIC covered entity/provider, and they don’t make it easy–painful to be become FDIC covered TBH. I hope you guys keep iterating and make the FDIC-Style Coverage come into fruition for the entire DeFi ecosystem.

All-in-all I believe that we need to start to think about how we can communicate with Regulators, and yes, even politicians. Personally I like to see the entire Maker Community make a push for such, even if most of us are not Americans–we ALL need to fight this battle together.

I urge the Maker community to push forward and think of how we can work together to make this beautiful technology take us to the next level.

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Not sure what to make of this. I do remember them–they made an appearance here: DMM mTokens–they even had an mDAI at one point. I think.

Anyhow–here’s the press release from the SEC: SEC Charges Decentralized Finance Lender and Top Executives for Raising $30 Million Through Fraudulent Offerings

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Circle says it will become a “national digital currency bank.”

The move will mean federal oversight of USDC, and increase reporting requirements–direct supervision of the Federal Reserve and various agencies run by the U.S. Treasury Department.

Jeremy Allaire Blog Post: Our Journey to Become a National Digital Currency Bank

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This Informal Poll will close in four (4) days–if you have not had your say, please vote/poll.

Thank you to those that have voiced their opinions.

Last but not least, looks like our good friends (:stuck_out_tongue_winking_eye: ) at TERRA/LUNA have an option for folks to get cover:

1 Like

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