Decentralized Finance (DeFi), a relatively new blockchain-based set of financial services, may come with risks that are not readily apparent to investors, according to the State Corporation Commission (SCC).
As such, the SCC urges Virginians to approach this technology as they would any other potential investment – with caution as well as an understanding of the potential benefits and risks.
DeFi firms rely on algorithms and use digital assets to provide financial services such as depository services, lending, investing and management services. Some of these services are highly complex, operate outside current regulatory frameworks and may offer few, if any, consumer protections. DeFi relies heavily on peer-to-peer transactions rather than an intermediary such as a bank that holds custody of funds.
“Never invest more than you can afford to lose,” said Ron Thomas, director of the SCC’s Division of Securities and Retail Franchising (Division). “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,” Thomas said.
To help Virginians better understand DeFi, the North American Securities Administrators Association, of which the SCC is a member, issued an investor advisory to explain DeFi, the technology behind it, how DeFi lending works, potential risks for investors, and how consumers can avoid becoming a victim to scams.
Thomas encourages Virginians to understand any investment and the person offering it before they invest.
For additional resources regarding securities and investing, or to find out if an investment or the person offering it are properly licensed or registered in Virginia, contact the Division of Securities and Retail Franchising in Richmond at 804-371-9051 or toll-free at 1-800-552-7945, or visit its website at scc.virginia.gov/pages/Consumer-Investments.