Where are DeFi platforms at risk?

Recently, DeFi projects have been booming and have become a hot topic in the global currency industry.

As of now, the service scope of DeFi projects has covered creditPayments, lending, decentralized exchanges, stablecoins, etc.. Although most platforms that operate DeFi projects are registered outside of mainland China, this does not mean that such platforms are not subject to Chinese criminal law.

The purpose of this article is to introduce DeFi lending projectsCriminal Law Risks in China, providing ideas for the compliance and development of cryptocurrency platforms.

DeFi Lending Project Overview

The text meaning of DeFi refers to decentralized finance, which corresponds to centralized finance CeFi. Common DeFi projects include MakerDAO, Uniswap, Pound, Aave, etc.

In a common DeFi lending model, lenders can pledge their digital currency to the platform. The platform pays them stablecoins or other assets according to a smart contract. After the contract period expires, the lender returns the borrowed currency in exchange for collateral assets.

Take MakerDAO as an example. The platform signs DeFi agreements with users to provide them with DAI, a stablecoin anchored in US dollars, as loans, while lenders are required to provide at least 150% of the loan valueETHWhen the token is used as collateral and consideration, when the value of the collateral token is too low, the platform will clear the collateral to maintain a stable flow of capital.

Also, it is worth mentioning how a pound platform operates a DeFi lending project. In addition to general interest income, a pound will distribute governance tokens to users as rewards, and users can exercise part of the power of the decentralized platform through governance tokens. Judging from the results, governance tokens have also attracted the entry of a large number of assets, making a pound monopolize funding in the field of decentralized finance.

Criminal risk analysis

Essentially, most DeFi projects are replications of traditional financial services in the blockchain field, and the act of running DeFi lending projects on platforms itself is the loan business of traditional financial institutions. Liquidity pools formed as a result of DeFi lending projects and stablecoin exchange channels anchored to fiat currencies are examples of the platform's capital payment and settlement business.

According to the provisions of Article 225 (3) of the Criminal Law of the People's Republic of China, a platform illegally engaging in fund payment and settlement business without a financial license may constitute a crime of illegal operation.

In line with the provisions of Article 3 of the “Interpretation of the Supreme People's Court and the Supreme People's Procuratorate on Certain Issues Concerning the Applicable Law in Handling Criminal Cases of Illegal Payment and Settlement of Funds and Illegal Foreign Exchange Trading”, the criminal amount for illegally engaging in fund payment and settlement business is the amount of illegal operation of 5 million yuan or more, or the amount of illegal proceeds of at least 100,000 yuan.

Considering that platforms that operate DeFi lending projects usually have large capital volumes, once a case is opened and investigated by the judicial authorities, it is difficult for the platform and controller to break through in determining the constituent elements.

Can domestic laws control it

Some DeFi platforms assume that their place of registration or business is overseas and will not be adjusted by domestic laws and regulations. However, according to the jurisdiction provisions of China's Criminal Law, the platform is still at risk in the following situations:Part oneAccording to the territorial jurisdiction provisions of Article 6 of the Criminal Law, where the place of business is domestic or where the result of the crime occurred, China's criminal law shall apply;SecondIf the management of the platform is of Chinese nationality, China's criminal law may be applied according to the personal jurisdiction provisions of Article 7 of the Criminal Law;ThirdIf the customer using the platform is of Chinese nationality, our country's criminal law may apply according to the provisions protecting jurisdiction in section 8 of the Criminal Law.

Furthermore, it is important to note that in determining the nationality of users, platforms must not simply use the inability to access the domestic Internet as evidence that the platform is not open to domestic users. Generally speaking, in judicial practice, operators are required to fulfill their duty of careful and diligent review. For operators engaged in blockchain business, determining whether users use a VPN to log in is a very simple matter. Therefore,If the platform does have a large number of users using VPNs, the operator subjectively has at least indirect intent.

Extend and expand

Some blockchain platforms do not directly operate DeFi lending projects, but instead provide an interface to DeFi platforms. We believe that this kind of behavior cannot avoid criminal liability.

Once the actions of a third party DeFi platform are found to be illegal and criminal, as an industry insider, the subjective circumstances of the platform providing the interface will be deemed to be known or should be known. While providing an interface, there is often a transfer of benefits between the two platforms. According to this, platforms that do not directly operate projects may also be identified as aiding offenders in illegal and criminal activities by providing an interface.

Write at the end

Decentralized finance with blockchain technology can control assets in the hands of private users through keys. Compared to trusting traditional finance — simply making huge giants that are not controlled by individuals, DeFi projects with the characteristics of financial democratization are more in line with the development trend of contemporary society.

However, in an environment where financial regulators have not given approval, DeFi projects are still popular in ChinaThere is no soil to promote developmentRecently, it has also been affected by money laundering crimes linked to its covert nature, and has a poor reputation.

Frankly speaking, we understand the value of financial market stability, so the regulatory authorities are willing to bear conservative accusations for it. However, we admire the innovators in the fintech sector even more because it takes a little more courage when the dawn breaks long into the night.

Source: Lawyer Shaw