Legal support for DeFi projects
There is a boom in DeFi (decentralized finance) at the moment. If only three years ago they were in a gray zone and the regulation was selective, based on specific precedents, now the main jurisdictions are trying to create special regulation. The activities of a DeFi project may be different, depending on which the legislation applied to it changes. In addition, DeFi projects carry out financial activities, the requirements for which are contained in various acts. Therefore, when supporting a DeFi project, it is necessary to carefully calculate the legal risks. You can read about the main ones in this article.
Content:
What is a DeFi project?
Before understanding how DeFi projects are supported, it is necessary to identify a number of characteristics of such projects.
DeFi projects are open source blockchain-based platforms. Such applications replace classic lending, primarily banking. Due to the used
technologies, decentralized finance allows to involve more people in the system, as a result, more people can get a loan, and some earn by providing funds. In addition, DeFi services are cheaper than banking services, as members save on transfer and credit fees.
DeFi project legal risks
Since DeFi projects use new technologies and actually act as an alternative to old financial institutions, it may be believed that the old rules do not apply to them. However, this is a mistake.
Also, a relevant issue for a DeFi project is the applicability of laws.
- Consumer protection act
- KYC policy, which fixes the procedure for identifying users
- AML / CFT-policies that stipulate the obligations of payment systems to combat money laundering.
Do I need permission to create a DeFi project?
The first question a startup faces is the qualification of the DeFi project. The answer to this question is important, since the need to obtain licenses or other permits depends on it.
DeFi projects can be engaged in lending, due to which their activities are similar to banking. At the same time, they work with securities, and such activity can be recognized as investment. On the other hand, the DeFi project is represented by a foundation.
This is the approach that the Securities and Exchange Commission (American regulator) relies on. If the activities of the DeFi project coincide with the one described in the existing regulation, then these laws apply to them equally.
The history of the ICO can be instructive. During the boom in these technologies, the US Securities Commission announced that ICOs can be a placement of securities, in connection with which they must be registered and comply with reporting rules. After that, the Commission began to check the existing ICOs, analyze the legal nature of the token using the Howey test and hold them accountable.
While decentralized finance offers different types of services, some of them require US regulatory approval:
- Crypto staking
- P2P lending platforms
- Digital banks
- Pools of liquidity
- Prediction Markets
- Minutes of interest rates, etc.
At the same time, the requirements of American law also apply to those legal entities that were not registered in the United States, if the DeFi platform is available to American users. Therefore, if you register a fintech project in another jurisdiction, you should still pay attention to this regulation.
The European Union is also actively involved in overseeing DeFi platforms. At the end of 2020, projects for special regulation of crypto assets, including DeFi projects, appeared. In accordance with this regulation, DeFi startups must notify the regulator (MiCA) and publish a White Paper. In addition, the DeFi project must register a legal entity. Although, according to experts, with such regulation, the DeFi platform can hardly exist, further clarifications from the European regulator are needed.
The Singapore regulator (MAS) also plans to create a dedicated regulation for DeFi projects following the US and EU. As MAS emphasized, AML / CFT regulation will require special development. You can read more about these requirements for fintech projects in our article “Obtaining a Payment System License in Singapore”.
Qualification of stablecoins used in DeFi projects
Under the new European regulation, stablecoins can be classified as electronic money tokens. Consequently, a license of the issuer of electronic money (E-Money Institution) is required to carry out activities.
Thus, the main jurisdictions are paying more and more attention to DeFi projects, trying to bring them out of the gray zone. Even in the absence of new special regulation, the legislation on classical financial institutions applies to them. In the US and the EU, there are special regulations that put forward a number of requirements for DeFi startups. If they are not observed, the risk of prosecution is quite high. Heavy fines from the American regulator have sometimes led to bankruptcy of companies. Therefore, when creating a DeFi platform, legal risks must be taken into account. If you need help in legal support of DeFi projects, contact A4 Law Firm lawyers.
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