Sector still in its infancy with uncertain regulatory contours, the DeFi evolves rapidlyment and presents numerous challenges for legislatorsconcerned about the market and user securitys. Overview of some services DeFI and what's at stake.

The " staking "

Lhe protocols commitment (or staking) allowto a standstill digital assets in the blockchain, to support its operations while generating payment in return. This practice, by now offered by all the major digital asset trading platforms, present several difficulties. Practical difficulties first of all, particularly for holders of small quantities of assets or those wishing to recover their stake before the end of a lock-up period, capital requirements and temporary illiquidity can prove restrictive.

The staking also raises questions about its legal status. The Autorité de contrôle prudentiel et de résolution (" L'ACPR "), the supervisory authority for the banking sector, draws an analogy between staking and the practice of " token escrow " " awarded " pa certificate of deposit that can himself be exchanged against other assets or used as a warranty, based on a construction similar to warrant for example.

The operation crystallizes most often around one or more services regulated as the conservation or of theThe exchange of digital assets for cashe fiat subject to registration and approval ; Depending on the methods used, the staking could also trigger the application of the regulations for payment services.

The prêt-emloan " collateralized " (lending) in the DeFI

The loan is to use from digital assets at warranty a loanin coins fiat or digital assets. This technique looks like as for she closely to the repurchase agreement (" repo "). Secure by a security deposit, BORROWING LOAN offer at lender a some protection against volatility digital assets and the risk of sound borrower. In practice, thehe collateral is liquidated generally immediately when its value decreases below a certain threshold. From pools liquidity are also "made available from users through guarantee calls that may be subject to discounts (haircuts) often conservatrices.

Borrowers must therefore " sur-collateraliser " their loan in immobilisant a value in superior warrantyrthan the loan requested. This requirement can raise the stakes the cost of the operationbecause a substantial part of the value of these assets are frozen as collateral, limiting profit opportunities. Similarly, in the event of a rapid increase in margins in a tight market situation, a "massive" liquidation assets would risk cause the devaluation of digital assets pledged as collateral. The subsequent disposal of assets exposewould be as follows borrowers to potential losses. A framework for such transactions, governing margin terms and limits, would help structure the market and to confine visit risks.

Collateralization and set-off

The DeFi, via these lending with a security deposit, offers significant advantages, in particular to guarantee the return of loaned digital assets. Digital assets can also be made up as collateral for other types of transactions.

The use of common law pledges, i.e. " the assignment, as security for an obligation, of present or future intangible movable property or a collection of intangible movable property. " (article 2355 of the Civil Code) is revealed inadequate for digital assets because of their specific features and vulnerabilities in the event of insolvency proceedings component.

Also, po strengthen the security of service providers and the market as a whole, why not extend the financial guarantees under the directive European of June 6, 2002 (articles L. 211-36 et seq. of the French Monetary and Financial Code) to digital assets? This profit sAs in the case of derivatives transactions, for example, it would extend to the netting of loan debt.

The flash loan ou the challenge ofinstantaneity in financial law

The flash loansinstant borrowing allow to borrow in some cases large sums in digital assets and this without warranty, which at considerably reduces costs, but can expose those who use it à some risks.

La DeFi would then be more vulnerable due to the automatic liquidation of positions, which can lead to massive sales ofdigital assets in the event of a decline in value, triggering a contagion effect on the market. In addition, market concentration DeFi in the hands of a few players and the high leverage used by many borrowers increase the fragility of the system.

Even if loans DeFi are generally overestimated.guaranteed for limit the credit and liquidation risk of the portfolio used as collateralmechanisms correlation can increase leverage. The dogma of over-coverage is not infallible, given that includingrisks of automated liquidation due to the effect of the agreed IT protocol, or due to its failure; a generalized fall in the value of digital assets would then be to be feared. In addition, thees flash loans can be used to carry out attacks against protocols by borrowing large amounts of governance tokens, then voting for decisions detrimental to other users, before immediately repaying the borrowed funds. These instant, unsecured loans call for heightened vigilance on the part of regulators. What's more, the ever-increasing sophistication of protocols makes these operations more expensive for users.

In response to the ACPR public consultation on the subject, it was suggested that a " recentralization " from protocols DeFi indulging regulated financial activities from traditional financeon the grounds that this would guaranteedes a level playing field respect for decentralized protocol governance DeFi is alternatively offered validation of smart contracts will appear as a necessity.

It is therefore appropriate to request a regulatory framework also simplifiedé as possible in this areawhile avoiding any restrictions underlying technological innovation.

The author thanks Léa Barmont and Inès Bendjaffer of Norton Rose Fulbright's Banking & Financial Regulations and Derivatives team for their invaluable help.