BlockBeats reported that on November 1st, the Web3 communication protocol WalletConnect officially announced that, in accordance with the latest laws and guidelines from the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury, the availability of the WalletConnect protocol in Russia has been restricted.
Multiple DeFi projects choose IP restrictions to avoid violations
BlockBeats previously reported that on October 23, due to "compliance concerns" with the regulations of the UK regulatory agency FCA, the leading DeFi protocol Marinade Finance in the Solana ecosystem blocked access to its website for UK users. The login page for UK users displayed a warning message, indicating that "users can extract liquidity, claim delayed tickets, or delay unstaking through our SDK." In addition, Solana ecosystem DEX Orca Finance also added geographic blocking for UK users.
Although Marinade Finance has not yet issued an official statement, the action of blocking access for UK users is closely related to the new regulations aimed at standardizing the marketing of crypto-related products or services by the FCA.
This is not the only case in the crypto field where usage has been restricted based on user IP addresses. Previously, the modular blockchain network Celestia announced in September that U.S. users are prohibited from receiving TIA token airdrops, and dApps like 1inch had already imposed geographical restrictions on U.S. users in 2021.
In addition to restricting users from specific countries or regions, even the use of VPNs may be prohibited. On May 9th, decentralized stablecoin protocol MakerDAO announced the launch of the DeFi lending protocol Spark Protocol centered around the stablecoin DAI, but it is not available to users in the U.S., and its terms of service also prohibit U.S. users from using VPNs to conceal their U.S. residency, and VPN usage by non-U.S. users is also prohibited.
In September, according to BlockBeats reports, after the U.S. CFTC charged three companies, Opyn, Inc., ZeroEx, Inc., and Deridex, Inc., the decentralized options platform Opyn's website indicated that Opyn had restricted the use by users in the U.S. They were accused of violating the Commodity Exchange Act (CEA) and CFTC regulations, including failure to register as a swap execution facility (SEF) or designated contract market (DCM), failure to register as a futures commission merchant (FCM), and failure to adopt a customer identification program.
Decentralization of DeFi may only apply to the protocol in the future, while the front end of DeFi may choose to accept regulation in order to achieve compliant development.
How are governments planning to regulate DeFi?
The new crypto regulations in the UK mentioned at the beginning refer to the cryptocurrency marketing rules that came into effect on October 8th by the Financial Conduct Authority (FCA) of the UK. The regulations state that as of October 8th, cryptocurrency services will be classified as high-risk investment products for marketing materials in the UK, and all platforms worldwide are required to display clear risk warnings to UK customers and have any public promotional activities approved by authorized companies. Continuing to promote crypto assets to UK customers without complying with the rules may constitute a criminal offense, punishable by an unlimited fine or (and) up to 2 years imprisonment.
This year, the tightening of crypto policy regulation in the UK has led to multiple CEXs announcing the suspension of cryptocurrency trading services in the UK. Similarly, the regulation of the crypto field in the U.S. is also "intense," with every news item involving the SEC or CFTC attracting attention, and the U.S. crypto regulation has always been unforgiving towards DeFi.
In the U.S., various aspects of DeFi may be subject to regulation by multiple federal agencies, including the United States Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN), the Office of Foreign Assets Control of the US Department of the Treasury (OFAC), and the Internal Revenue Service (IRS).
The regulations introduced by these regulatory platforms are not limited to the DeFi field, so an increasing number of crypto companies have compliance officers or positions specifically targeting policy departments.
Related reading: "The U.S. is launching a 'whole government' crackdown on the crypto industry, and crypto assets are fleeing?"
"In preparation for crypto legislation, the U.S. House Financial Services Committee has established a subcommittee for digital assets, marking the first time in congressional history that a dedicated body has been set up for digital assets; second, there is strong hostility towards crypto in the current Washington regulatory environment, with a group of politicians turning the crackdown on crypto into a political correctness, creating an atmosphere that allows regulatory pioneers like SEC Chairman Gary Gensler to implement policies with ease."
U.S. Senator Elizabeth Warren wants to "build an anti-crypto army" in the U.S.
In addition to the enactment of regulatory laws by various countries, the Financial Action Task Force (FATF) has also issued new guidance for Virtual Asset Service Providers (VASPs), with a focus on DeFi. FATF recommends that its members can combat DeFi without KYC and appropriate AML monitoring. On June 27, FATF released a report urging countries to quickly implement FATF recommendations on virtual assets and VASPs, including travel rules, and emphasizing the financial risks of DeFi and peer-to-peer transactions.
You may think that IP address blocking is too broad, but precisely because the path to compliance is still being explored, projects like Marinade Finance have set "blocking" plans based on factors such as location, products and services provided, and the location of front-end users within their risk tolerance. In the traditional world of centralized regulation, the decentralization of finance is not achieved with just a few words in a white paper; it requires a step-by-step exploration of the compliance path in the crypto world.
Abandoning the front end to protect the protocol, the Web3 "entrepreneurial path" explored by Uniswap
DeFi leader Uniswap has also stumbled in terms of compliance, but it is indeed leading the way in exploring the compliant path of DeFi.
Last week, Uniswap announced a 0.15% exchange fee for certain tokens in its web application and wallet, a decision that sparked dissatisfaction among Uniswap token holders and triggered much speculation about the future development of Uniswap Labs within the community.
Cryptocurrency researcher Haotian (@tmel0211) stated that Uniswap protocol and Uniswap Labs are two different things. Uniswap is attempting to convey to the Uni community users through this highly controversial unilateral "notification that only the Uniswap protocol is decentralized, while the web and mobile terminals are owned by Uniswap Labs. Additional charges are likely just the beginning of centralized measures, and executing KYC regulatory strategies through these channels will also be inevitable, as no company can develop without compliance issues. The 0.15 fee was not voted on, it was announced directly, which already indicates the issue. Voting only applies to changes in the Uniswap protocol itself."
In 2021, Uniswap updated its logo, with the left being the Uniswap protocol logo and the right being the Uniswap Labs logo. Image source: Uniswap.org
Charging for the front end and open sourcing the protocol also brings new insights into how other DeFi projects can make profits and comply with regulations. Previously, BlockBeats conducted a comprehensive analysis of Uniswap, and Uniswap Labs has a clear vision in this regard. They want to take this path - separating the team (front end) from the protocol.
Related reading: "Uniswap, the most successful U.S. Internet Fintech company under the Web3 dividend"
"The Uniswap protocol is the largest decentralized trading and automated market-making protocol on Ethereum... The Uniswap Labs team is the main contributor to the Uniswap protocol and is now focused on building a suite of products to support the Uniswap ecosystem." This statement from the Uniswap recruitment interface indicates that the goal of separating the team from the protocol was already on the agenda from the beginning of the company's establishment.
One of the main purposes of Uniswap's separation of the protocol from the team is to gain more room for maneuver and even advantages in terms of regulatory compliance.
Front-end compliance, open protocols, or the new normal for DeFi regulation?
The decision by WalletConnect to prohibit the use of its services in Russia has left some members of the community puzzled. WalletConnect does not hold an MSB (Money Services Business) registration, does not hold funds, does not manage payments, and does not execute transactions. It simply sends signed messages from point A to point B. Well-known KOL and CEHV partner Adam Cochran stated, "I can't find any OFAC orders trying to expand its applicability in such a way that WalletConnect should even consider getting caught up in it."
However, against the backdrop of the broad context of the U.S. enacting sanctions legislation, OFAC's decision may apply to technology providers that may not even touch any funds in transactions.
The restrictions imposed by Solana's Marinade Finance and Orca Finance on UK IP addresses, as well as Spark Protocol's restriction on VPN user access, are all compliance explorations by DeFi projects in the current policy context.
Recently, Uniswap's ability to introduce front-end fees is also due to the operational method of separating the team from the protocol. Uniswap, as a protocol that provides token or "unregistered securities" trading, cannot directly generate revenue for the team due to regulatory reasons. However, Uniswap Labs can create compliant front-end user products based on this open protocol and generate revenue through this product.
If a token like HEX is sued by the SEC or other regulatory agencies, its trading on the front end can be immediately suspended, allowing the team and the product itself to avoid the regulatory risks they may face.
It can be predicted that in the future, more DeFi projects will join the queue for "separating the front end from the protocol" and use a compromise to achieve the original decentralized vision of crypto. However, the strategy of front-end compliance and open protocols satisfies the regulatory authorities' "desire for control," and whether it will affect crypto users' confidence in the products is a question worth paying attention to.
Note: Some of the content in this article is from previous drafts, and the updated project dynamics are being reissued.
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