On January 25, the Florida Office of Financial Regulation (OFR) issued an investor advisory “to raise awareness about decentralized finance (DeFi), a relatively new blockchain-based group of financial services gaining popularity[.]” The OFR defines DeFi as “financial services provided by an algorithm on a blockchain, without a traditional financial services company.” The advisory describes DeFi, the technology behind it, how DeFi lending works, and potential risks.
According to OFR Commissioner Russell C. Weigel, III, “DeFi-based companies offer lending, banking, and investing options that are decentralized and not dependent on traditional financial markets. This evolution of financial services is not necessarily a bad thing and may be a good thing, but before getting involved with a company or product in the DeFi market, take reasonable steps to understand the risks of this emerging blockchain-based technology and market. The Office of Financial Regulation is committed to allowing innovation to grow and thrive while protecting Floridians from bad actors, but the best practice is to educate yourself before risking your money.”
The OFR recommends that, before committing to a decision on a financial services business or professional, investors educate themselves about the potential risk. It also notes that DeFi investment opportunities and markets are new, typically highly volatile, appear to be driven more by psychological factors than investment fundamentals, and that many digital asset investment opportunities are not asset-backed.