The securities have not been and will not be registered under the U.S. Securities Act of 1933, as amended or with any other regulatory authority of any State or other jurisdiction of the United States or Canada and (i) may not be offered, sold or delivered within the United States or Canada, or to, or for the account or benefit of any U.S. Person or Canadian, and (ii) may be offered, sold or otherwise delivered at any time only to transferees that are Non-United States Persons and Non-Canadians.

July 4, 2023

DeFi fraud; UK Law Commission; MiCa

Welcome to Swarm Markets’ media memo. This weekly update provides comments from Swarm Markets’ co-founders, Philipp Pieper and Timo Lehes, on key industry news that has caught our eye, plus our own developments.  

Comments available on the following news items:


  • Digital asset fraud recovery improving
  • UK Law Commission warns on digital asset ownership rules
  • MiCa implementation: Where now for DeFi in the EU?


DeFi fraud losses fall as recovery progress improves


Losses stemming from fraud and other kinds of digital crime have fallen according to De.Fi Rekt’s latest report. While the nominal figures around losses are still high it is encouraging to see the trend move in the right direction.


Fraud is not an issue exclusive to DeFi and affects the entire global financial infrastructure. But high profile issues such as rug pulls and other frauds have put the sector in the spotlight. As trading activity has slowed down in crypto to move into bear market conditions, we can expect fraudulent activity to also quell. However, DeFi has tools at its disposal that will in time make it vastly more secure than TradFi systems in the prevention and recovery of assets. 


Recovery is a particularly interesting issue here as on-chain transparency and data available to specialists in retrieving lost assets enables law enforcement to track down lost assets and catch criminals in the act. This is further enhanced by the improving regulatory environment which this year will no doubt have begun to help.


In the long-term, prevention is always going to be the solution to the problem, with robust systems in place to protect users and a comprehensive regulatory framework, which is making its way onto statute books, to raise the standard of providers across the sector. 


UK Law Commission raises key digital asset ownership flag 


In the wake of the successful introduction of the Financial Services and Markets Bill in the UK, the country’s Law Commission has raised an issue over ownership rights in the country. 


With the competitive regulatory changes underway between countries such as the UK, EU and other areas, core legal principles will always have to be updated to accommodate new and innovative ownership methods such as digital assets. 


Western countries are able to attract investment principally because of robust ownership rights, whether that be of real estate, shares in companies or basically anything else. Those with capital move to jurisdictions where they know the courts will uphold their rights.


This is no different in principle when it comes to digital assets. But because such assets are based in code rather than anything tangible and physical, this leaves room for foul play from unscrupulous providers and leads to outcomes that include what went on at some now infamous exchanges where user assets and funds were commingled freely without permission. 


Where now for DeFi? MiCa implementation next steps


After a two and a half year process, MiCa has finally been enshrined in law. With the ink barely dry on the new legislation, there is already talk of MiCa II in the pipeline. But how long could that end up taking?


The best example we have to look back on, in EU regulatory terms that encompass finance, is MiFID I and MiFID II. MiFID was a groundbreaking set of rules to set out the authorization requirements of investment firms, while MiFID II provided a legal framework for the securities market in the EU and was introduced in 2014. What is notable here is how long the time frame between parts one and two were – 7 years.


Innovation cycles are speeding up and the pace of regulatory change is accelerating alongside them.We don’t think it will take this long for a potential MiCa II to come into existence, as governing institutions become more adept and adapt to developing new frameworks. While the effect of MiCa will take time to feed through to the sector, DeFi businesses should be thinking now what this next set of rules could be and how to become fully future proofed for a regulatory-first approach.