On the third anniversary of 9.4, will DeFi face strong regulation like ICO?

9.4 Announcement Review

Source: People's Bank of China

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Figure: 9.4 Announcement

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Source: People's Bank of China

On September 4, 2017, the People's Bank of China and other seven ministries and commissions jointly issued the "Announcement on Preventing the Risks of Token Issuance and Financing", which clarified that the tokens or virtual currencies used in token issuance and financing "are not issued by monetary authorities and have no legal It does not have the same legal status as currency, and cannot and should not be used as currency in circulation in the market", and the following policy actions are proposed:

Second, any so-called token financing trading platform shall not engage in the exchange business between legal tender and tokens, "virtual currency", shall not buy or sell tokens or "virtual currency" as a central counterparty, and shall not be a token or "virtual currency" "Virtual currency" provides pricing, information intermediary and other services.

The fourth is to remind the risk. Warn the public that they should be highly alert to the hidden risks of token issuance financing and transactions. There are multiple risks in the issuance, financing and trading of tokens, including the risk of false assets. We hope that investors will beware of being deceived. For all kinds of illegal financial activities using the name of "currency", the public should strengthen their awareness of risk prevention and identification capabilities, and report relevant clues of violations of laws and regulations in a timely manner.

Fifth, give full play to the self-discipline role of industry organizations. Various financial industry organizations should do a good job in policy interpretation, urge member units to consciously resist illegal financial activities related to token issuance financing transactions and "virtual currency", stay away from market chaos, strengthen investor education, and jointly maintain normal financial order.

How DeFi became popular

Compared with traditional finance, decentralized finance has achieved "disintermediation" through blockchain technology, reducing the role of middlemen, thereby reducing a lot of costs in the middle links.

In 2019, many people in the industry predicted that DeFi would shine in 2020. This is indeed the case. In February 2020, the total lock-up volume of DeFi projects on the market exceeded 1 billion US dollars for the first time ("total lock-up volume" is an important indicator to measure the scale of use of DeFi projects, and the total lock-up volume is equal to all locked-in The sum of the total value (in USD) of ETH and various ERC-20 tokens in the smart contract of the DeFi project.

Figure: Changes in the total lock-up volume of DeFi

Source: DEFIPULSE

In June 2020, the DeFi project Compound introduced the concept of "liquidity mining" for the first time, which increased the total lock-up volume of the project from US$113 million in early June to US$709.86 million in early September. The price of the token COMP has also experienced a surge.

Figure: Changes in the total locked amount of Compound

Source: DEFIPULSE

In less than a month, "liquidity mining" has become a hot topic in the cryptocurrency community, and more and more DeFi projects have also begun to launch their own liquidity mining (in short, liquidity mining is mainly through DeFi products on the market provide liquidity to obtain income). On June 24, 2020, the automatic market maker exchange project Balancer announced the deployment of its governance token BAL on the Ethereum mainnet. On June 30, the Curve project announced the issuance of the governance token CRV. In order to seek these token rewards, investors actively provide liquidity to these DeFi projects, and DeFi has become extremely popular in the cryptocurrency community. As more and more DeFi projects issue their own governance tokens and distribute these tokens to liquidity providers, the concept of "Yield Farming" (Yield Farming) was born, which means that cryptocurrency investors will transfer funds Invest in different DeFi protocols to maximize returns.

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The DeFi fire has greatly increased the FOMO sentiment (Fear of Missing Out) in the market, but in addition to thinking about how to get on the bus without being left behind, everyone should also think about the hidden risks behind the DeFi model.

Just take the DeFi project Uniswap, which currently ranks first in total locked positions, as an example. This project is currently a star project in decentralized digital currency exchanges. As of September 4, 2020, the 24-hour trading volume of Uniswap exceeded 8.6 billion U.S. dollars, such a transaction volume can already be ranked in the top four among the centralized digital currency exchanges.

Source: CoinMarketCap

Figure: Exchanges ranked by trading volume (as of September 4, 2020)

Source: CoinMarketCap

The Uniswap project was officially released at the end of 2018. This decentralized digital currency exchange has been tepid in the early stages of development, but in 2020 it was pushed to the altar in a short time. Why?

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Figure: Uniswap ranks first in total locked positions (as of September 4, 2020)

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First of all, Uniswap users do not need to register or go through the cumbersome KYC process, but as long as they have an Ethereum wallet, they can enter the market, which can be said to greatly reduce the entry threshold for "leeks". However, since there is no channel for legal currency, new users must first obtain digital currency through OTC over-the-counter transactions.

Without the listing review of the centralized exchange, Uniswap has become a paradise for garbage coins and air coins. After a considerable number of projects issued coins, they used telegram groups and other forms to establish communities, and then frantically shouted for a single pull head to pick up the offer. After receiving some ETH, they directly took it off the shelf and ran away. It can be said that the method of defrauding money in this type of project is very simple and rude. Slogans such as "get rich or return to zero" are very common in the Uniswap community, so Uniswap is also known as the "currency slot machine".

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When does regulation come into play?

In addition to Uniswap, the wealth effect generated by the popularity of other DeFi projects has caused a lot of bubbles to accumulate in the entire DeFi industry. There are many similarities between the DeFi boom and the ICO bubble in 2017, that is, crazy transactions, projects with little or no testing and auditing, etc., and there are currently no clear regulatory guidelines around the world. If the DeFi ecosystem does not do a good job of self-regulation, it is not ruled out that a new round of regulatory review storms against DeFi will start in countries such as China.

In this regard, Liu Lei, a lawyer from the digital currency legal service team of Beijing Yingke (Shanghai) Law Firm, said that how to regulate DeFi first needs to explain the types of digital currencies, because different digital currency categories have different legal attributes, and the adjustments are subject to Different laws and regulations will naturally lead to different regulations.

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Lawyer Lei Liu, Digital Currency Legal Service Team, Beijing Yingke (Shanghai) Law Firm