In Need of a Sheriff? Crypto’s Wild West

Welcome to the July 2022 edition of our newsletter!  In this issue, we’ll examine the patchwork of international laws surrounding decentralized finance and the risks posed in the evolving industry.

Decentralized Finance and Concentrated Risk: Global Aspects of Crypto Trading

As more financial institutions seek to make digital token trading part of their platforms, with some providers offering cryptocurrencies as part of 401(k) plans, the patchwork nature of international regulations regarding such trading is an issue.  For example, the Financial Action Task force recently surveyed 98 countries and found that only 29 had “travel rules” in place concerning the money-laundering implications of cryptocurrency. Such rules require businesses to share information about cryptocurrencies.  But the decentralized, digital nature of the tokens is in itself an issue, and the finance industry watchdog has urged member countries to implement their own rules.

As that process develops, some crypto holders have found themselves in a perilous spot, as some cryptocurrency “banks” and lenders have sought bankruptcy protection given the industry’s recent increased volatility.  Legal issues concerning ownership of tokens are also an emerging field of case law, as questions have arisen about who owns them once they are transferred to a lender.

One step a potential crypto investor can take before dealing with a lender is to carefully read the terms of use, which will spell out a holder’s rights in the event of a liquidation.  The burden to investigate a lender and any affiliates ultimately falls on the investor, as the process of regulating cryptocurrency continues to take shape in the United States and elsewhere.  Researching the background of lenders, especially with regard to their corporate structure and any cross-border risk exposure it might generate, is an important step for institutions and investors to take as the cryptocurrency market continues to fluctuate and evolve toward some semblance of a self-regulating marketplace.