Alternative finance (DeFi)

The concept of “alternative finance” refers to financial products and services that develop outside the boundaries of conventional controlled markets (capital markets, banking market).

Fintech (financial technology) is the provision of financial services using innovative technologies. This refers to blockchain, artificial intelligence, cloud technologies, biometrics, and so on.

DeFi is short for Decentralized Finance – decentralized finance. DeFi is an updated model for organizing finance, where there are no intermediaries. Transactions in this case occur automatically using smart contracts, which are created on the basis of distributed ledger technology, and users control their own assets.

Advantages and disadvantages of DeFi

Of course, each financial instrument has advantages and disadvantages. Decentralized finance offers investors simple and efficient ways to make financial transfers:

• DeFi makes it easy to access financial markets. Anyone can create an application and use it;
• Decentralized finance has a beneficial effect on the price segment. Transactions are executed quickly and without a chain of intermediaries, which reduces the cost of commissions;
• The DeFi protocol offers more transparency.
• The source code of the applications is available for viewing and studying the vulnerability. 

The DeFi system also has a list of disadvantages:

• High volatility, including interest rates, high cost of commission for launching smart contracts (can “eat up” all profits);
• Uncertainty of regulation, in many jurisdictions rules are only being created to regulate DeFi, in many there are old traditional rules for investments, in any case, non-compliance with the rules of the law can lead to fines and bankruptcy;
• Third party audit required;
• Centralized submission of information – Blockchain is not able to access data that is not in the system;
• DeFi projects are vulnerable to hacker attacks;
• High risk of fraudulent schemes.

DeFi Legal issues

Currently, there is an active introduction into the legislative system of many countries of a special regime for regulating decentralized finance (DeFi). If just three years ago the regulation of DeFi projects was in the shadows, now many jurisdictions are working on creating special legislation to control the activities of such projects.

Many DeFi project owners still believe that they do not need legal registration and obtaining permits due to the nature of the decentralized finance ecosystem. This is a big misconception that can lead to a lot of problems with the legalization of finances, as well as attract the attention of regulatory authorities for money laundering illegally obtained and terrorism financing.

Therefore, before launching such projects, we recommend contacting our blockchain lawyer for detailed advice and legal registration of a DeFi project.

License (permission) to create and operate a DeFi project

DeFi project is a platform based on open source blockchain technologies. Thanks to the applied technologies, DeFi helps to attract many users to the system. Decentralized finance services are cheaper than banking services due to savings on commissions, transfers, and loans.

Therefore, the actual issue for the owner is the application of laws:

• On consumer protection
• KYC policy, fixing the procedure for identifying users
• AML/CFT policy, fixing the obligations of payment systems to combat money laundering
• GDPR-policy, on the protection of personal data of participants

In addition, taking into account the specifics of the activities of a DeFi startup, for example, lending or investing, a further strategy is determined for choosing a “convenient” jurisdiction for registering such a startup tech company DeFi and raising the issue of the need to obtain permits. With the help of DeFi technologies, it is possible to provide a number of alternative banking services and funds. Therefore, any of these areas may attract the attention of supervisory authorities.

Therefore, it is important to discuss all business processes of a fintech project with a blockchain lawyer and a fintech lawyer. From a detailed fintech strategy on the legal side, the need for obtaining licenses or other permits.

Stablecoins and DeFi projects

Stablecoins are cryptocurrencies with a stable and established exchange rate. This is a universal unit of calculation, convenient for protecting investments from an unstable exchange rate. It is used in trade, to store capital. Stablecoins are divided into centralized and decentralized. The latter make it possible to save cryptocurrency pegged to the euro or dollar. Thanks to this, you can not worry about currency jumps.

So, based on the recently introduced European legislation, stablecoins are directly related to electronic money tokens. Therefore, for this activity, an electronic money license (E-Money Institution) is required. The absence of such a license will lead to high fines from European and other regulators and, as a result, to the bankruptcy of the business.

Therefore, when creating a DeFi project, there are many legal risks to consider. For legal support and technical creation of a decentralized platform, please contact us by e-mail: info@sion-ip.com

What is Initial DEX offering (IDO)?

Initial DEX offering or IDO is a fundraising method when the pre-sale of tokens is carried out with the assistance of a decentralized exchange using a liquidity pool. With it, merchants will be able to quickly and easily purchase new tokens on Dex exchanges. The liquidity pool consists of trading pairs of standard cryptocurrencies and stable funds, allowing traders to switch between stablecoins and cryptoassets based on market conditions.

Of course, such activities are associated with a number of legal risks from the legal regulation of the creation of the proposal itself and the verification of the project to the licensing activities of the decentralized platform. Given the evolution of IDO from STO (Security token offering) and IEO (Initial exchange offering), regulators in most jurisdictions have required startups to comply with laws on the issuance and distribution of securities. Due to the fact that the tokens are digital securities (security token) when raising funds. And here, again, a misconception for the owners of IDO blockchain startups.

Considering the specifics of IDO, in particular, the absence of the need to create their own infrastructure for the sale of their tokens and their addition to the listing of crypto-exchanges, does not exempt from the control of regulators and the payment of fines imposed by them.

Development of DAO protocols

DAO – decentralized autonomous organizations – a secure method to interact with partners around the world powered by a blockchain decentralized protocol. An autonomous system in the blockchain, which is controlled by program code and does not depend on a person.

What are they needed for? The advantage of interacting with a DAO is that there is no need to trust those with whom you have only interacted and communicated on the Web. You should only trust the code of decentralized autonomous organizations, which is completely transparent and can be checked by any user. This opens up new opportunities for productive cooperation and interaction.

An important feature of the DAO is the collective decision-making on any changes to the decentralized protocol. And most importantly, not only blockchain developers but also blockchain lawyers actively participate in the preparation of business processes that are regulated by DAO protocols.

Fintech and DeFi: blockchain legal services

Today, a whole range of legal services is offered for Fintech and DeFi projects. This:

• Support of the procedure for obtaining licenses and other permits;
• Privacy, personal data protection, cybersecurity;
• Preparation of AML/CFT policies;
• KYC policy;
• Development of user documentation, including user agreement;
• Development and writing of White Paper;
• Formation of the corporate and legal structure of the crypto business;
• Advising on the choice of jurisdiction for registering a crypto business, taxes, etc.

Among our clients are crypto exchanges, digital banks, exchanges for trading virtual assets, various DeFi projects operating in different jurisdictions and in different markets around the world.

SION developers and blockchain lawyers will help you deal with a number of issues related to the creation and legal operation of fintech projects. For a detailed discussion of the startup and details of cooperation, please write to us at email: info@sion-ip.com.