SushiSwap Builds in Controls as AML Measures Loom

Decentralized finance (DeFi) is supposed to be the ultimate expression of democratic governance. There is no human management, no incorporation in any jurisdiction and all issues decided by token-holder voting.

There aren’t even know your customer (KYC) or anti-money laundering (AML) checks.

And yet, token holders in SushiSwap — the 14th-largest decentralized exchange (DEX) with a 24-hour trading volume of more than $85 million and a market capitalization of $834 million as of Monday (March 21), is now voting on whether to create a Swiss-incorporated foundation.

So why is one of the top DEXs trying to create a foundation to provide both more centralized control and fit the project into a national legal system?

Simple. The proposal said it should be done “in order to mitigate future risks.”

Specifically, this will provide the decentralized autonomous organization (DAO)-run DeFi project with “legal clarity regarding the rights and obligations of token holders and contributors, limit liability of token holders and contributors, and create an apparatus to manage administrative issues for SushiDAO.”

See also: Unpacking DeFi and DAO

That sounds mighty centralized.

Indeed, the 243-word proposal also includes setting up a development company and hiring a general counsel, proposing that “various services entities can be created for contributors to the Sushi Protocol.”

Anyone holding the DEX’s native cryptocurrency token, SUSHI, which is required for transaction fees, can vote.

Targeting DeFi

DeFi projects have been in regulators’ and politicians’ crosshairs for some time, most notably with the Financial Action Task Force (FATF)’s recent Travel Rule, which required virtual asset service providers (VASPs) to follow KYC and AML regulations.

Among other things, it warned regulators not to simply accept DeFi projects’ argument that they are truly decentralized. In most cases, it said, these platforms have some person or legal entity that “controls or influences” the project sufficiently to be targeted for violations, according to CoinDesk.

Which is more or less what is acknowledged by the SushiSwap proposal, which so far has 100% voter support.

Certainly the U.S. is watching. In September, Uniswap Labs, the development company behind Uniswap, a DEX with a 24-hour trade volume of more than $1.3 billion — revealed that it was being investigated by the Securities and Exchange Commission (SEC).

And SEC Chairman Gary Gensler has called DeFi “a bit of a misnomer,” adding that parts of the transactions are actually “highly centralized.”

Backtracking or Moving Forward?

So, what’s SushiSwap doing?

To start with, it chose Switzerland because it is a crypto-friendly destination — it was one of the first countries with a legal framework for crypto, and many projects, centralized and decentralized alike, are headquartered there. Meta’s abandoned Libra (later Diem)…