When Decentralised Finance (“DeFi”) Meets Securities Laws - A Regulatory Deep Dive

April 2022

DeFi is an umbrella term that encompasses a range of financial services provided on public blockchains. This emerging ecosystem of financial technology products claims to be more open, inclusive and transparent in relation to its accessibility, service offering, and transactions/ operations (including fees charged).

Through decentralised apps, users can lend out “virtual assets” (“VA”) to earn interest, stake their crypto holding in return for staking rewards, participate in liquidity mining, purchase synthetic assets or even participate as stakeholders of these decentralised platforms (by being members of decentralised autonomous organisations (“DAOs”).

With DeFi strategies becoming increasingly popular and with DeFi assets comprising a growing proportion of many VA fund portfolios, the question of regulations has come back into focus. In particular, the assumption that “crypto is not a security” bears further scrutiny, given the more complex characteristics of DeFi assets and activities (and the fact that they are fundamentally set up to mimic/replicate traditional financial functions and instruments).

In this paper, we will examine some of these DeFi assets/strategies in greater detail from the viewpoint of regulations, and whether, in particular, managing, dealing in, or advising on, a portfolio of such assets would amount to regulated activity in Hong Kong (thereby requiring a licence from the Securities and Futures Commission (“SFC”)).