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Regulated crypto exchanges are ahead of the curve: WEF launches whitepaper for policymakers

Views differ among the majority of the world’s population on the purpose and motive of the World Economic Forum (WEF) led by controversial figure Klaus Schwab.

Despite its omnipresence in the news and use among disgruntled members of the locked down public over the past year, the WEF has been in existence since 1971 and its founder, Mr Schwab, is still in the driver’s seat after fifty years in the same position.

Therefore, the WEF is very much an old-school institution. It is as steeped in post-war pseudo-government background as the International Monetary Fund (IMF) and is older than the European Central Bank.

It is fair to say that the WEF, and its Davos conferences, is an organization whose dialog and publication is taken very seriously indeed.

Some believe that it is the originator of a well-planned malintent and that it works alongside big corporations and big government to conspire against the liberties of the average citizen, and that it has a globalist agenda. These are the exact suspicions that led cryptocurrency to popularity in its years of infancy a decade ago.

Today, however, the WEF has demonstrated that it is absolutely bang up to date with the ever-evolving maturity of cryptocurrency, and has actually produced a white paper in the form of a ‘toolkit’ for national financial markets regulators so that they can understand the decentralized finance (DeFi) industry.

The white paper is fresh off the press, and came into circulation early this morning Central European Time.

Its synopsis surrounds its purpose as a series of information and guidelines to inform government and regulatory policymakers on the varying aspects of DeFi within the now well established cryptocurrency topography.

Published under the name “Policy Makers Toolkit”, the white paper describes the ethos and components of DeFi, and was written by Sumedha Deshmukh, Platform Curator, Blockchain and Digital Assets at the WEF, along with Sheila Warren, Deputy Head, Center for the Fourth Industrial Revolution who is also a Member of the Executive Committee at the WEF and Kevin Werbach who is Professor of Legal Studies & Business Ethics, and Director of Blockchain and Digital Asset Project, Wharton School, University of Pennsylvania.

Three well versed academics indeed.

Whilst the white paper does not actually advise on policy with regard to regulation, it demonstrates to governments and regulators what constitutes DeFi, gives a detailed description of the components of both a DeFi entity and the DeFi infrastructure that currently exists and how it will likely develop in the immediate future, covering infrastructure and the type of design of each category of DeFi along with its associated definition.

It describes the methodology and structure of Trust-minimized operation and settlement, non-custodial design and open, programmable and composable architecture which refers to the broad availability of the underlying source code for DeFi protocols and a public application
programming interface (API) enabling service composability, similar to open banking in centralized financial services.

The execution of smart contracts is covered in detail, and the white paper defines the roles of operators who create code, signers and token holders, and categorizes the service categories into exchanges, stablecoins and credit.

Ahead of the curve, Coinmetro is regulated by the Estonian authorities, with the company holding both a cryptocurrency exchange license as well as a digital wallet license since 2018.

Traditional financial markets features such as counterparty risk and liquidity risk are covered, both of which are aspects that apply to trading desks within banks and traditional commodities exchanges, however the white paper also coves miner risk which deals with the possibility that transaction processing entities behave maliciously towards certain transactions. This depends on the correctordering and execution of transactions sent to a DeFi smart contract.

A number of case studies are included, including the infamous 2020 SushiSwap vampire attack on Uniswap in which pseudonymous developer, Chef Nomi, forked Uniswap, an open-source decentralized exchange, to make SushiSwap, a nearly identical exchange with an added token (SUSHI) and token rewards for liquidity providers and token holders.

The incident, which became known as the first “vampire mining” event, was unique in that SushiSwap indirectly competed with Uniswap by providing the same service using identical code but with an additional incentive, draining Uniswap’s liquidity. Initial participants in SushiSwap earned SUSHI by depositing Uniswap’s LP tokens, which represented user deposits in the Uniswap DEX. These Uniswap LP tokens were then swapped for the SUSHI, so that Uniswap liquidity would become SushiSwap liquidity.

Ten days later, the pseudonymous developer sold all of his SUSHI tokens for $13 million in Ether and handed over control of the protocol to the Chief Executive Officer of FTX, a centralized exchange.

Ultimately, it is a good thing indeed that these matters, along with the framework and facts about the inner workings of cryptocurrency are being discussed and provided to regulators, as it is clear that being a regulated cryptocurrency exchange is one of the routes to sustainability and is key to the growth of the digital asset industry as it becomes an increasingly important component in the world’s financial market sector.