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Palley@stephendpalley

DeFi is at an historical inflection point. The legal status of these alternative financial rails will be resolved for short/mid-term purposes in the next 2 to 3 years, maybe sooner.

A thread.  1/n

Palley@stephendpalley

At issue is the application of hundred year old legal models written to govern centralized financial markets and centralized asset issuers.

Palley@stephendpalley

Where one has centralized marketplaces that control trading of stocks or derivatives, there's logic to having laws to govern those marketplaces. 2/n

Palley@stephendpalley

If there are no marketplaces and transactions can either take place without an intermediary or counterparty, laws regulating marketplaces no longer make sense. 3/n

Palley@stephendpalley

This is not an ancap/libertarian position.  

Rather, it's a recognition that the square peg of decentralization does not fit into the round hole of centralization.  4/n

Palley@stephendpalley

It's a tired analogy, but true:  we don't use 19th century horse and buggy speedlimits to govern airplanes.  

The model doesn't fit the risk. 5/n

Palley@stephendpalley

"How will it play out, Steve?"

My suspicion is that we are more likely to see court decisions than legislation, in the near term.  6/n

Palley@stephendpalley

Whether or not courts get the rules of the road right will depend on the facts at issue, the judges and the lawyers.

Bad facts make bad law.

So do bad lawyers and bad judges.   7/n

Palley@stephendpalley

Like it or not, in the long term, legislation that governs software design risk is likely to surpass the importance of financial regulatory laws and make the likes of SEC enforcement either moot or a parallel concern.  8/n.

Palley@stephendpalley

My own view, simple country lawyer-ish perhaps, is that peer-to-peer or counterparts-less financial rails should be removed from the realm of financial regulatory oversight and treated as software risk, appropriately governed by software-related guidelines.  9/n

Palley@stephendpalley

It's hard to know whether those guidelines are force-of-law enforced by state actors or controlled by industry groups or "the free market".

My own prediction is that there will be something like the industry-gov collaboration we see in building codes. 10/n

Palley@stephendpalley

I'm skeptical that congress will be able to act in any coordinated fashion in the near term to modify or create new laws that are purpose fit for DeFi.

We're more likely to have here and there judicial opinions that provide a mixed bag of guidance.  11/n

Palley@stephendpalley

Another observation -- I don't mean this as a libertarian screed or homage, it's truly just an observation. but innovators, -- true ones, not financial rugpull scammers -- will generally not ask for permission.

Palley@stephendpalley

Anyway.  

Eventually, and I don't think it's anytime soon, the Securities Exchange Act of 1934 will be irrelevant and deprecated, not just in words.

If we don't have financial intermediaries we don't need regulations that govern them.  12/n

Palley@stephendpalley

Instead, we will have a framework -- either imposed from without or within, or both -- that controls the technology risk that underlies tech mediated financial transactions.

Palley@stephendpalley

"BUT WHAT ABOUT BAD ACTORS, STEVE?"

Look, we have plenty of laws on the books to prosecute frauds.  

There's nothing about DeFI or blockchain that requires newness here.

That's a herring as red as one I've ever seen.

Palley@stephendpalle

Anyway, it was on my mind. And now it's on yours.

xo, Pally

Palley (@stephendpalley)
DeFi is at an historical inflection point. The legal status of these alternative financial rails will be resolved for short/mid-term purposes in the next 2 to 3 years, maybe sooner. A thread. 1/n

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