Decentralised Finance: navigating the rugged regulatory landscape
The rapid growth of Decentralised Finance – or DeFi - has been hitting headlines in recent months, often compared to the ICO boom of 2017. Broadly speaking, DeFi involves the provision of quasi financial services through a decentralised platform. Many players in the space have been operating on the assumption they are unregulated, often without fully understanding the complexity of the regulatory landscape. Our new publication highlights some of the subtleties in this area and the importance of precise legal structuring.
What is DeFi?
DeFi is a collective term for applications that deliver services through a decentralised platform which closely resemble regulated financial services. It encompasses a wide range of activities including stablecoin networks, decentralised exchanges, crypto-lending, collateral management platforms and “yield farming” services (which help crypto holders earn returns on their capital).
Over the last year, the total economic value of cryptoassets locked in DeFi applications has grown exponentially – reportedly from around $0.5bn in September 2019 to almost $10bn in September 2020.
There is a perception that DeFi activities fall outside the regulatory perimeter by virtue of the use of unregulated cryptoassets as collateral and exchange of value tools and the lack of a central operator. However, in our experience the regulatory analysis in relation to these business models can be highly complex and often sophisticated multi-jurisdictional legal advice is needed to understand and respond to it.
Our new publication highlights some of the subtleties in this area and the importance of precise legal structuring.