Decentralized finance’s (DeFi’s) reign as a crypto-libertarian tool of bypassing government control of finance took another step toward the ash heap of history this week as a leading DeFi project moved to incorporate in Panama.
SushiSwap, a leading decentralized exchange (DEX) and crypto lending platform is moving toward a vote to turn the supposedly leaderless project over to two foundations and a corporation that will provide a remarkably centralized version of decentralization.
Read more: CFTC Lawsuit Aims to Rein in DeFi
While the planning began months ago, it was based on legal advice aimed at mitigating risk of the type that hit another DeFi project, crypto lender Ooki, last week when it was sued by the Commodity Futures Trading Commission (CFTC) on claims that it violated the Commodities Exchange Act (CEA). It was the first time one of the decentralized autonomous organizations (DAOs) that claim to eliminate all management in favor of self-executing smart contracts controlled by token-holder votes.
See also: DeFi Series: Unpacking DeFi and DAO
At the time, Ooki’s creators had already agreed to a $250,000 settlement and turned its management over to a DAO. But in suing the DAO, the CFTC put forth the claim that anyone who owned a DAO governance token or used one to vote on a DAO proposal could be liable legally liable for all of the same complaints the CFTC brought against Ooki’s pre-DAO creator, bZeroX and its founders. It opens up the possibility of criminal charges for DeFi projects that don’t follow anti-money-laundering (AML) rules, including identifying users and reporting suspicious transactions.
Governance tokens are held widely, often less for actual influence on the direction and management of the project itself than for the ability to use them to take out loans and stake them as part of more complex DeFi yield farming projects.
See more: DeFi Series: What is Yield Farming and Liquidity Mining?
The SushiSwap proposal — made by a law firm hired for its experience in crypto and DeFi — would create a three-part structure: a foundation based in the Caymans to create a governance council to “administer” the governance votes, facilitate voting and administer the project’s fee-based treasury.
It would also have a Panamanian foundation to “administer the existing Sushi protocol” and hire developers for ongoing work and a foundation-owned Panamanian corporation “to operate the GUI layer (front-end) of the protocol.”
Which is a whole lot of uses of the word “administer” for an allegedly decentralized project.
Of course, SushiSwap has never really been truly DeFi — among the governance issues token holders have always voted on was selecting a “head chef” to run the project based on community votes.
Incorporating in the Caymans and Panama would certainly make it tougher for authorities to crack the project’s management. SushiSwap had earlier considered and rejected a Swiss foundation that would provide it the structure it needs for compliance with various laws and rules that to keep its notably human management structure and governance token holders out of trouble.
Broader Aims
The CFTC’s goal in suing the DAO was to “demonstrate the CFTC’s commitment to aggressively pursuing individuals and their operations who purposefully seek to evade regulatory oversight,” said CFTC Chairman Rostin Behnam at the time of the Ooki announcement. “Margined, leveraged or financed digital asset trading offered to retail U.S. customers must occur on properly registered and regulated exchanges in accordance with all applicable laws and regulations. These requirements apply equally to entities with more traditional business structures as well as to DAOs.”
Based on messages posted on the SushiSwap governance proposal forum, he has been heard loud and clear.
One (presumable) voter, who identified himself as Neil Bhasin, responded to others who voted no on the proposal, largely because they felt it was moving too fast with exactly the sentiment Benham was seeking
“I would like to point out that voting no & seeking to move slower comes with the consequence of prolonging the risk & exposure to all that contribute to sushi, along with the project itself,” Bhasin said under his “Neiltbe” profile. “Perhaps that is an acceptable trade off to you but I would like to acknowledge the elephant in the room directly.”
Another, posting under “kagan” — and identified as JaredC — said “regulation by enforcement is coming. Just get this done.”
What Decentralization?
It’s worth noting that the vote, which opened on Sept. 22, has received a grand total of 14 votes, 12 of whom voted yes on the foundation and incorporation plan.
This is for a project in which investors have $28.4 billion locked at present, according to DeFi Pulse. At the height of the crypto booms a year ago, that number was almost $100 billion.
Nonetheless, SushiSwap has one of the more active DAO voter pools, industry news source CoinDesk said, pointing to data showing that some 1,800 wallets have voted on SushiSwap proposals in the past six months, compared to Ooki’s nine.
It also noted that Jared Grey, who was elected “head chef” recently — with 62% of the votes coming from two wallets — said last week on the SushiSwap Discord channel, that “simply calling an unregistered group of individuals voting on governance a DAO isn’t going to fly, and that’s what the newest lawsuits target.”
And given those voter numbers, it won’t be too hard for the agency to enforce.
This brings up an inescapable problem with the libertarian ideal of DAOs: There’s still a small core of people managing the decentralized projects.
The core difference between that kind of DeFi and centralized blockchain-based FinTechs? DeFi is run by managers who can’t implement decisions without what amounts to a shareholder vote that can take days or weeks.
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