Multinational regulatory intervention DeFi “Wild West” flashes red

Three days after the chairman of the US Securities and Exchange Commission (SEC) Gary Gensler delivered a speech entitled “Encryption Currency and National Security”, the SEC published the first case on DeFi platform supervision on its official website.

A platform called DeFi Money Market issued mToken tokens and governance token DMG. The SEC determined that the sponsor of the project violated the Securities Law, issued a fine of US$125,000 and required the project to return more than US$12.8 million in illegal income.

A few days later, on August 11, the Manchester Police announced that they had cracked the StableMagnet Finance running case. Different from the previous “private recovery of stolen money” model in the DeFi field, this case was an action taken by a law enforcement agency against a DeFi fraud. It is also the first on-chain refund case promoted by the police in the history of DeFi attacks.

Decentralized DeFi is no longer illegal, and it is the same in our country.

In September last year, Emeraldmine (Emerald), a project on the EOS chain, ran away. The founder took away 2.5 million USD worth of tokens. After community tracking and negotiation, the project party returned part of the assets. What many people don’t know is that the Yongjia County Public Security Bureau of Wenzhou City, Zhejiang Province arrested Zhong Moumou, the main initiator of the jade project in October last year. In May of this year, the Yongjia County People’s Court investigated him for criminal responsibility for the crime of illegally obtaining computer information and data.

When more and more incidents of fraud and currency theft by hackers in the DeFi field, financial regulatory or law enforcement agencies in many countries have begun to intervene in this market. Kenneth Blanco, the head of the US Financial Crime Enforcement Network (FinCEN), once expressed his regulatory attitude towards DeFi: Just because you say you are a banana does not make you a banana. What matters is not what label you put on it, but the activity you actually do.

Although countries have not yet established a complete regulatory framework and legislation specifically for blockchain and DeFi, law enforcement agencies can still find a basis for law enforcement from existing regulations based on illegal activities. When supervision entered the DeFi city, this new “Wild West” began to flash red lights.

U.S. SEC issues first DeFi ticket

On August 3, when Gary Gensler, Chairman of the US Securities and Exchange Commission (SEC) called the crypto economy including DeFi the “Wild West,” many people have realized that there will be strong regulatory intervention in the next script. , Fraudulent encryption platforms will be punished one after another, and the free and chaotic territory is being targeted.

As the new chairman of the SEC who took office only in March this year, one of Gensler’s work is to reduce the risk of financial instability in the field of encrypted assets. When this work faces pressure from the US Congress, he needs to act.

In early July, US Senator Elizabeth Warren sent a letter to Gensler. The letter mentioned that cryptocurrency platforms lack the same basic protections as traditional exchanges. In the six months to March 2021, nearly 7,000 people reported that cryptocurrency fraud caused losses totaling US$80 million. Warren said that the SEC must make full use of its power to deal with these risks, and Congress must step up to fill these regulatory gaps.

Warren’s determination to supervise with an iron hand is why Gensler used a serious and huge theme in his speech on the regulation of the crypto economy in early August-“Cryptocurrency and National Security”. Not only did he mention that virtual assets such as stock tokens, stablecoins or other securities are subject to securities laws, he also called on the U.S. Congress to give the SEC more powers to oversee platforms such as lending and DeFi.

Members of Congress put pressure on the SEC, and the SEC responded that it needed Congress to be empowered to supervise DeFi, which looked like a kick, but then the SEC took action, and the agency issued a fine for the DeFi platform for the first time.

On August 6, a press release appeared on the SEC’s official website. The regulator accused two Florida men and their Cayman Islands company of using smart contracts and so-called “decentralized finance (DeFi)” technology. Without registration, sales of securities in excess of 30 million U.S. dollars.

Multinational regulatory intervention DeFi "Wild West" flashes red

SEC accused DeFi Money Market of issuing securities without registration

The alleged DeFi application is called DeFi Money Market (DMM), which issued mToken tokens and governance token DMG. According to the project introduction, users can deposit ETH , DAI and other encrypted assets into the application, and mine to obtain mToken tokens, and then DMM will invest these assets in real-world assets that are guaranteed to generate income, and then return them to The system. Finally, the user can exchange the mToken in his hand for assets such as ETH and DAI to obtain interest income.

DMM claimed that they used the funds deposited on the platform to purchase the car loans they showed on their official website. However, after investigation by the SEC, DMM misrepresented its operation method. It did not purchase the ownership of any car loan, but used personal funds and funds from another company they controlled to pay the interest on mToken redemption.

SEC Enforcement Department Director Gluwa said, “No matter what technology is used to provide and sell these securities, complete and honest disclosure is still the cornerstone of our securities law so that investors can make wise decisions.” Despite the claim to be a DeFi platform. However, the SEC determined that both mToken and DMG governance tokens belonged to unregistered investment contracts, and that they were offered and sold to investors in violation of the Securities Law. The SEC issued a fine of $125,000 to the initiator of the project and demanded the return of more than $12.8 million in illegal gains. At the same time, the project party needs to provide funds for the smart contract so that platform users can redeem the principal and interest.

This is the first case in which the SEC conducts supervision on the DeFi platform. When Gensler described DeFi as the “Wild West” , the punch quickly landed. Although there has not yet been a regulatory framework specifically for DeFi in the United States, traditional financial regulations such as the Securities Law have still become the current basis for SEC enforcement.

As Michael, the head of the complex financial instruments division of the SEC’s law enforcement department, said, the federal securities laws also apply to ancient frauds using today’s latest technology. Marking products as decentralized and securities as governance tokens will not hinder the enforcement of the SEC.

Chinese and British police punish DeFi perpetrators

For a long time past, the encryption geeks will Ethernet Square and other block chain network as a dark forest, “to the center” is the most striking theme of this wilderness areas. When they followed the “Code is law” in the forest to cheer the flourishing of DeFi applications, fraud and looting also flooded them.

According to a new report from the blockchain intelligence company CipherTrace, in the first 7 months of this year, DeFi-related hacking and fraud incidents have cost each protocol and its users US$474 million.

The most eye-catching incident in the industry recently is the incident of “PolyNetwork was stolen by $580 million and then returned by hackers.” Yuchi co-founder Shenyu revealed that in the asset tracking link, dozens of participants including white hat hacker MR. 600 MILLION, SlowMist Technology, Tether, PolyNetwork, etc. distributed and collaborated to quickly complete vulnerability analysis and orderly communication. Advance the progress of the event. In the end, the hacker returned all the stolen funds under pressure.

This is one of the typical cases of “private recovery of stolen money” in the DeFi field. Due to the high level of attention and the assistance of various industry forces, the hackers were eventually forced to return the funds. However, in the DeFi ecosystem, there are more cases where hackers steal coins or run off the project’s money, and users have no way to recover the stolen goods. In the end, they can only recognize the plant.

Nowadays, as the supervision of various countries pays more attention to the chaos in the DeFi field, there is an additional defender in this dark forest.

On August 11, the Manchester Police issued a notice announcing that it had cracked the case of StableMagnet Finance (SMAG) running away, and at the same time historically enabled on-chain refunds.

Multinational regulatory intervention DeFi "Wild West" flashes red

 British police announced that they had cracked the case of StableMagnet Finance running away

SMAG, which is built on the BSC chain, is a stable currency exchange agreement. On June 23, the SMAG project took advantage of the sleep time of most investors to launch an attack and stole 24 million US dollars of stable currency. Then the project website, The telegram group and official Twitter are all closed and disbanded.

When users realized all this, Chinese and English rights protection groups were quickly formed. As usual, “scientists” and security experts in the community tried to investigate the traces and clues left by hackers, and soon the principle of hacker attacks And the trajectory of capital flow is identified.

A scene different from the theft of PolyNetwork appeared. The clues held by Binance Exchange and the community point to the suspect may be in Hong Kong, but according to participants, the suspect refused to communicate from beginning to end.

“When the problem cannot be resolved in a decentralized way, the victims pin their hopes on the police.” According to personal experience, the Hong Kong victims were filed by the police after they reported the case, and then the British police also filed the case and transferred it to the crime team for processing. According to the investigation, the members of the project party fled from Hong Kong to the United Kingdom, and then the serious case team composed of the Manchester Police Cybercrime Division, Economic Crime Division, Anti-Money Laundering and Financial Investigation Division quickly completed the arrest and recovered US$22.2 million. assets.

This is the first time in the history of DeFi attacks that the police participated in the detection and the police promoted an on-chain refund. Different from the previous “private recovery of stolen money”, this case is a DeFi fraud case in which law enforcement agencies intervened after receiving the report.

DeFi is no longer a threshold that cannot be touched by external regulatory forces, and law enforcement actions do not only take place overseas.

In September last year, the EOS chain project Emeraldmine (Emerald) ran away, and the founder transferred $2.5 million worth of tokens. Then, under the technical tracking and negotiation between the community and the TokenPocket wallet, the project party returned part of the assets. But this incident is not over. After the victim reported the case, the Zhejiang Yongjia County Public Security Bureau arrested Zhong Moumou, the main initiator of the emerald project, on suspicion of illegally obtaining computer information system data on October 20 last year. In May of this year, the Yongjia County People’s Court sentenced Zhong to fixed-term imprisonment of four years and six months and fined him 100,000 yuan.

Regulatory eyes on DeFi earlier than expected

When the financial regulators and law enforcement agencies of mainstream countries such as China, the United Kingdom, and the United States punished DeFi-related crimes one after another, this decentralized dark forest began to flash red lights.

In fact, the time for regulation to focus on DeFi is earlier than expected. In November 2018, not long after the concept of DeFi was proposed, the SEC issued a public statement on the issuance and trading of digital asset securities, which covered the SEC’s position on ICOs, broker-dealers, crypto exchanges, and crypto investment tools.

The decentralized exchange EtherDelta (Germany) built on Ethereum has become the first DeFi platform to implement regulations in the true sense of the regulator. According to the SEC, EtherDelta brings together buyers and sellers of cryptocurrencies to form a market through the joint use of an order book, a website that displays orders, and a smart contract running on the Ethereum blockchain. These activities obviously belong to the definition of an exchange, so EtherDelta is obliged to register with the SEC or apply for an exemption.

As a result, EtherDelta did not register with the SEC, and eventually the platform was fined $388,000 by the SEC. Dean Steinbeck, a legal expert and managing director of Crypto Law Insider, interpreted the case and said that just as the SEC can make decentralized exchanges comply with securities laws, it can also do the same with DeFi applications. This judgment was verified in the subsequent DMM case.

Dean Steinbeck believes that although DeFi’s technology is new, the banking, finance, lending, and investment activities are not new. In the traditional financial industry, these activities already have an established regulatory framework. Ignoring these regulations will affect subsequent projects. That may be costly. In his view, any project that provides investors with income may need to obtain a license or be registered with a regulatory agency.

In the United States, in addition to the SEC, the Financial Crimes Enforcement Network (FinCEN) also pays attention to DeFi. Previously, the agency issued relevant guidelines on decentralized applications. It clearly stated that if DApp accepts and transmits value, then it must be regulated as a “money transmitter”.

“Just because you say you are a banana does not make you a banana. FinCEN applies the same technology-neutral regulatory framework to any activity that provides the same function at the same level or risk, regardless of its label. What matters is not that you give it to it. What label you put on is the activity you actually do.” said Kenneth Blanco, the head of FinCEN.

Looking back now, the handling of DeFi cases by the regulatory authorities of various countries is indeed based on the “actual activities” of the responsible persons and entities. In the DMM case, the SEC pointed out that it had issued and sold unregistered securities and committed fraud, which violated the securities law; the Manchester police in the United Kingdom classified the SMAG running case as an international cryptocurrency scam; the main perpetrator of the “Emerald” running case The Yongjia County People’s Court made a verdict on the crime of illegally obtaining computer information system data.

These cases mean that even if there is no regulatory framework and legislation specifically for blockchain and DeFi, law enforcement agencies can still punish violations of the law.

Of course, if DeFi is further developed or even popularized, the establishment of relevant laws may become more and more necessary. In this regard, Jai Massari, a partner at Davis Polk Law Firm, believes that legislation will take time, and DeFi may raise more difficult legal issues, “because it represents a decentralization and disintermediation that regulators have never faced. This is a different challenge.”

When we discuss DeFi-related regulation, a new topic will emerge. Does the decentralized DeFi world need regulatory intervention?

The book “Regulating Blockchain: The Rule of Code”, published in early 2019, expresses the view that even the most autonomous system will be subject to specific forces and constraints. Blockchain systems must rely on code (or architecture), and their mode of operation ultimately depends on market forces and is subject to social norms.

In OAK cloud chain group vice president Zhang Chao seems, decentralization does not mean no regulation, nor do any occult evil, as the block chain technology innovation, in order to better serve the financial sector, rather than The financial industry is more difficult to supervise, less compliant and opaque. “Dancing with a certain restraint can make the dance more beautiful.”

Didn’t the “Wild West” that really existed in the United States finally come into order after the 19th century?


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