DeFi and regulation: Dr. Joachim Schwerin

CryptoLaw spoke to Dr. Joachim Schwerin, Principal Economist at the European Commission, about decentralized finance (DeFi) and regulation. Dr. Schwerin transcends the standard questions about DeFi regulation to get to the core issues that we should be looking into.

We’ve selected some highlights from our talk, followed by the full transcript of the video.

*We made minor editorial changes to improve readibility. Dr. Schwerin spoke in his personal capacity and his views do not necessarily reflect those of the European commission.

Key takeaways: 

  • DeFi combines earlier examples of local finance and decentralization. It came about not because of blockchain, but because of a “much greater need” of decentralization that is as old as humanity.  
  • There is so far no systemic risk in DeFi compared to other parts of the financial system, the legacy system, where there are systemic risks. We shouldn’t exaggerate those risks. “The more so as there is quite some interest by incumbents to flag a lot of risks” in DeFi. 
  • DeFi is not just an extension of traditional finance. Regulators often see DeFi as a digital extension of traditional finance. “In my opinion, that is completely wrong.” 
  • “DeFi is – as the name says – focusing on finance, but it is actually an empowerment that extends much further than finance. Your money belongs to you. I have never understood why anyone else should take decisions on your money, including your bank.” But the last 200 years, “we have been always centralizing, centralizing, centralizing.” 
  • “If I take, with my background, a decision to go into certain things that other people consider as risky, my bank for example tries to prevent it.” They have “standard rules that say that you are too stupid to understand the risks. And then I tell my bank: you are too stupid to understand that is my money. Goodbye.” 
  • If you do not put data [on DeFi or otherwise] “into their context, into the belief systems of those that produce the data-, you get completely on the wrong track and then you end up with the solutions that you have today.” 
  • Even when there are legal procedures affecting DeFi: “there is hardly any price movement, which means that people who are in the DeFi space … simply do not seem to care about certain concerns that come from outside.” “So on the one hand side you have data that is very rich but not yet fully analysed. On the other hand you have different sorts of people interpreting the same in a completely different way.” Data is one very important aspect, “but the framing, the interpretation of data is much more important than the pure data. And there I see a huge knowledge gap.” 
  • To me it does not make very much sense to take the same transparency rules that we have in the traditional financial system and put them also into the crypto space – unless there are negative spillover effects on outsiders, such as money laundering. “I think that this problem is hugely exaggerated.” 
  • Having the same extremely rigid burdensome rules that we have in the outside world in the crypto space “would kill innovation. But it would be much more dangerous than that, because it would also harm the spirit that we have just discussed on this decentralised movement, which is a very positive aspect.” 
  • There are “those people that come from completely other activities and see now a threat of competition and try to explain now to other people how dangerous [DeFi] is: it is not.” 
  • In DeFi, people are not (only) consumers, they are also users and producers. “When you enter that space you are co-developing that space at the same moment”. This gives answers to the “legal discussion of: who is responsible? I don’t think that the individual as such is responsible: it is the group that is responsible.”  We “need to find new rules on how to govern and make that collective responsible”, although the situation is different when there are spillover effects on outsiders.  
  • Technology is one thing, the business model is another thing. But the core issue is: benefits that they create for the public (e.g., for SMEs by lowering fixed costs linked to intermediaries). 
  • Crowdfunding paved the way for tokenized economy: it changed the mindset of regulators. 
  • “We need to make sure entrepreneurs not only have access to tokenized finance, but can also create it themselves.” Become ‘mini-financial markets’ themselves. It must be the decision of the entrepreneur to decide: “how do I structure, organize and govern my own finance”?  
  • The state of Wyoming in the US, “has created the legal status for DAOs, which I find very important because that sends precedent out there to see that you can deal with these things in a way.” 
  • The question of what drives people to form such collectives that are outside the centralized control … is a completely underdeveloped question. And that gives you an indication of where people want to go to.” 
  • “I very often get the question of “why don’t you regulate all that stuff? … But what people need to understand is that the regulators are much more important than the regulation. … And if the persons interpreting the regulation have knowledge about what they are discussing, work together with the DeFi space (because the DeFi space is open to it), you prevent at least 90% of the problems to emerge. … And then we don’t need to discuss much of this regulatory, centralistic, interventionist discussions again, because we don’t need to.” 
  • DeFi is a challenge for policymakers and regulators, to really understand not just the business model as such but what is behind it, what are the opportunities. 
  • The challenge for the DeFi community is ‘to understand that you are not only playing around, but if you consume energy, if you are creating certain risks that you may not have under control, if there is a part of your community that has bad intentions,  to put it a bit simply, then you have an obligation to act on that together with the society in which you live.” 
  • If regulators and politicans try “to really cut down DeFi, prohibit it, prevent it, you will fail.” This is “very well understood in Europe, actually.”  DeFi “has started rolling and you will not get it back into the box. So live with it, deal with it, but do it in a positive way.” 

Full transcript:

*We’ve made minor editorial changes to improve the readibility of this transcript. 
 

ASC (Ann Sofie Cloots) 

We have with us today Dr. Joachim Schwerin. Dr. Schwerin is Principal Economist at the European Commission, working at DG GROW, and has been thinking quite a lot about digital assets in general, DeFi specifically and many other related topics.We are very grateful, Dr. Schwerin, that you have made time to be with us today to talk about these important issues.  

Dr. Schwerin 

It’s my pleasure to be here so thank you very much for the invitation and really looking forward to our discussions. So I guess we dive right into it. 

ASC 

Ok – The first question, just to open the floor and set the scene: what do you think are the key opportunities and the key risks that you see for decentralized finance or DeFi? 

Dr. Schwerin 

I think I focus on the opportunities, because obviously there are risks, but there are whole libraries that have been written on the risks of DeFi. And I think with regards to risks, we need to distinguish between different types of risks. There is so far no systemic risk in DeFi compared to other parts of the financial system, the legacy system, where there are systemic risks, which we have seen. There are the usual suspects of risks, I would say, in terms of financial activities, investments etc., but this is not DeFi specific. And of course there are some technical aspects which might be difficult to grasp for some people who are not necessarily those that have indeed been busy with DeFi, that have been developing and using it. So I think that is a rather confined space in terms of risks. And we should not exaggerate that. The more so as there is quite some interest by incumbents to flag a lot of risks where I think, at this stage of DeFi, we should focus on the opportunities. 

And the opportunities: I don’t want to be too basic, by discussing again all of that in terms of innovation, financial inclusion, all the other societal benefits that are in the DeFi space. I would look even broader: DeFi, in my opinion, is not just an extension of traditional finance. There are a lot of people that start from a regulatory perspective, from a political perspective, looking at what has already been around in the past. And basically saying: DeFi is the extension of that, just digital. I think, in my opinion, that is completely wrong. 

DeFi is a sort of philosophical, very basic movement, that goes even further than what is often called the democratization of finance. It is basically to put things to where they should belong: to the individual, but also to the collective. ‘Collective’ not in the sense of a state or an enterprise, but the ‘collective’ in the sense of the community. And the two come together: the individual is part of the community and the community can’t exist without the individual. But it is a bottom-up approach, it is not a top-down approach. 

So in that sense, DeFi is – as the name says – focusing on finance, but it is actually an empowerment that extends much further than finance. It is about all the resources according to your preferences, if they are used, it is about how we live together as members of a specific group, what are our rights? 

And this is completely in line with the approach that we actually take in Europe. If you look at our data legislation, etcetera: data belong to you and to no one else. You grant access to your data. Your money belongs to you. I have never understood why anyone else should take decisions on your money, including your bank. They are not in a position to take decisions, only you. 

And that is so fundamental, so self-evident, that it is very striking that, in the past, in the structures that we have built over the last 200 years – not before: before, historically, we had different situations – but the last 200 years, we have been always centralizing, centralizing, centralizing.  

And DeFi is, not the starting point, but is a key element in order to get us back where we belong and that is the decentralized community aspect in it. And if you allow me to add that point, because I find it very important: we also need to discuss, I think, what DeFi is

DeFi: I mean, I hear a lot of people – again, coming from a technological perspective – [stating] that DeFi started a couple of years ago, that it started on the blockchain and that it is necessarily digital. In my opinion, that is wrong. 

DeFi is decentralized finance. It does not say digital. There is analogue decentralized finance. Historically, there have been many parts of local, regional developments, where the internet hasn’t been existing, blockchain has not yet been existing, but there have been forms of decentralized finance.  

This scoping is extremely important. Words are important. It is important to understand what a token is: a token is not primarily digital, either. A token is also in the analogue world. And there are a lot of examples for that. And this shows you, I think, a little bit of what we are discussing here.  

We can, of course, have a very technocratic discussion, a very regulatory discussion, a very legal discussion really on the terminology that is now coming in most of the publications. But, from an academic perspective, that is wrong. We need to be much broader in order to be also beyond pure financial things and the philosophical, the anthropological aspects that are important in this discussion.  

To give you a grasp: the whole power of the movement, which is enormously strong if you liberate these forces that lie in individuals and in the groups that they form, independent of the centralistic structures of the present state we have. 

ASC: 

That is a very interesting take on DeFi. It really, as you say, broadens the picture. Instead of saying ‘it is just a technological innovation that is just doing the same things but more efficient or quicker’, I think what you touch on is something important: it is more than that, than just technological innovation.  

And another thing you mentioned is the need to see this from a broader perspective means it is not just about regulation: there are many other aspects. For me as an academic, I’m thinking: inter-disciplinary research.  

My question to you: from your position at the European Commission or from your position as somebody interested in DeFi, do you think there are any knowledge gaps that we need to address, just as perhaps the one you just mentioned? Do you think there is enough data to assess what DeFi is and what the volumes are, transaction flows, that we need to better understand? How do you think we can use that to better understand what DeFi is? 

Dr. Schwerin: 

That’s a very interesting question. First of all, let me allow to say that I work for the Commission but in this discussion I do not represent the Commission. Everything that I say are my personal opinions. So please don’t think that we will do something, or start something, just because I say something. These are my private opinions. 

We have a lot of data. And, I don’t call it a ‘problem’, we have a mismatch of the data that are available at the decentralised level, we have data that come from the service providers, we have a lot of stuff out there. We of course have data on the blockchain as well, or on the blockchains, which does not mean that they are easily accessible, but the data is there.  

The data is, at this moment, not very much matched with how we have approached data in the past. If I only look from a governance perspective: the European Commission is an organisation comprising 27 member states. We have always tended to look at national data and the policies also very much targeted national data.  

The European perspective in the DeFi space – by definition you do not have borders, you do not have countries, you do not really have the data sets of country-by-country data sets – because it does not make any sense. So you have platform-by-platform, application-by-application or whatever you have. There needs to be a better understanding of what all these decentralised data actually mean and how they can be used.  

But also: that must be linked to what we have been discussing before and that is the broader aspects of DeFi. It is interesting to see in a sense all these developments of, for example, volumes prices fluctuations et cetera and I can understand the technological fascination behind it. From an investment and finance perspective that makes sense. But we need to interpret these data also in terms of its use, what is the benefit for that community. And there I very much observed a complete separation between how people active in the DeFi space very often interact with the data and how the others that are, for example politicians or regulators, define the data. 

One very good example is actually the short term price fluctuations. It’s about questions of whether certain stablecoins are really backed up to a considerable extent by any reserves or assets behind them et cetera. That has been a big concern, as you know, for regulators. But, for example, when they make a press release to look into this matter or when there is even a legal procedure: there is hardly any price movement, which means that people who are in the DeFi space, in the community simply do not seem to care about certain concerns that come from outside.  

So on the one hand side you have data that is very rich but not yet fully analysed. On the other hand you have different sorts of people interpreting the same in a completely different way. And my take on this is that, actually, when you are looking at this space, it should be more relevant what people active in the space think about the data than what the people outside the space think about the data. Because, at the end of the day, you enter that space with your money, with your intentions, with your activities.  

If you have a major problem with the setup of the DeFi space, then in God’s name do not enter it. But if you want to enter it just as a side activity, because you are doing 1000 other things, you do not understand the philosophy, then you cry when something goes wrong and go to the regulator for some legal help, etc., then I think you take the wrong approach.  

Therefore data is one very important aspect, but the framing, the interpretation of data is much more important than the pure data. And there I see a huge knowledge gap in this area because it is so far hardly discussed. 

ASC: 

Again you broaden the discussion and say it is not just about the myopic views that we sometimes focus on – price fluctuations, very specific factual questions – but it is about linking the data to broader questions and the bigger picture. 

Dr. Schwerin: 

I am an economist, so basically I know what to do with the data. One of the first things that I learned at university when people came up with these very elaborate models – statistical models, econometric models – doing a lot with a lot of data etc., getting a lot of results that are completely counter intuitive, that do not match your gut feeling: the most important thing as an expert, even if you are advanced, is your gut feeling. If the data interpretation does not make any sense, it is probably wrong. So you need to approach economics – but I feel also law and the other aspect that we are discussing – as a sort of coherent, interdisciplinary field that basically you need to understand all the mechanisms. But if you understand data ‘dry’ – in a sense that you do not put them into their context, into the belief systems of those that produce the data-, you get completely on the wrong track and then you end up with the solutions that you have today. 

ASC 

Picking up on something that you mentioned earlier about how the insiders may see it very differently and they may not care about price fluctuation: just thinking about one of the arguments I sometimes hear in DeFi is “well, DeFi can bring so much more transparency because, as you mentioned, so much data is on-chain”. It does not necessarily mean anybody can access those data but the argument is one of transparency, saying “well, DeFi has fewer information asymmetry problems. It does not have the same insider – outsider gap when it comes to information.” Can you elaborate a little bit more on what you said about: ok, the data may be there, we do need to find ways to understand and interpret it, to allow anyone interacting with DeFi to understand it before they come into the space or when they are in the space.  Have you seen any practical solutions to how those data can be digested – any tools that people can use to use those data on chain? 

Dr. Schwerin: 

I think there are a lot of tools on the market. I am not an expert, I have just researched a little bit about actually what people do with data. There seemed to be a lot of ideas floating around. At the end of the day, I don’t think that is the critical point that answers the very important question that you actually raise and that is: the insiders versus the outsiders – who are they, what is their perspective, et cetera.  

It is fundamental to distinguish between two things. Obviously when you go from fiat to crypto, when you enter that space or whatever you like to call it: you become a sort of insider by the activity that you do. And I feel that some mechanisms in this inside space work differently than they work in the traditional domain, because indeed you have the transactions, we have the data that you create that are on the blockchain. But I would doubt myself – I don’t know that many people that are actually engaged with crypto activities, etc. really are that much interested in the transparency aspect. We know that it’s a safeguard, we know it creates trust, we know it can be accessed if something goes wrong, we know there is a guarantee mechanism. All of that is extremely important and it is present.  

For normal transactions, I would compare it more with a gaming structure or very innovative space, where people try out certain things. And you see that, actually, with a lot of developments this year. So in a sense, the question is, first of all, for the insiders: do they need to be protected from themselves and from others in the space? This is a perspective that outsiders very often take, because they compare it with your, let’s say, person that has very little money and is at risk of fraud and needs to be protected in the real world – which is completely right.  

But if you enter that [DeFi] space, I think the perspective changes. [For] the insiders, of course, [there’s] the perspective that there is transparency, but normally that they are not in a position where they need to use that transparency. Also, I feel there are quite some misperceptions actually of what that transparency is. They like to have a certain lack of transparency compared to certain outsiders. A lot of people go into crypto currency thinking they are anonymous, which they are not – at least most of them. Others are going into this space saying “we love this full transparency”, but again it is a data problem, it is an excess problem, it is an energy problem, it is a storage problem, especially if you scale. 

So there are unsolved problems but nevertheless it works.  

And I fear, therefore, to me it does not make very much sense to take the same transparency rules that we have in the traditional financial system and put them also into the crypto space – unless, of course, you produce something that has a negative effect again on the outsiders, on the outside world. That can be of course terrorist financing etcetera, or money laundering. I see the figures regularly because I am sitting in the relevant committees and I think that this problem is hugely exaggerated. So I do not see the big risk. I do not see the systemic risk either, because at the moment we do not have the size of the market to be very much of a systemic risk.  

So I think those risks to outsiders are very limited. Of course you need to discuss certain issues, such as how is advertisement being made, is there fraud, are there false promises and stuff like that. And I agree that we need more information, we need certain rules on that. But to have the same extremely rigid burdensome rules that we have in the outside world in the crypto space would kill innovation. But it would be much more dangerous than that, because it would also harm the spirit that we have just discussed on this decentralised movement, which is a very positive aspect. 

This needs to be raised. This needs to be assessed, in my opinion, by those people that do it and not by those people that come from completely other activities and see now a threat of competition and try to explain now to other people how dangerous it is: it is not. 

ASC 

Again, you make many interesting points. This may not necessarily be understood by people who are not yet familiar with DeFi. It is hard to blame everybody, because DeFi moves so quickly. For many public officials, whether regulator or lawmaker, it is just one of the many things on the agenda. There is one point that you mentioned that made me think about what another person said in this series: that we should stop thinking about people using DeFi as consumers and see them more as users.  

That terminally terminology is important, because it shifts that focus away from “we just need to protect people”, protect the insiders from themselves versus “we need to enable them to explore within certain boundaries” (as you say, obviously if there is no money laundering influence or any other risks to others). 

One more question: what can this ‘decentralisation’ in DeFi lead to? What other areas of decentralisation are there? Do you see any role for DAOs, do you see an increased use in smart contracts? Is that something that you are looking at? Where is decentralisation leading us to? 

Dr. Schwerin: 

First of all, I am not that time constrained, I find it an interesting discussion and we can certainly elaborate on a few more things. 

Also I would like to briefly address what you mentioned before, and what Sheila Warren has said: yes people are not consumers, people are users. Yes, of course, they are, but they are also producers – they are everything. You need to be broader than that, because, when you enter the space and when you take the attitude that ‘I am sitting on my chair and I am perhaps not that passive but I use the stuff, you fail to see that, as I mentioned, that you are co-developing that space at the same moment, you are using and developing it. And this a very different perspective: this is the individual, as your own small factory of productive entity or idea-generating mechanism. You, as an individual, entering the collective space and engaging as this collective, take a much more active role as a group to develop these things. 

I address this point because it gives answers to the legal discussion, of course (but it happens very often): who is responsible? I don’t think that the individual as such is responsible: it is the group that is responsible. That, of course, is a discussion of whom can you actually identify in order to put the blame on when something goes wrong and the liability and stuff. Is it one person? Is it the programmer? No: it is the collective. And you need to find new rules on how to govern and make that collective responsible – but only of course for things, as discussed before, that spill over to the outsiders and not necessarily to the insiders. 

That also, of course, links to the question that you have just raised: where is this going towards? Is it going towards DAOs? Is it going towards other parts? When we started to look at blockchain solutions or the crypto space, a lot of years ago, as a public organisation in which I am working: technology is one thing, the business model is another thing. All of that is fascinating, but this is not really the core issue. The core issue is benefits that they create for the public, for the population, for the economically active population but also for other parts that perhaps use less monetized tools as such. That, for example, includes a lot of practical applications for the real economy, for SMEs, for productive enterprises that can be in a much better competitive position, because we can establish structures where the services that are so costly because of the fixed costs that are associated to that – costs created by intermediaries, we know all the theory – is reduced by integrating that into a tokenized version or a tokenised machine, by the interaction of machine-to-machine, by autonomous behaviour of certain small-scale production structures that are based on smart contracts. 

All of that creates huge opportunities that are being explored of course at this moment. That’s a very strong point. Similar to DAOs: if you look at the history of that, it has not been too convincing yet, in my opinion. But a number of new ones have been founded this year. We heard earlier this year for the first time that an important entity, the state of Wyoming in the US, has created the legal status for DAOs, which I find very important because that sends precedent out there to see that you can deal with these things in a way. And this is also an intermediate step – it is not an end step. It is like stablecoins – we can come to that if the topic is interesting.  

But DAOs, in a sense, are still humanly created and then we start the smart contract that then starts this autonomous behaviour. We can of course think that further: you can have that either as a human-centric discussion or you can have that with no human involvement at all. And this, of course, brings us back to the very fundamental point: do we want that? Is that from a normative perspective good or bad? We are not there yet at this stage. It is always very important to distinguish between the facts and the normative aspects.  

But the only thing that this lengthy answer is [aiming] to provide is: the creative space [opportunities] of where we go to are endless. You have applications in each and every production system, in each ecosystem in the real economy. You have that in the crypto space purely if you create some sort of smart contract-driven DAO or whatever. 

You can fine-tune that to the needs of the collective again. None of this is really falling from heaven, but this is something that is created really to the preferences of those involved at a very local level.  

And therefore I think the question of what drives people to form such collectives that are outside the centralized control, that so much is taking over in most parts of the world at this moment, is a completely underdeveloped question. And that gives you an indication of where people want to go to.  

There are a lot of people that go into the DeFi space, the decentralised space, just because they say: “leave us alone” to those that are outside, “we want to play, we want to do our own stuff, we don’t need your laws and stuff like that”. And all of that is fine, but if you want to scale it, of course — and this is what the DeFi people have to understand — you need to have certain rules. 

And you better get them from their own governance structures, from your own code of conduct, that need to work. But if that does not work and if you scale and if that movement becomes very big, you need not be surprised that then the centralised entities come in and try to regulate things (we have not done so yet, for very good reasons) and try indeed to prevent the negative spillovers to the outsiders in the system. 

But – and this is a point that I know is very important to you – again brings us to the final question of regulation and the regulators.  

I very often get the question of “why don’t you regulate all that stuff?”. And a lot of people do have very good arguments not to do so, including myself, because it is very innovative, very much opportunities-driven and not risk-driven, as such. But what people need to understand is that the regulators are much more important than the regulation. Regulation is something that you write on paper and will then remain unchanged and it has a certain spirit.  

And if the persons interpreting the regulation have knowledge about what they are discussing, work together with the DeFi space (because the DeFi space is open to it), you prevent at least 90% of the problems to emerge. Because the regulation is a patient piece of paper, at the end of the day, and you can interpret it in different ways. So it is much more important to educate the regulators and to have them work together in spaces, that can be sandboxes or anything else, joint developments of all sorts, together with the space, to develop the philosophy and understand actually what the benefits are. And then we don’t need to discuss much of this regulatory, centralistic, interventionist discussions again, because we don’t need to. 

ASC 

So, again, trying to bridge the two different worlds: the DeFi people may not have been thinking about regulation that much when they’re actually developing products – and then regulators looking at it. And try to bring those two together to understand each other’s perspective. It is not, as you say, something that is just risk-driven but it also offers opportunities that we are still exploring. We don’t have all the answers yet, but it may be worth allowing it to evolve and see what it can feed into, even if we are not happy with what we see at this very moment. 

Dr. Schwerin: 

And- just perhaps to wrap up this line of thinking- it poses a challenge to the three parties that are involved, in my opinion: the challenge to (1) the policymakers, to regulators, to really understand not just the business model as such but what is behind it, what are the opportunities; (2) it is a challenge to academics, especially the legal community, of course, but also economics and others, to work together to develop a framework, including a language, definitions and legal principles for collective action compared to individual action (because we are discussing here groups, autonomous groups); and (3) it is a challenge to the DeFi community indeed, to understand that you are not only playing around, but if you consume energy, if you are creating certain risks that you may not have under control, if there is a part of your community that has bad intentions,  to put it a bit simply, then you have an obligation to act on that together with the society in which you live. And this needs to be understood.  

If all three come together to a certain space, there is a lot of opportunity in that. But the point regulators and politicians need to understand is: even if that does not happen and if you try to really cut down DeFi, prohibit it, prevent it, you will fail. Because you do not have it under control. And this is very well understood in Europe, actually. I do not know to what extent it is understood elsewhere, but from discussions in the US [it is clear] they understand this very well. This is something that is just a fact. 

I’m not comparing it to climate change (as it is very negative, and DeFi is a very positive development), but it is something that has started rolling and you will not get it back into the box. So live with it, deal with it, but do it in a positive way. 

ASC 

That is also an important question: even if you would want to stop [DeFi], how do you do that? 

Dr. Schwerin: 

I think for the right reasons. Because at the end of the day, including myself as an individual I want to decide myself what I do. I do not accept any one’s right for example to tell me what I do with my money. If I take, with my background, a decision to go into certain things that other people consider as risky, my bank for example tries to prevent it, because then they have standard rules that say that you are too stupid to understand the risks. And then I tell my bank: you are too stupid to understand that is my money. Goodbye. 

ASC 

One final question: you mentioned SMEs [=small and medium enterprises] and financing. I know you’ve been working on that a lot. Is DeFi another way of financing [for SMEs]? Is that one of the drivers behind it? Is it something it could lead to, even if it is not a driver yet? 

Dr. Schwerin 

I don’t want to be too positive on what we have been doing on the side of the European Commission, because it sounds a bit like we are tapping on our shoulder. But I think, with the MiCA [=Markets in Crypto Assets] Regulation, the whole approach we take on blockchain: we are quite opportunity-driven, with the exception of certain discussions on stablecoins, I keep that out for a moment, but that is a temporary issue. 

In general terms, we are very positive. We are that, not because all of a suddenly we like crypto-currencies or blockchain, but because we had a fundamental problem more than 10 years ago, with the Financial Crisis, with the financing of our real economy. In Europe, compared to other parts of the world, 75% if not more, of the financing of our small and medium sized enterprises came through the banking system. And suddenly the banking system was in complete turmoil, with a lot of systemic risks. We looked for alternatives. The first alternative that came across was crowdfunding, we call this the services that provided alternative financing. And what crowdfunding did is not that it provided the volumes of financing that needed for SME, but it completely changed the mindset. Not only of the entrepreneurs, but also the regulators, because that was the complete opposite from regulation of maturer markets. That was suddenly very innovative, very grassroots, very bottom-up, in a local environment, with competition for the market, not within the market, destructive innovation,… – all these things that suddenly came about.  

And for a lot of reasons, as is always -or very often- the case, the first mover didn’t really earn the big rewards, because that was a very cumbersome way. But it paved the way, for the whole fintech development, for the whole development now of blockchain, of the token economy, that we are discussing now, only 10 years later. This is absolutely essential for SMEs.  

You have already some quite innovative legislation in some parts of the world on this, where you need to also put the entrepreneur in a position to not only have access to crypto assets or to tokenized finance, but to create it himor herself according to the needs, according to the principles, and then be a sort of mini-financial market in that environment. And we have a number of examples of that already, in this domain. And this is suddenly possible, because you do not have all the fixed costs of coming from the intermediaries, but you also now have a better framework as regards the legal situation – it’s not perfect, but it has been improving, at least to allow you to do certain things and learn.  

This must go much further. At the end of the day, it must be the decision of an entrepreneur, he or she, large or small, not only to decide on ‘what person do I employ, what input do I use’, but also: ‘how do I structure, organize and govern my own finance’? Because if someone on that basis gives you money, who should prevent that, at the end of the day?  

There are very good examples of people who take that approach. They get finance from their local community because they are trusted, they are living there, they have their social centre there, they know they will get completely discredited if something goes wrong. This works at the local level. I am not saying this works globally. But what you can do is, you can create a structure where you have the local success story and you can combine that with a decentralized network with a broader perspective. Then you create, again, a DeFi space, but that does not come because of blockchain, but because of a much greater need that has been there before at all time in human history, because that is what people want.  

ASC 

You put Defi in a much broader perspective: the questions that are being asked now, are they indeed the right questions being raised? As academics, we can do a much better job saying not just what DeFi is but where it comes from and what it can lead to. 

Thank you so much for giving us such a rich discussion on DeFi and showing us that there is so much more to be discussed – and a positive discussion we can have. 

End of transcript

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