Compliance in decentralized finance

9 minute read

There has been a lot of discussion recently—across the globe—about how (or if) to regulate the decentralized finance (DeFi) industry. The term DeFi encompasses a broad range of activities and services, including, but not limited to:

  • Minting and trading nonfungible tokens (NFTs) and other types of tokens, including derivative instruments with tokens as their underlying asset;

  • Offering exchange-type facilities for NFTs and other tokens;

  • New types of business structures offering more traditional products and services, such as decentralized autonomous organizations (DAOs); and

  • Anti-money laundering and anti-fraud measures.

Some jurisdictions have made strides in the area. The European Union (EU) is close to launching its Markets in Cryptoassets Directive (MICA) —the DeFi equivalent of the securities and derivatives rules known as MiFID.[1] The United Kingdom (UK) has its regime for “cryptoasset businesses,” which is based on the money-laundering rules and shortly will have a MICA-equivalent.[2] And there have been regulatory advancements pursuant to which it is easier (but not simple) to categorize a token and determine whether it falls within a regulatory perimeter.[3]

DeFi has produced a large range of product and service providers with business models that bear more than a striking resemblance to those seen in traditional finance (TradFi). Some of these businesses have become household names—more infamous than famous—such as Voyager, Celsius, 3 Arrows Capital, and FTX. This article focuses on FTX and its charismatic founder, Sam Bankman-Fried.

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