Where CeFi outshines DeFi: Lawyers’ perspective on asset protection

Transparency: transparent financial technologies vs. nodes

Comparison of CeFi and DeFi. Adapted from LeewayHertz

CoinLoan’s experience

Flip side of growth

Number of unique addresses that bought or sold a DeFi asset worldwide between December 2017 and July 4, 2022. Source: Statista

Inherent risks of DeFi

  • Hacking and bugs. One of the downsides of self-custody is a greater responsibility to prevent loss of capital. In 2020, users lost almost $100 million worth of crypto due to bugs, exploits, and hacks. Cybercriminals can inspect the code of a DeFi app and exploit unaddressed bugs.
  • Smart contract exploits. The crucial role of software raises operational risks, as flawed coding can affect the security of smart contracts. Unlike TradFi, where users are punished for breaking the law, the rules of DeFi transactions are encoded in smart contracts. While they cannot be broken, the contracts themselves may — and have been — manipulated.
  • Pump-and-dump schemes. Anyone can mint scam tokens, list them on a DeFi exchange, leverage social media to inflate their price, and eventually dump them to cash in.
  • Rug pulls. There have been cases when DeFi developers ran away with investors’ funds, “possibly using a deliberately introduced flaw in the code.” For example, developers of the SQUID token defrauded investors by limiting sell orders.
DeFi hacks accounted for the largest share of crypto stolen in 2021. Source: Chainanalysis

Convenience of unified regulation

  • With regard to AML compliance, FATF’s guidelines cover legal jurisdictions, the treatment of cryptoassets, source-of-funds checks, and so on.
  • In terms of taxation, CeFi platforms can generate reports in formats accepted by tax authorities in the clients’ jurisdictions. DeFi, with its complex models like yield farming, presents unique challenges, as taxpayers need third-party software to import their data from the ledger.
  • Situations involving the transfer of asset ownership, such as settling inheritance, are treated by banks and CeFi similarly. CoinLoan follows the same principles as TradFi, requiring (depending on the jurisdiction) a Certificate of Inheritance to prove ownership of the deceased’s assets, the death certificate, and, if applicable, the last will and testament. Access is granted following administrative verification.

State of DeFi regulation

Downside of self-sovereignty

DeFi future regulation is inevitable

All-encompassing protection is a must

The need for a tailored approach

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CoinLoan is a Crypto Lending Platform

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