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JP Morgan and SBI discuss how to make DeFi more secure – Ledger Insights – blockchain for enterprise

During a session at the Point Zero Forum, how to make DeFi more secure was discussed by executives from JP Morgan’s Onyx blockchain division, SBI Digital Asset Holdings (SBI DAH) and custody company Metaco, which earlier announced a digital asset custodial agreement with Citi today. Two of the speakers made suggestions for self-regulation in addition to the inevitable regulation.

DeFi: learning or lack of regulation?

The failure of stablecoin Terra and its associated Luna token, which together lost $44 billion in a week, was a big part of the discussion. Metaco CEO Adrien Treccani, as an entrepreneur, argued that a single failure should not lead to rejecting the technology. Failure is an integral part of innovation.

SBI’s Fernando Luis Vazquez Cao disagreed. He observed that going fast and breaking things might be okay in Web 1 or Web 2, but not in financial services, where the cost of failure is much higher. There should be no shortcuts. Referring to one of the failures of the dotcom era, he observed, “I really don’t care if something like goes down. But if you’re building a platform with billions of dollars in AUM (assets under management), then the stakes are much higher. He concluded that the focus should be on proper regulation of the service rather than technology.

JPM’s Onyx CEO Umar Farooq agrees. “Tens of billions of wealth have been lost. Retail people. And if a bank lost $10 billion in retail customers (money) and said, ‘I’m sorry, we’re moving very fast,’ management would be lynched in the street,” Farooq said. Treccani added that there had been a lot of losses due to centralized finance.

Farooq viewed recent DeFi issues as a failure to learn from history and previous financial crises, particularly the degree of leverage and the ultimate outcome.

“Somehow, crypto-assets got away with murder, unregulated,” said Diana Paredes, CEO of regtech startup Suade Labs. One of the issues highlighted by Paredes was the degree of interconnectedness within the crypto industry and the extreme price correlation between assets. However, Metaco’s Treccani noted the strong correlation between tech stock prices.

Potential self-regulatory solutions?

The discussion then turned to what should be done regarding the risks of DeFi, with each of the panelists having different views. A key point of debate was whether smart contracts could continue to be downloaded by anyone or whether there should be a gatekeeper.

Metaco’s Treccani observed that the nature of startups is to push boundaries, and if Uber had asked permission first, it wouldn’t exist today. He was adamant about the need to retain the freedom for anyone to download a smart contract, arguing that if rolling out regulatory approval or smart licensing required regulatory approval, “I think that would be a disaster. This would massively harm innovation. The practicality of blocking the deployment of smart contracts on a public blockchain was not discussed.

Metaco’s CEO wants to have objective third-party auditors rather than regulators. These auditors would review smart contracts, not just for code security, but for potential financial impact. In Terra’s case, he was surprised that people in the markets weren’t shouting “you shouldn’t touch that thing” because he thought its collapse was predictable. That said, several people raised red flags a long time ago, but most ignored them.

While Treccani mentioned a potential role for auditors, we see major rating agencies getting involved in the sector, with teams like Fitch and S&P Global Ratings.

A second aspect will be the inevitable regulation. Treccani said it was important that any law continue to promote innovation without creating as much risk as it does today.

SBI’s Vazquez Cao had a nuanced perspective forged through his experience in the early open source movement. He thinks self-governance is a key requirement and noted that with today’s DeFi, governance is tight. Only token holders get a vote, and regulators don’t have a seat at the table. He argues that DeFi governance should be multi-stakeholder.

Like Treccani, he also suggested that smart contracts should be audited. However, he positioned these auditors as gatekeepers or trust anchors who could verify smart contracts. And the role could potentially go to people like JP Morgan to keep the process light on scrutiny by a regulator.

From an open source perspective, it was when IBM “committed millions of dollars that open source became mainstream,” Vazquez Cao said. “I see something similar happening with DeFi. If we can identify what these trust anchors and gatekeepers should be doing, it’s going to explode. This will be a game changer for the industry. »

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