Related Practices and Jurisdictions
Decentralized finance, DeFi, has quickly grown in popularity and is beginning to attract the attention of regulators trying to stay ahead of one of the latest investor crazes. Blockchain-based financial technologies like DeFi largely operate outside of the traditional financial ecosystem staffed by government agencies, intermediaries, central banks, brokers, exchanges, and banks using cryptocurrencies. DeFi providers offer lending, banking and investment options that are decentralized and not dependent on financial markets or regulations. As a result, DeFi providers often operate illegally or lack the protections afforded to traditional financial services providers.
Similar to peer-to-peer systems that allow users to lend fiat money (e.g. US dollars), DeFi platforms allow individual lenders to lend cryptocurrency in a permissionless manner without an intermediary like a bank or broker to offer. DeFi lending relies on smart contracts to pool investors’ money, and the smart contract issues the tokens to the borrower. The collateral for these DeFi loans is the cryptocurrency itself, which is often worth more than the loan.
State banking regulators have begun issuing consumer guidance addressing risks associated with DeFi, including investing through cryptocurrency exchanges, noting that DeFi platform users typically have little recourse should a transaction go wrong, and the parties involved in the transaction can be located anywhere in the world.
put into practice: While the advisory seeks to positively influence DeFi, it warns investors before entering into relationships with potentially unlicensed individuals operating illegally in an unregulated market. While it is true that many well-known and lesser-known companies are dabbling in DeFi or operating decentralized exchanges or marketplaces, some appear to be doing so largely without heeding consumer protection laws or regulations, including any licensing requirements. As a result, these DeFi platforms are likely to at least facilitate the violation of basic lending and investment laws, the guide notes.
Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 108
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