Blockchain Legal Forum | DeFi teams face certain legal risks, but current financial regulations may not necessarily apply

The Blockchain Application Legal Summit, organized by Blocklike and co-hosted by the Argo Group, took place on October 19 at the China Southern Bank International Conference Center. In the afternoon session, discussions were led by Tsai Yu-ling, co-founder of Lee Tsai & Partners, Liu Yu-shao, partner lawyer at Lee Tsai & Partners, Yang Yue-ping, assistant professor at the Law Department of National Taiwan University, and Alex Liu, CEO of MaiCoin, focusing on the business models and legal risks of DeFi decentralized financial products.

Are DeFi Platforms Subject to Regulatory Risks?

Lawyer Liu Yushao, a partner at Li-Ci Law Firm, stated that decentralized finance platforms such as Maker and Uniswap are characterized by being based on distributed ledgers, open-source technology, and allowing users to self-custody. The subject of legal regulation is the actors and their behaviors. However, in the case of Maker, for example, the lending activities conducted by users depositing assets are executed by the code of smart contracts, and it seems difficult to identify the actual actors operating these activities. Within the fund pools managed by smart contracts, without actual actors, it does not seem to constitute "acceptance" or "absorption" of deposits, and without actors constituting custody of funds, anti-money laundering activities cannot be regulated.

However, Lawyer Liu stated that the "decentralization" of these financial platforms still varies in degree. Questions such as whether smart contracts can be altered, measures for safeguarding and using private keys, governance mechanisms, and issues of centralized governance need to be considered.

Assistant Professor Yang Yueping from the Department of Law at National Taiwan University continued on the topic of "degree of decentralization" and stated that DeFi does not imply exemption from regulatory oversight. He believes that the current level of decentralization in DeFi still leaves room for regulation. Although the fund pools in DeFi are managed through decentralized autonomous organizations (DAOs), there are still major shareholders who hold a significant amount of governance tokens, giving them control over the platform. Professor Yang further explained that even if they are minor shareholders, as long as they have control over the DeFi platform, whether it be individuals such as the DeFi team or companies, they may fall within the regulatory scope.

Professor Yang concluded by stating that compared to traditional finance, DeFi has fewer human-induced risks, with most risks being related to smart contract technology. Due to its significant operational differences from traditional finance, direct regulation using existing laws may not be entirely appropriate, and there is still much legal work to be done. In addition, governance tokens with governance and profit-sharing rights fall under the definition of securities. However, small amounts of governance tokens distributed through airdrops still have compliant space within the tiered supervision mechanism.

Jurisdictional Issues Raised?

Professor Yang stated that many blockchain companies are decentralized organizations that provide services worldwide, raising complex discussions on key regulatory issues such as "jurisdiction." The attribution of responsibility by regulatory agencies and the scope of regulation all contribute to these complex discussions. Currently, there is no universal standard for jurisdictional rules worldwide, and Taiwan can establish its own applicable standards.

He gave an example of how jurisdiction should be divided internationally, whether based on "effectiveness," such as the location of the victim, or on the "place of occurrence" of the action. If effectiveness is prioritized, the conditions should be limited to nationals of the Republic of China or residents in the Republic of China. Once these conditions are regulated, it will be more convenient for consumers and service providers to apply the rules.

Professor Yang believes that to protect Taiwanese consumers, local businesses can choose to block users in Taiwan and provide services overseas. In addition, he believes that Taiwan's regulatory authorities can inform consumers through risk education, allowing businesses to provide local services. After all, consumers have the ability to judge investment risks themselves. At the same time, this can attract overseas businesses willing to enter Taiwan, creating a win-win opportunity.

Cathy Tsai, co-founder of Li-Ci Law Firm, summarized that in the online world, it is challenging to effectively block users from any region. If regulatory authorities can establish moderate consumer protection measures, both regulatory agencies and industries can achieve a balance.