The Virginia State Corporation Commission (SCC) is urging state residents to approach decentralized finance, or DeFi, services with caution and warns them to understand the potential benefits and risks.
DeFi is a relatively new blockchain-based set of financial services that could come with risks that are not readily apparent to investors, SCC officials said. DeFi firms rely on algorithms and use digital assets to provide financial services such as depository services, lending, investing, and management. Also, DeFi relies heavily on peer-to-peer transactions rather than an intermediary such as a bank that holds custody of funds. SCC officials warn that some of these services are highly complex, operate outside of current regulatory frameworks, and offer little, if any, consumer protections.
“Never invest more than you can afford to lose,” Ron Thomas, director of the SCC’s Division of Securities and Retail Franchising, said. “Because DeFi is an emerging technology – and offers lending and investing options that are not dependent on traditional financial markets – the risks differ from those in traditional markets. The growing popularity of cryptocurrencies is one of the main drivers behind the development of alternative banking and business opportunities that may rely on DeFi models.”
The North American Securities Administrators Association, of which the SCC is a member, recently issued an investor advisory to help consumers better understand DeFi. It explains DeFi, the technology behind it, how DeFi lending works, potential risks for investors, and how consumers can avoid becoming victims of scams.
Residents can learn more at scc.virginia.gov/pages/Consumer-Investments.