Mapping out policy challenges and opportunities for Maker

As you may remember (link to a respective forum post), the FATF is expected to issue its amended guidelines on crypto very soon. This document may become the cornerstone of the global AML framework for DeFi and, as such, may be very relevant for Maker.

Let’s wait for the final document before discussing this specific topic further. However, it’s a good occasion to start mapping out general policy challenges and opportunities for Maker.

Why is this relevant? Significant policy and regulatory developments are often game changers in terms of projects’ competitive (dis)advantages. On the one hand, restrictive guidelines may stifle Maker’s growth. On the other hand, it may turn out that what will be a bump in the road for Maker may be game over for stablecoin newcomers.

I want to underline the last point. Monitoring, analysing and responding to policy developments is not only about trying to survive in an adverse regulatory environment. A good understanding of policy trends and an ability to influence them and adapt to changing circumstances is a great opportunity for Maker to excel—especially with all plans to onboard RWAs and scale up beyond the crypto bubble.
To put it simply, it is not enough to survive and avoid regulatory scrutiny. To grow and outcompete traditional finance, Maker will need sophisticated regulatory thinking embedded in its overall strategy.

Notably, the release of FATF guidelines will be a significant, yet just one of many developments that have taken place over years. I want to kick off the discussion over what is and what is not relevant and see the community’s thinking about some of the emerging trends.

These are some of the most notable trends of relevance for Maker:

  • Regulation of stablecoins

Obviously, Dai is the core product of MakerDAO. It has already been a few years since stablecoins became one of the main topics of interest for policymakers, financial regulators and central banks. Initially, the work was focused at the international level; it culminated in October 2020, when the Financial Stability Board has issued their recommendations in terms of regulation of global stablecoins, among the work conducted by the FATF, BIS, IOSCO, OECD, etc. Currently, we have entered a phase of building national regulatory frameworks for stablecoins, including MiCAR in the EU, plans in the UK, some attempts in the US, etc. The results of these ongoing processes will decide the fate of Dai, especially as a widely available and freely tradable asset (in particular for retail holders and use in incumbent finance). Of course, developments in terms of central bank digital currencies are also going to be very relevant.

  • Regulatory scrutiny on DeFi

Since Maker is a major player and pillar of DeFi, any significant regulatory scrutiny of the space may have a huge impact on Maker, including its ability to grow and make an impact beyond core crypto. It is the DAO’s homework to think about potential vector attacks in terms of the entire DeFi space and those relevant and/or specific to Maker. The list includes securities law and banking law. Even if scrutiny is not directly applied to MakerDAO, it may harm the DAO and its ability to grow.

  • New approaches to regulating DeFi

Similar to the one above, this trend is also about how policymakers approach DeFi. However, the difference is that beyond the enforcement of the current rule, I there is a lot of actual interest in policymaking and regulatory circles in terms of understanding what DeFi is all about and how it could be regulated. This discussion is, to some extent, still happening behind closed doors, but the recently published WEF DeFi Policy-Making Toolkit may give you a feeling of what the discussion topics are. While it is not about direct enforcement, the long-term impact may be a big challenge—as part of the discussion, there is a trend of looking for so-called regulatory access points beyond traditional financial intermediaries, which is directly relevant for Maker (e.g. because of the structure based on core units).

  • AML/KYC and sanctions regimes

Because of the aforementioned new FATF guidance (but also steps already considered by individual countries—remember the US FinCEN’s proposal?), this is one of the most urgent and important areas for Maker (and all DeFi). Some of the proposed approaches may hit the very core of DeFi, as they may petrify the role of traditional intermediaries in financial services, overburden individuals, DAOs, etc. with regulatory obligations and liability, impose unrealistic requirements on decentralized structures and create huge tensions between the overall anonymity of DeFi and the forced transparency of financial transactions.

This is far from a complete list of challenges, opportunities and trends and naturally provides a very basic outlook. Let’s start discussing these topics though. Please help expand the list and provide your own thoughts, which could lead Maker towards determining its strategy and action items.

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I think capital ratios for equity capital will eventually be enforced. It may be a good thing because it will make it easier to sell Dai as fixed income product to corporate treasuries.

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@jacek What are things Core Units and members of the community can do to help or be proactive on these fronts?

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@jacek Great post. Currently, I am involved in a bank-wide regulatory programme of work with one of the biggest Australian banks (i.e. TradFi). The task from regulation to implementation is no small one. To put it mildly, should Maker have to follow similar frameworks, we’re greatly unprepared.

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Jacek, thank you for getting this very important discussion started. Your post highlights some of the significant challenges and opportunities Maker as a DAO will potentially face. I want to add one which is a Marketing-related challenge:

  • Marketing of Maker
    Given the uncertainties mentioned in the original post, how we market the Maker protocol and DAI will need to be carefully examined for various jurisdictions. While the Strategic Marcomms unit I am proposing has a legal budget to ensure the marketing campaigns we run and the content we provide is legally sound, it is unclear to me whether all units or future CUs are aware of such regulatory risks and have a plan in place.

Jacek, how do you think we can foster more sophisticated regulatory thinking in the community? One idea I have is to increase awareness by hosting a monthly conversation where the community can get regular updates related to regulation.

These policy challenges, opportunities, and trends are longer-term, and we need to be vigilant and stay a step ahead even if possible in risk management.

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Hi, long-time lurker to this forum, but concerned Maker holder. It seems to me that the uncertainty around regulation, and whether or not MakerDAO is willing and able to deal with it, will continue to create a downward pressure on the price of the MKR token, and will cause potential DAI-minters to look towards less complicated, more “understandable” forms of stablecoins until the space is appropriately regulated. There is no more pressing issue that the DAO should be concerned with than how it will survive regulation. I continue to not see this question answered across the forums, and as a person with great interest in Maker I am writing this reply full of concern about where we are headed.

True DeFi-hards can moan about their concerns about the USDC consortium, and note DAI’s strength as a decentralized currency, but at the end of the day USDC is regulation ready. They have a group of people who are paid to prepare the books, ensure due diligence can be done by TradFI folks investigating potential trades, and when regulators inevitably come calling, they’re ready to explain their product, what they do, and how it is backed. Is MakerDAO ready for this?

This is not an academic discussion; the regulation train is coming, and we need to be prepared. It’s not just the potential legal ramification that comes from MARCOMMS, it’s everything. It’s the whole MakerDAO ecosystem. Can we explain it easily? Can we show it is auditable? Can we prove it is resilient? Have we tested it in anything other than the real world? While I think the answer to all of these questions is yes, I worry that the decentralized nature of the DAO will work against us when traditional regulators come calling.

I work in government; I make policy for a living. I have never felt more strongly that the MakerDAO Foundation should be re-established specifically to deal with this problem. When regulation emerges, it is going to take teams of people to implement it, ensure it meets the legal ramifications of the regulators in question, and then prove it to those regulators. As policy changes roll out, that same team will need to make revisions to ensure compliance. If Maker aspires to be the Central Bank (or a bank; or something else entirely that even looks like a bank to regulators) then it needs to come to terms with this.

The 80 or so million that the DAI is projected to make this year will be wasted if it is not put, in some small way, towards ensuring that the DAI remains a viable stablecoin through the roiling sea of regulations that are about to hit it. If this means hiring lawyers, hire them; if this means bringing back the Foundation to set and maintain a long-term strategic vision, then bring it back. Pulling in real-world assets and pushing DAI across new platforms is all interesting work that will boost profits in the near to mid-term. However, the potential for regulators to establish criteria that we cannot manage is a potential game-ender for the DAO.

Someone is going to reply to this and tell me that this is already being done; that the MakerDAO is all over this. But who is responsible for this specifically? Are they full or part-time? Again, rooms and rooms of people perform regulatory compliance for major banks; what is our equivalent? We have almost 5 billion dollars in our coffers, and we’re going to post a profit this year of 100mil. What is the equivalently sized bank’s compliance division size?

My proposal is fairly straightforward. We need to 1) establish full-time positions associated with legal compliance and, 2) establish a more understandable legal framework for the MakerDAO organization. The DAO, which currently only exists as a legal entity in a few States, should consider whether or not it is an appropriate organization to continue running Maker when regulation is announced. We should have a team working now on getting us ready for that eventuality.

I’m not one of those people that contributes a lot on these boards; I know you are all working very hard to make Maker the best product it can be, however I see the bow wave of this thing approaching and it makes me fearful that all your work will be for naught if we don’t deal with it proactively. Thanks again for letting me be involved and say my piece, and thanks again for everyone’s great work thus far!

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Really important topic, and we’re way behind. That being said, there is a vision of Maker integrating with the real world financial system.

Note that the Fed said yes when we asked it to dance for tomorrow. Hopefully we can get to know one another better from here.

There is also a proposal for a new CU that has the goal of Maker owning $1 trillion in US Treasury debt in the next five years. Playing by the rules and building relations with government is the next stage of Maker’s growth.

We definitely need a more comprehensive plan, but there’s more support than you think for Maker dressing in a three-piece suit and being the adult in the DeFi space. We’re behind where we should be, but not hopelessly so.

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Thanks @PaperImperium. Have suit, will travel – if I had a traditional finance background I’d be happy to get involved, but alas that is not the case. Thanks for all your efforts.

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You bring up some very interesting points. Where do you see regulation coming from with regard to Maker and other Defi projects in particular? Presuming you are looking at this from a US-centric position.

Thanks for your thoughtful post.

What you have highlighted are important to prioritize indeed. That sense of urgency is shared.

To get to what you have proposed, someone capable or a team will need to take the time to work on a proposal and get it approved. That’s what I see specifically can be done, in addition, to increase awareness in the community, which provides a chance for us to find solutions. Someone who has similar background or experience like yours would be able to make a difference for MakerDAO on this front potentially.

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Others have posted in this forum about FATF; it’s entirely possible that we could see something like that, as well as applications of existing regulations, or legal opinions that set precedent for the employment of older regulations against the crypto. I’m also not ruling out novel legislation from Congress that could seek to fill holes in the U.S. regulatory apparatus on crypto. Regardless, I would expect the U.S. Senate Banking Committee to hold hearings on crypto in the near term, and they might be a great indicator about where certain parties are in their views of crypto. Notably, Elizabeth Warren (D-MA) has been pretty critical of crypto in general. I don’t have a lot of visibility into the European or Latin American regulatory spheres unfortunately.

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Yeah I’d be happy to support it; I do know a few folks that work in compliance for hedgies. However, you may know people as well given your background.

Warren is concerning, that’s right, as well as some others on the House side of things (Maxine Waters, for one). That said, I don’t expect legislation to make its way through as the crypto space has started to amass and allocate significant resources towards lobbying efforts. A good case in point was how industry reacted to Treasury’s midnight rule-making last December.

I personally think a change in tenor at the OCC or FinCEN could have a significant impact on DeFi in total but, to date, those two agencies have been refreshingly forward thinking in regards to guidance/rule making.

Thanks for a good discussion everyone.

In my view, there is a need for action in three streams:

  1. Monitoring. At a minimum, we need to be aware of what’s going on. The idea behind this forum post was to start the discussion, but also to provide a basic overview on what are the current policy and regulatory trends of relevance for Maker.
  2. Advocacy. We’ve been the first DeFi project with such an active advocacy agenda. At the Maker Foundation we’ve run policy projects all around the globe, involving policymakers and regulators in many countries and international organizations. MakerDAO will need to undertake such activities too, for the reasons which I outlined in the first post in this thread.
  3. Product strategy and design. Lastly, Maker has to embed regulatory thinking into its product strategy and design of particular features. There is a lot to win by doing this right, and a lot to lose by making mistakes.

It seems to me that these streams will require a dedicated workforce which should go much deeper than these high-level thoughts which we are exchanging here. I am not sure yet what’s the most appropriate form. It seems to me, however, that the community should figure that out at the latest by this year’s end.

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Raise the dust parameter to 1 Million DAI and implement KYC/AML for Institutional Vaults? Its the same thing Circle told the Growth Core Unit, provide KYC/AML for MakerDAO :man_shrugging:t4:

It just feels like this is the way things will turn-out for DeFi. What can you do. There’s no denying that All regulators care mostly about money laundering/nefarious loopholes. That’s just the way it is. But hey… Risk is real, fear is a choice.

They really said this? The conversation was on what the DAO would have to do in order to get some return on the USDC in the PSM, no?

@jacek Thanks for sharing your thoughts on some of the high-level actions the core units could take. In your personal view, do you see a move towards an Institutional “permissioned” market as part of the Maker protocol suite of “products” as a necessity or a nice to have in that upcoming regulatory environment? I guess just trying to sense the battle ground feel. Other protocols are going in that direction of two-market fits: open and permissioned. But I am not sure what would be the reasons or the requirements in doing so should Maker go there. Maybe a conversation to add @Derek in a product owner capacity too :slight_smile: .

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All big institutions were asking about KYC in some form or another, not only circle.
Both legal teams (Growth + potential partner) are working to see what are things needed to move forward with some kind of “regulation friendly product” that institutions and possibly regulators are happy to work with.

as @jacek perfectly said

Maker has to embed regulatory thinking into its product strategy and design of particular features.

As soon we have more news we will be sharing it with the community.

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Great question. I would say that at this point at least researching and considering a “permissioned” approach is a necessity for market and business reasons, as pointed out by @MarianoDP :

For me the main question is how and where exactly the “permissioned” aspects should be implemented. Ideally it is an option for those who need it, which does not negate the overall “permissionless” approach and the open nature of the Maker Protocol. This is where Aave Pro seems to be going. Also, “permissioned” approach may apply at various levels, and probably the farther from the core protocol and the closer to user interfaces, the better. However, we cannot just directly replicate the currently popular approach of parallel development of “permissioned” and open versions of products. Except vaults, which as already discussed many times may be more or less permissionless in various ways, we also have Dai. Personally I would not want to see a “permissioned” version of Dai, and yet this is exactly where some of regulatory developments in various countries are going (by adopting strict regulatory frameworks on stablecoin schemes). That’s why we need to strategize and see what could be a potential adjustment, and what goes too far.

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Interesting observation by Crypto B.

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