Where are the risks of the DeFi platform?

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

As of now, the service scope of DeFi projects has covered credit payment, lending, decentralized exchanges, stable coins and other fields. Although most platforms operating DeFi projects are registered outside mainland China, this does not mean that such platforms will not be regulated by Chinese criminal laws.

This article aims to introduce the Chinese criminal legal risks of DeFi lending projects, and provide ideas for the compliance and development of currency circle platforms.

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

Ethereum expansion solution Polygon integrates DeFi game platform Team3D (VIDYA): According to official news, Ethereum expansion solution Polygon integrates DeFi game platform Team3D (VIDYA).

Team3D (VIDYA) provides hosting solutions for multiplayer player-to-player games, betting and eSports betting. [2021/6/2 23:04:49]

In the common DeFi lending model, the lender can mortgage his digital currency to the platform, and the platform pays him stable currency or other assets according to the smart contract. After the contract period expires, the lender returns the loaned currency to exchange for mortgage property.

Take MakerDAO as an example. The platform signs a DeFi agreement with users to provide them with the stable currency DAI anchored in the US dollar as a loan, while the lender needs to provide more than 150% of the loan value in tokens such as ETH as collateral and consideration. When the value of collateralized tokens is too low, the platform will liquidate the collateral to maintain the stability of capital flow.

David: YouSwap will grasp the trend of mutual integration and connection between different DeFi tracks: On March 23, David, the founder of the YouSwap Chinese community, held an online salon "DEX rides the wind and waves, how does YouSwap compete for debut?" "It is a very important trend to integrate and connect different DeFi tracks. YouSwap hopes to be an "aggregator" of the entire DeFi track. Modules, so that each module blends with each other for mutual benefit. It allows users to easily use the functions of most mainstream DeFi protocols on one exchange, avoiding users to switch back and forth between different DeFi protocols, and improving efficiency. [2021/3/23 19:10:46]

In addition, it is worth mentioning the way a certain pound platform operates DeFi lending projects. In addition to the general interest income, a certain pound will distribute governance tokens to users as rewards. Users can exercise part of the power of the decentralized platform through governance tokens , Judging from the results, governance tokens have attracted a large number of assets, making a certain pound take the lead in the field of decentralized finance.

V God: If you don’t know the situation, you don’t have to participate in the so-called latest popular DeFi project in Ethereum: Vitalik Buterin, the founder of Ethereum, reminded users on Twitter that unless you really understand the real situation, you don’t need to participate in the current so-called DeFi project in Ethereum. The latest hot DeFi projects, and many other types of Ethereum DApps worth exploring. [2020/8/14]

In essence, DeFi projects are mostly replicas of traditional financial services in the blockchain field, and the behavior of platforms operating DeFi lending projects is itself the loan business of traditional financial institutions. The liquidity pool formed by the DeFi lending project and the stablecoin exchange channel anchored to the fiat currency are the manifestations of the platform's fund payment and settlement business.

OKEx CEO JayHao: BTC locked positions in DeFi are concentrated in two projects of WBTC and Lightning Network: Jinse Finance reported, why did the number of Ethereum in DeFi applications drop, while the number of BTC hit a record high? OKEx CEO JayHao pointed out in an exclusive interview with Jinse Finance: Because most of the ETH lockups in DeFi are projects in the lending market, such as MakerDao, due to the recent sharp drop in the price of ETH, the current problems in the lending market have been exposed, which has hit users’ interest. Confidence, so the amount of locked ETH has dropped significantly. Most of the BTC lockups in DeFi are concentrated in two projects, WBTC and Lightning Network. The former is in the field of stable currency, and the latter is in the field of payment. At present, these two projects have not aroused users’ concerns, so the lockup of BTC is continuing growing. Especially the WBTC project recently received 1,000 bitcoin mortgages from Coinlist, so the amount of BTC locked up suddenly increased. Since BTC is more recognized by users than ETH, it is also more stable than ETH. Therefore, while the ETH lock-up volume on MakerDao has decreased, the BTC lock-up volume has increased. In addition, whether the halving will promote the transfer of BTC to DeFi applications. JayHao also pointed out that what promotes BTC's shift to DeFi applications should be DeFi projects supported by BTC, rather than halving or future increases in Bitcoin prices. [2020/5/13]

According to the third item of Article 225 of the "Criminal Law of the People's Republic of China", without a financial license, the platform illegally engages in fund payment and settlement business, which may constitute the crime of illegal business operation.

Combining with the provisions of Article 3 of the Interpretation of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues Concerning the Application of Law in Criminal Cases of Illegally Engaging in Fund Payment and Settlement Business and Illegal Trading of Foreign Exchange, the amount of conviction for illegally engaging in fund payment and settlement business is the amount of illegal business operations. More than 5 million yuan or the amount of illegal gains is more than 100,000 yuan.

Considering that platforms that operate DeFi lending projects usually have a large amount of funds, once the judicial authorities file a case for the above-mentioned crimes, it is difficult for the platform and the controller to make a breakthrough in the identification of the constituent elements.

Some DeFi platforms believe that their registration or business premises are abroad and will not be adjusted by domestic laws and regulations. However, according to the provisions on jurisdiction in my country's "Criminal Law", the platform still has risks in the following situations: First, according to the provisions on territorial jurisdiction in Article 6 of the "Criminal Law", if the place of business is in the country or the place where the criminal result occurs is in the country, the platform shall The criminal law of our country is applicable; second, if the management of the platform is of Chinese nationality, according to the provisions of personal jurisdiction in Article 7 of the "Criminal Law", the criminal law of our country may be applicable; third, if the customer using the platform is of Chinese nationality, according to the "Criminal Law" The provision of protective jurisdiction in Article 8 of the Criminal Law may apply to the criminal law of our country.

In addition, it needs to be reminded that when judging the nationality of users, the platform should not simply use the inaccessibility of the domestic Internet as evidence that the platform is not open to domestic users. Generally speaking, in judicial practice, operators are required to fulfill the duty of due diligence. For operators engaged in blockchain business, it is very simple to determine whether a user logs in with a VPN. Therefore, if there are indeed a large number of users using VPN on the platform, the operator has at least indirect intention subjectively.

Some blockchain platforms do not directly operate DeFi lending projects, but provide DeFi platform interfaces. We believe that such behavior cannot evade criminal responsibility.

Once the behavior of the third-party DeFi platform is determined to be illegal and criminal, as an industry insider, the subjective situation of the interface provided by the platform will be determined to be known or should be known. While providing an interface, there is often a transfer of benefits between the two platforms. Accordingly, platforms that do not directly operate projects may also be identified as accomplices in illegal and criminal activities for providing interfaces.

Decentralized finance of blockchain technology can control assets in the hands of private users through keys. Compared with relying on traditional finance, which blindly creates behemoths such as banks that are not controlled by individuals, DeFi projects with financial democratization features are more In order to conform to the development trend of contemporary society.

However, in the general environment where financial regulatory authorities have not approved, DeFi projects do not yet have the soil for promotion and development in China. Recently, they have been burdened by money laundering crimes related to their concealment, and their reputation is not good.

Frankly speaking, we understand the value of financial market stability, so regulators are willing to bear the stigma of being conservative for it. However, we admire the innovators in the field of financial technology more, because when the long night dawns, some courage is needed.

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