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DeFi
Legal Advise

Our Law Firm provides legal consulting services to DeFi application developers, startups, platforms and users

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We are proponents of the DeFi evolution and gradual, yet steady, development of the DeFi ecosystem – project-by-project. Being a part of our blockchain practice, DeFi projects especially excite us. As blockchain and fintech attorneys, we are all for the development of an alternative decentralized financial system offering equal access to financial services globally, transparently, seamlessly and free of censorship and other central-authority abuses. Also, successful DeFi projects promote a wider adoption of cryptocurrencies, which is a tremendous benefit for the industry.

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While the goal of the DeFi ecosystem is to become “trustless,” or fully transparent and programmable with the help of smart contracts establishing and enforcing the financing terms, the need for legal experts in DeFi is yet to be eliminated.

DeFi platforms and the financial instruments they offer may contain centralized components (such as centralized custody, administration, protocol development, interest rates, margin calls, price feeds, etc.).

Additionally, legislators and regulations are still far from adapting to the concept of a deregulated DeFi infrastructure and tokenized assets, so the existing conventional legislation must be interpreted to apply to the DeFi.

Furthermore, as the DeFi ecosystem is still at a relatively early stage of development, DeFi protocols, platforms and smart contracts present considerable risks, which have to be properly disclosed to users on the one hand, and addressed by the regulators and courts, on the other hand.

According to the Commodity Futures Trading Commission (CFTC),  peer-to-peer DeFi-based products and derivates may be illegal as per the Commodity Exchange Act regulations.

Dan M. Berkovitz, a commissioner for the Commodity Futures Trading Commission (CFTC), openly criticized DeFi industry—during a conference on June 8, 2021.  The CTFC Commissioner said that:

Decentralized finance—or “DeFi”—is a rapidly-expanding technology related to cryptocurrency and the blockchain…Given the explosive growth of this sector, federal regulators should become familiar with this new technology and its potential uses and be prepared to protect the public against misuse.

In a pure “peer-to-peer” DeFi system, none of [the tradional] benefits or protections exist.  There is no intermediary to monitor markets for fraud and manipulation, prevent money laundering, safeguard deposited funds, ensure counterparty performance, or make customers whole when processes fail.  A system without intermediaries is a Hobbesian marketplace with each person looking out for themselves.  Caveat emptor—“let the buyer beware.”

Not only do I think that unlicensed DeFi markets for derivative instruments are a bad idea, I also do not see how they are legal under the CEA.

The CEA requires any facility that provides for the trading or processing of swaps to be registered as a DCM or a swap execution facility (SEF).  DeFi markets, platforms, or websites are not registered as DCMs or SEFs.  The CEA does not contain any exception from registration for digital currencies, blockchains, or “smart contracts.

Apart from the legality issue, in my view it is untenable to allow an unregulated, unlicensed derivatives market to compete, side-by-side, with a fully regulated and licensed derivatives market

As such, DeFi market participants should carefully map out risks and liabilities before engaging in DeFi transactions.

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Legal Support of DeFi

 

Our attorneys and DeFi experts advise clients on operational, transactional and regulatory aspects of DeFi projects, including:

  • legal of trading activities on Defi exchanges, e.g., Uniswap, PancakeSwap, etc.

  • CFTC defense strategy in connection with violations of the Commodity Exchange Act for operating illegal Defi platforms and exchanges;

  • application of federal and state money transmitter regulations to DeFi projects;

  • the legality of yield farming, staking and operating liqudity pools;

  • anti-money laundering prevention and compliance with the Bank Secrecy Act;

  • due diligence of DeFi projects;

  • tokenization of DeFi networks;

  • regulatory compliance of DeFi projects and communications with regulators;

  • KYC/AML checks in DeFi transactions; and

  • incorporation of DeFi technology by traditional financial services providers.

 

Resources

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