DeFi Transactions Pose Higher Risks, Thai SEC Cautions Investors

Thailand Security and Exchange Commission (SEC) warns investors within the state about the risks that DeFi transactions pose. SEC claimed that DeFi’s ecosystem, especially lending and debit-taking firms, may not include necessary parameters in their mechanisms to ensure the prevention of rug-pull and overleveraged collateral. 

While cryptocurrency gained prominent growth in recent years, it also alerted global security watchdogs to supervise as the crypto-space has become the favorite choice of cyber criminals and the likes of Terra collapse stunned the world’s crypto enthusiasts.

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In line with the SEC’s Wednesday statements, the Officials termed the DeFi transactions risky, saying these firms may lack mechanisms that ensure the system’s efficiency by applying terms and conditions in the smart contracts. Officials added;

“Therefore investors are advised to study any DeFi programme before joining… as deposit taking and lending services are not regulated by the financial and capital market regulators in Thailand.”

In Decentralized Finance (DeFi), financial decisions are made by the applied mechanism over meeting the specific terms and conditions. Therefore, it does not include any third-party counter to supervise the system.

SEC added,

“However, any DeFi transaction carries a number of risks, including the risks from the products and services which can be complicated”

Citing the risks featured in DeFi projects, SEC’s representatives added that lending cryptocurrencies could exceed collaterals and may not receive their cash back and expected return on investment (ROI). 

SEC Sees DeFi Projects’ Mechanisms Of Smart-Contracts More Vulnerable

As per the SEC’s findings, the technical and security risks in DeFi projects make them more vulnerable. For example, projects management could flee with investors’ money by pulling the system and making a project’s native currency worthless for purchasers (Rugpull). But, the expectation of high returns attracts investors without showing the risks.

“Therefore, investors are advised to study any DeFi programme before joining the programme and should be exercised carefully in transactions as deposit taking and lending services are not regulated by the financial and capital market regulators in Thailand.”

Notably, the Thai commission started cautioning investors after the two DeFi platforms halted withdrawals recently. Zipmex, a digital assets brokerage, announced on 21 July to cease withdrawal from the company’s subsidiaries in Thailand and Singapore. 

The blockchain research firm Chainalysis also published a report on criminal activities targeting the crypto industry. The report revealed that 97% of the total stolen digital assets till May 2022, which was $1.7 billion, belonged to the DeFi ecosystem.

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Considering the growing risks, SEC further noted they are in the process of reviewing the regulatory guidelines for cryptocurrencies. The existing regulatory framework does not support the lending of cryptocurrency and deposits in a centralized or decentralized way. So, to protect investors to their best capacity, officials collaborate with the relevant authority to implement complete regulations ensuring users’ safety.

Featured image from Pixabay and chart from TradingView.com