The US Department of Justice should stop holding decentralized finance (DeFi) protocols accountable for wrongdoing they didn’t instigate and can’t control, venture capital firm a16z said in a Feb. 4 blog post.
According to the post, “Holding people responsible for systems and activities over which they exercise no agency or control leads to perverse outcomes.”
Unfortunately, the Department of Justice (DOJ) has ignored this distinction and is attempting to do just that by holding software developers responsible for the actions of third parties that use neutral tools the developers originally created but no longer control.
The VC firm said the new US presidential administration’s “biggest policy priority” for crypto should be “codifying the proper and legally correct understanding of ‘control’ in law.”
This is particularly important in determining whether crypto companies qualify as “money transmitting businesses,” which are subject to specific rules and obligations, a16z said.
A16z’s portfolio of venture investments spans upward of 100 crypto companies, including decentralized exchanges (DEXs) such as Uniswap, according to its website.
Changing federal crypto stance
Under former US President Joe Biden, federal agencies took an aggressive regulatory stance toward crypto. For instance, the Securities and Exchange Commission, the top US financial regulator, brought upward of 100 regulatory actions against industry companies.
US President Donald Trump, who began his term on Jan. 20, has promised to make America “the crypto capital of the world” and to replace agency heads with more industry-friendly appointees.
In past legal actions, US prosecutors sought to hold cryptocurrency developers liable for activities conducted on their platforms by others. In its January blog post, a16z compared this to holding a car manufacturer accountable for actions by a negligent driver that resulted in a crash.
“It wouldn’t make sense to hold carmakers responsible for the bad driving of their vehicles’ users,” a16z said. “These principles seem obvious in the case of automobiles, but they are very much still at issue in the digital sphere.”
Unlike centralized exchanges like Coinbase, DEXs such as Uniswap do “not retain control over the protocol or have the ability to control how third-parties use it,” a16z said.
Understanding this distinction is crucial to “establish[ing] a clear and fair foundation for crypto entrepreneurs and developers to build in the United States,” the VC said.