DeFi Skepticism, Decentralization, Tax Define London Blockchain Week

The final stage of London Blockchain Week looked as if it would be the latest victim to the coronavirus crisis. Many of the events that had initially been set to take place physically were held online. Others were canceled outright. But the jewel in the crown of blockchain week in London, CryptoCompare’s Digital Asset Summit, went ahead as planned. 

Rumors swirled that there would be poor attendance and mass dropouts from panelists. Many of the week’s previous events had suffered from coronavirus fears, and venues were often half-empty. The massive Magazine London space, in the shadow of the city’s iconic 02 Arena, was far from full. But it was a marked improvement over the rest of the week. 

DeFi dominates the day

The crypto industry is particularly prone to hype, and the past week has been no exception. While at FinanceWorldwide’s blockchain summit, central bank digital currencies were the talk of the town, DeFi permeated all talks on all stages. There was even a stage dedicated exclusively to talks about the burgeoning sector itself. 

The first discussion on the topic kicked off on a philosophical note familiar to many in the industry: The issue of decentralization. It will come as no surprise that panelists had a variety of views on the topic, with Aave founder and CEO Stani Kulechov opining that decentralization is a spectrum. Other panelists agreed that DeFi does not have to be either centralized or totally decentralized, with MakerDAO’s Gustav Arentoft arguing that total decentralization from the very beginning can lead to inefficiency and expose a young project to myriad security risks: 

“Current protocols are relatively new. As time goes by you inherently have more and more confidence with it. Gradual decentralization there’s a reason, if you are totally, you need to have the ability to defend against every possible attack vector.”

Security was at the forefront of the discussion enveloping DeFi throughout the day, with Kulechov explaining, “We used to have nerds attacking the system, now we have nerds with money.” Arentoft also told the audience that security has been a big challenge for DeFi projects: 

“Most work is done by manual audits, but to verify everything is more of an art than a progression. It’s a difficult field. We have bigger responsibility when building the system, as the code is completely public. We have limited time to build the system. Hackers have unlimited time to research the code and create hacks. And that’s the hardest thing to beat.”

Crypto tax

It is said that in life, there are two certainties: Death and taxes. In the time of coronavirus and the nearing end of the fiscal year, there’s sure to be an influx of both. Tax has been an area of difficulty since the birth of cryptocurrencies due to ongoing debate about their taxable nature along with a lack of universal regulation. One panelist gave insight into his experience while talking about taxation with crypto investors, “We found that people are technologists first, investors second and tax payers third.”

Given the lack of regulatory clarity around cryptocurrencies, what they are in the eyes of the law and people’s own diligence in checking to see what they are liable to pay, the fact that the panel of tax experts found people not overly concerned about their responsibilities is unsurprising. But those looking for a soft touch quickly found themselves disappointed. 

The general theme was that ignorance of the law is no excuse. And, with Britain’s self-assessment tax system, the onus is on the taxpayer to make sure they pay what they owe. The country’s tax authority, Her Majesty’s Revenue and Customs, has published a series of papers in the past two years giving taxpayers a more solid idea of what they need to declare and how. But the on-screen questions showed that investors still weren’t happy with the HMRC framework, with many suggesting that the guidelines were too general and did not take into account the complex nature of ways in which revenue can be generated in crypto, such as mining contracts and rewards. 

For the panelists, the message seemed clear: Do your research and pay what you owe. David Britton, tax partner at BDO, told the audience, “We’re not changing the legislation, we’re fitting crypto assets within the legislation. The tax regime fits quite well with how we deal with crypto assets.” 

The panel suggested that the Organization for Economic Co-operation and Development was in discussion about taxation of the digital economy. There is the widespread understanding that many of the world’s biggest companies, including the big-four of tech, systematically avoid costs by setting up in tax havens. The new taxation of the digital economy could now focus on end-user location, meaning companies would have multiple filing obligations and wouldn’t be able to rely on low-tax jurisdictions to boost profits. 

But the tax experts said that all investors in cryptocurrency would have to declare their earnings or face getting caught. The United Kingdom government has been direct about investing in new technology to crack down on crypto tax avoidance. The panel gave a stern warning to any investors who were considering trying their luck: 

“We will engage, and use industry power to get data. Banks and crypto exchanges will be no different. There’s no point beating around the bush. We are developing tracing capabilities to track down and follow the crypto asset flow.”

Blockchain and banking

Anyone spending even a small amount of time around people who are seriously into crypto knows that there is a lot of extremely ambitious talk about “widespread adoption” and one day replacing mainstream finance. By virtue of the industry being young and driven by passionate people with a tunnel-like focus, it often resembles an echo chamber. 

Institutional adoption is a key part of cryptocurrency finding its way into the wallets of a wider audience, along with earning itself some much-needed credibility among non-crypto natives. Fortunately, some experts from the institutional world were on-hand to tell the audience their own perspective on the crypto narrative. Ruth Wandhofer, nonexecutive director at London Stock Exchange Group, said that demand for blockchain banking in terms of knowledge and market cap was not yet ready: 

“There’s not enough demand or knowledge base. We don’t have teams that are ready to understand the market or how it evolves and build solutions in an efficient way. If we look at the market cap, the scale is just not there. Private crypto space, security tokens, the general market is not big enough for the required learning, technology and to put this in place.”

In general, panelists were underwhelmed by the DeFi hype currently taking hold across the industry. Blockchain is often seen as a one-trick fix to all finance’s woes, but the institutional panel agreed it would be hasty for investors to put all their eggs in one basket. The question of efficiency once again reared its head, with Sebastian Widmann of financial service firm Nomura stating that centralization can often be much more effective. 

The panelists were ready to admit that they saw potential in DeFi. It’s just that any meaningful impact they foresaw was a long way off. For Wandhofer, the all-important issue of bank’s aversion to risk still meant that most crypto projects were off the cards: 

“You cannot underestimate the degree of risk aversion — we’ve already had examples where one bank has built up knowledge, onboarding exchanges but then at some point has said we’re offboarding. It was risk-averseness.”

Throughout the day, the exhibition area bristled with attendees, some still choosing to shake hands, others tapping elbows or feet. The booze started flowing early in the afternoon, and it was clear that the summit was a success from the attendee point of view, even without an open buffet. But the question that looms over the entirety of London Blockchain Week is whether it should have happened at all. 

With the news that co-founder of decentralized login service provider TorusLabs, Zhen Yu Yong (Zen) had been diagnosed with COVID-19 shortly after his attendance at the ETHLondon hackathon and the Ethereum Community Conference in Paris, the decision to continue a public event during what has been described as “the greatest public health crisis in a generation” is one that will surely be scrutinized in the coming weeks. 

With an incubation period of up to 14 days, it may be some time before the impact of coronavirus on attendees of London Blockchain Week becomes known. Until then, wishing everyone to stay in good health, keep washing those hands and carry on.