Introduction:
According to my country's current regulatory policies and judicial practices, the property attributes of virtual currencies are affirmed, but their issuance and transaction use as currency in the country are prohibited. . Defi is a series of financial services based on blockchain technology, with virtual currency as the main body. Under my country's strong regulatory situation, operators of Defi-related businesses will locate their business entities overseas. Can this be done to bypass supervision and avoid domestic criminal legal risks? This article will take you to understand Defi and the criminal legal risks of doing Defi projects in China.
What is Defi?
Defi (Decentralized Finance), that is, "decentralized finance", corresponds to the concept of "centralized finance" in Cefi (Centralized Finance).
Banks, stock exchanges, etc. under the existing financial system are all Cefi. Defi can be regarded as a parallel world of real finance. Defi’s financial stack has five main components: Stablecoin , exchanges, money markets, synthetic currencies, insurance. Stablecoins, as a bridge linking legal currencies and virtual currencies, are of great significance to the Defi financial system; decentralized exchanges allow users to conduct peer-to-peer transactions without intermediaries; the Defi currency market is completely transparent, and anyone can view it at any time. The number of loans issued by a loan pool to ensure that there is enough cryptocurrency left to back the outstanding loans; synthetic assets represent financial instruments that are a combination of derivatives of one or more assets, that is, they are not the original assets. But synthetic. For example, the US dollar is an initial asset, while USDT is suitable for synthetic assets that are anchored to the US dollar and introduced into the blockchain; insurance is divided into centralized insurance and decentralized insurance. Decentralized insurance can be used more quickly. reimbursement and greater flexibility.
The application and common risks of Defi
Defi can realize the flow and distribution of funds through smart contracts rather than third-party centralized organizations, and is often used In the following fields:
1. Loans. In Defi lending, transactions are executed through smart contracts, and the lending type is over-collateralized.
2. Financing. Financing on the blockchain is in return for tokens (ICO).
3. Derivative products. Synthetix, for example, is a synthetic asset issuance protocol based on Ethereum. Users can mint, hold and trade a variety of synthetic assets. Users can access long and short related assets through integrated assets.
4. Decentralized trading. For example, Uniswap, DEX (decentralized exchange) allows users to trade directly on the chain without an intermediary.
Currently, there are still a lot of risks in Defi-related applications.
1. Due to the lack of regulatory review, potential security vulnerabilities and instability in DEX will expose users to capital security and liquidity risks.
2. Due to the irreversibility of smart contracts, transactions cannot be reversed once completed. If the user is defrauded or makes operational errors during the transaction, the losses will be irreversible.
3. Project funds in the Defi ecosystem originate from the liquidity provided by users. If a large number of users withdraw funds, it may lead to insufficient liquidity and thus lead to risks.
Criminal risks involved in operating Defi projects
my country’s virtual currency-related businesses, such as legal currency and virtual currency exchange, token issuance financing, derivatives Transactions, etc., are all classified as illegal financial activities. Therefore, doing Defi will involve the following criminal legal risks.
1. Illegal business crime
As a parallel world of the real financial system, Defi provides lending transactions, asset management, insurance, derivatives and other products and services. According to the provisions of the Criminal Law, engaging in the aforementioned business without obtaining corresponding qualifications and licenses shall constitute the crime of illegal business operations. Defi products provide mortgage loans and support payment and settlement between virtual currency and legal currency. The related financial business uses virtual currency transactions as a medium and is suspected of illegal business operations.
2. Crimes of illegally absorbing public deposits and fund-raising fraud
The project party issued Dogecoins and altcoins, and then through communities, Kol, road shows, etc. The publicity in this way induces domestic users to buy on DEX, the project side runs away, and the investors become harvested leeks. If investors collectively defend their rights and report the case, the project party will be suspected of illegally absorbing public deposits and fund-raising fraud.
3. Crime of organizing and leading pyramid schemes
Virtual currency mining project, under the guise of Defi mining, uses LP pledges to conduct liquidity mining The model of obtaining income, but in essence paying entry fees per head as the basis for rebates, is suspected of organizing and leading pyramid schemes.
4. Crimes of opening casinos, gambling, and organizing participation in overseas (overseas) gambling
Due to the anonymity and decentralization of blockchain technology, With the characteristics of blockchain technology and the use of smart contracts, gambling games can be developed and designed based on blockchain technology. If the gaming GameFi (Game+Defi, chain game) has the function of withdrawing game tokens, it may constitute a gambling crime in my country's criminal law.
In view of the above, relevant people in the industry have taken a curveball approach to save the country and opened Defi-related businesses abroad to avoid my country's supervision. So, if theproject is carried out abroad and people carry out "remote control" at home, can we sit back and relax? The answer is no.
According to my country's "Criminal Law", jurisdiction is provided forterritorial jurisdiction and personal jurisdiction. Territorial jurisdiction means that as long as the criminal act or result occurs within the territory of our country, our country has jurisdiction; personal jurisdiction means that as long as a Chinese person commits a crime outside the territory of our country, our country also enjoys jurisdiction jurisdiction.
According to Article 2 of the Interpretation of the Criminal Procedure Law of the People's Republic of China (2021), for crimes committed against or mainly using computer networks, the place of crime includes the location of the server used for network services used to commit criminal acts. , the location of the network service provider, the location of the infringed information network system and its administrator, the location of the information network system used by the defendant and the victim during the crime, as well as the location of the victim when the infringement was committed and the location where the victim's property was damaged, etc.
So, as long as a Chinese person commits a crime, or the crime or the result is domestic, our country has the right to control it.
Furthermore, according to the following provisions, personnel who provide marketing publicity, payment settlement, technical support and other services are responsible.
According to the "Notice on Further Preventing and Dealing with Speculation Risks in Virtual Currency Transactions" 1. (3) It is also illegal for overseas virtual currency exchanges to provide services to residents in my country through the Internet financial activities. For domestic staff of relevant overseas virtual currency exchanges, as well as legal persons and illegal persons who know or should know that they are engaged in virtual currency-related businesses, but still provide them with marketing promotion, payment and settlement, technical support, etc. services Organizations and natural persons shall be held accountable in accordance with the law.
Conclusion
The Internet knows no borders, and neither does criminal risk. When operating Defi projects abroad, even if my country's IP addresses are blocked, there is no guarantee that Chinese people will not use related services, and it is difficult to avoid my country's criminal legal risks.
Catherine
Kikyo
Anais
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