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This series features questions submitted by the Bancor community and answered by Bancor Project Lead, Dr. Mark Richardson, in a recent Q&A session.
Part 1, Carbon DeFi’s Execution Architecture and What Comes Next, focuses on execution architecture, intent-based systems, protocol upgrades, and how Carbon DeFi fits into an evolving wallet and AI-driven landscape.
Part 2 focuses on regulation, tokenized real world assets (RWAs), market structure, and how Carbon DeFi operates within evolving policy frameworks.
Q: From Bancor’s perspective, what regulatory developments would most directly accelerate the growth of onchain secondary markets for RWAs?
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Mark:
It’s good question. I’m not entirely sure there’s a simple answer to this. Part of me wants to say the regulatory developments don’t really have any impact on the growth of secondary markets for RWAs onchain.
The reason I say that is because even within the existing regulatory paradigm, or what was the regulatory paradigm of yesteryear 2017, 2015- it was still possible to do RWAs onchain if you wanted to.
I would say it was more difficult back then, but it wasn’t prohibitively difficult. It was really just a question of which jurisdiction did you operate inside of, and how are you handling things like AMLATF compliance and Travel Rule and that kind of thing.
So in terms of regulatory developments, I can point to Switzerland, that has made tokenized representation of securities and commodities a part of its legislature. If the entire world took that perspective, then that could massively accelerate the growth of onchain secondary markets for RWAs.
But at the same time, just because the regulatory landscape is permissive of these things doesn’t necessarily mean we should expect an on rush of enormous RWA transaction volume onto blockchains.
And I think that that’s maybe the expectation that the blockchain community has been fed since the early days of Ethereum. That eventually the regulators are going to catch up and all these institutions are going to want to do all this stuff, and so on and so forth.
But the reality is that the existing infrastructure with its regulations, if that regulation then becomes compatible with blockchains and the rules are similar in both of those environments, blockchain execution doesn’t necessarily offer a huge advantage over a non blockchain execution. In many ways, not doing stuff on a blockchain is preferable to doing it on a blockchain.
Now, that’s not true everywhere, and it’s not true for all asset types or all markets, but I think that the acceleration of growth for RWAs on blockchains has very little to do with regulation at this point, and a lot to do with specifically the people who are moving and interacting with those markets regularly, and what their habits are, and administrative processes and things for those institutions.
So I think this is a generational thing, not necessarily a regulatory thing. It’s kind of like asking why aren’t the baby boomers adopting TikTok? Like what would accelerate the growth of Boomer activity on TikTok? And I think if I put it in that light, it becomes more clear. It’s that TikTok is built for younger generations and there’s nothing you can do to make boomers interested in using some of these social media applications.
And I think the same is going to be true of the RWA markets. In the beginning there will be a small group who does prefer using blockchains for these things. And that group will continue to grow over time, but it’s really a sort of cultural alignment and values alignment more than anything else.
We could see that blockchain execution start to solve some of the, let’s say like self-reporting or compliance issues over time.
But for now, some of these companies have such massive inertia that even if they are turning their attention to blockchains and many, many are, still going to be a long time before they can update their own internal processes and climatize their own customers to using blockchain technology instead of the TradFi alternatives. So yeah, I don’t think it’s a regulatory issue.
Q: If clear regulatory definitions emerge around commodities versus securities, does that expand the design space for Carbon style secondary markets, especially for tokenized real world assets?
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Mark:
I understand the motivation for this question, but I think what’s embedded in the way this question is phrased is the assumption that Carbon is better suited to one of these than the other, and I don’t think that’s true.
We deliberately designed Carbon to be as abstract as it needs to be to achieve anything you can achieve with order book style primitives.
So depending on how regulatory definitions emerge around whatever, Carbon will be able to accommodate it.
Carbon at the smart contract level doesn’t know or care about what the tokens represent.
To Carbon, everything is just a number in a dedicated field. So we don’t have specific policy assumptions built into the design of Carbon.
Carbon is built specifically for people who want to price whatever asset they have over whatever price range they want to price them, and then broadcast that to everyone listening to the blockchain.
As regulatory definitions change, I expect the types of assets that people are trading on Carbon to change. But that won’t impact, and shouldn’t impact the way the protocol is designed. It’s more general than that.
Q: Do you expect future regulation to place more responsibility on wallets, brokers, or routing layers for execution quality? And how does Bancor’s approach align with that direction?
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Mark:
It’s a relatively well informed question, but I really don’t have any expectations for what future regulation is going to be. I’ve been doing this for too long. The regulatory landscape breathes in and out the same way the Bitcoin price does.
You might get an administration in some government around the world, it takes an extremely hard view of specific use of DeFi protocols in certain contexts. And you might get another government at another place in the world that’s much more liberal than that.
With respect to whether responsibility lies on wallets, brokers, or routing layers, all three of those things are going to be affected to differing amounts, and the amount of effect that they feel is going to change with every election cycle.
Let me put it this way: I think it would be extremely naive for myself or Bancor to be so arrogant as to assume that we can anticipate what that regulation landscape is going to look like in the future. So I deliberately don’t take a perspective on it, and I think that everyone in DeFi remains reactive when it comes to these things, and that’s the only sensible position to take.
Q: How does Bancor view the potential impact of a US market structure bill, like the Clarity Act, on onchain execution and secondary markets, particularly for deterministic trading systems?
https://medium.com/media/04e35c188c931ebee887d7e3aacfeb4c/href
Mark:
I don’t think either of the policy changes being proposed by the Trump government really have much impact on Bancor or anyone else in DeFi. The Genius Act, which put forth the rules for stablecoins and what would be considered, for example, acceptable collateralization for their issuance and other things, I think that has actually been beneficial because things like Tether now can’t use things like corporate debt to collateralize the USDT token. And Circle is held to the same standard. Those things are generally good because I think DeFi is going to be on slightly stronger footing, given the thoroughly entrenched nature of stablecoins across that ecosystem.
But it doesn’t really affect DeFi protocols necessarily. It’s very specific to stablecoin issuers. The Clarity Act really is about whether or not a specific token will be categorized as a commodity or a security. And this is really only important because of the way that the US regulates exchanges. Under US law, an exchange that deals in commodities is not allowed to deal in securities and vice versa. These things have to be kept separate.
And so the question was, are things like ETH securities or are they commodities? Are things like Bitcoin? Like XRP? This was the huge legal battle Ripple was going through. Whether or not $XRP, the token, is a security or a commodity. The Clarity Act is meant to specifically resolve that single issue.
But the Clarity Act also provides DeFi protocols a kind of safe harbor. There’s a specific exemption for non-custodial protocols. Basically all DeFi products fall into that category. Not every single one of them, but 99% of DeFi protocols are non-custodial. That means people who are developing protocols and validating transactions for those protocols and so on, are exempt from registering as financial brokers.
So it’s nice to have that declaration from the US government that they don’t see DeFi protocols as belonging to that class of businesses that need to separate securities and commodities and that kind of thing. So in a way, the Clarity Act continues to respect the kind of privilege decentralized protocols have already enjoyed up to this point in time. Long story short, the Clarity Act removes a little bit of the fear DeFi protocols had prior to the Clarity Act being proposed.
Secondary market’s are going to be the same. Deterministic trading systems are going to be the same, so on and so forth. The only kind of exchanges that are affected by the Clarity Act are going to be the purely custodial registered exchanges that will now need to separate the commodity-like tokens from the security-like tokens.
So exchanges like Binance and Coinbase, and so on. The Clarity Act for them is a much more significant issue, maybe in a bad way because it means that there will be this ladder that tokens need to climb, where they go from security status eventually up to commodity status. That’s kind of the idea. And so it’s reasonable to speculate that there’ll be two versions of Binance. They will have to be separate entities, one which deals with new tokens, which it will treat as securities.
After those tokens get to a certain age, they suddenly become commodities, and they’ll all need to move to the other Binance which deals solely in commodities. So it doesn’t affect DeFi protocols at all, but for centralized exchanges, I imagine it’s going to be a very tricky thing to navigate.
Q: As tokenized real world assets scale, what execution constraints do you think secondary markets will require, and where does Bancor technology fit into that picture?
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Mark:
Let me elaborate on the question a little bit to point out that for many real world assets, the idea that everything should be permissionless and/or anonymous, completely flies in the face of how that financial instrument is regulated in wherever that financial instrument was created. It’s very, very likely there will be constraints on how certain RWAs behave onchain.
So for example, think back to DeFi 1.0. People just create a liquidity pool and now it’s there. And anyone can create that liquidity pool and now that the liquidity pool exists, anyone can trade tokens with it and so on. That’s fine because none of the tokens that existed in that era were strictly regulated assets.
With RWAs, when they come onchain, the tokens that represent those assets will probably inherit the policy that governs them in the real world. The fact that they’re now tokens doesn’t exempt them from their regulatory status.
So what does that mean for DeFi?What does it mean for Bancor technology?
The way the Carbon contracts are constructed are deliberately agnostic to those kinds of things.
I think it’s going to come down to the token level.
So a good friend of mine once showed me a design he had for creating regulation aware wrappers of tokens. So you could, for example, have a real world asset that’s been tokenized and just issue it as a plain ERC-20. Then, put it through a wrapper contract that creates a compliant version of that ERC-20. That would instill things like KYC properties or like Travel Rule tracing, features to that wrapped token.
And that would mean if you put it into a DeFi protocol like Carbon, when people are interacting with Carbon, the permissions to trade that token now exist at the token level. So someone who isn’t on that white list hasn’t got permissions to buy or trade that specific RWA token version would then be prohibited from doing so. I think that’s kind of what it’s going to look like. We’ve seen things like Aave Arc, which was kind of an institutional compliant version of Aave that was developed. And I think that was a really good forward looking experiment by Aave.
But I also think this idea of having to splinter every protocol and have one that is permissioned and one that’s permissionless is probably a bad design paradigm. I think what we will see is either this kind of wrapping concept that I described or just have non-standard ERC20s where the permissions are built directly into the token contract become more commonplace.
So in that sense, just because it’s a much more elegant design principle, I think we’ll see those kinds of things begin to dominate. And because the Bancor contracts are already agnostic to that kind of stuff it will operate perfectly well under those kinds of constraints. So that’s how I think it’s going to go down.
Now what does that mean for the secondary markets? I think for onchain stuff it’s going to look basically the same as it does in the offchain markets. There are some assets that you need to have certain credentials to trade with. And if you’re doing it onchain, you’re going to need to have those credentials as well.
I don’t think we should expect the secondary market to really notice or care in those specific circumstances.
Continue the Series
Part 1, Carbon DeFi’s Execution Architecture and What Comes Next, focuses on execution architecture, intent-based systems, protocol upgrades, the Vortex 2.0, and how Carbon DeFi fits into an evolving wallet and AI-driven landscape.
Part 3 turns to governance, privacy design, institutional alignment, and what long-term success actually means for Bancor.
Bancor
Bancor is a pioneer in decentralized finance (DeFi), established in 2016. It invented the core technologies underpinning the majority of today’s automated market makers (AMMs) and continues to develop the foundational infrastructure critical to DeFi’s success — focusing on enhanced liquidity mechanics and robust onchain market operation. All products of Bancor are governed by the Bancor DAO.
Website | Blog | X/Twitter | Analytics | YouTube | Governance
Carbon DeFi
Carbon DeFi, Bancor’s flagship DEX, enables users to do everything possible on a traditional AMM — and more. This includes custom onchain limit and range orders, with the ability to combine orders into automated buy low, sell high strategies. It is powered by Bancor’s latest patented technologies: Asymmetric Liquidity and Adjustable Bonding Curves.
Website | X/Twitter | Analytics | Telegram
The Arb Fast Lane
DeFi’s most advanced arbitrage infrastructure powered by Marginal Price Optimization, a new method of optimal routing with unmatched computational efficiency.
Website | Research | Analytics
Carbon DeFi, Regulation, and the Future of Onchain Secondary Markets was originally published in Bancor on Medium, where people are continuing the conversation by highlighting and responding to this story.
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