How to achieve legal compliance for blockchain-based DeFi wealth management projects?
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How to achieve legal compliance for blockchain-based DeFi wealth management projects?
Non-custodial ≠ Zero responsibility.
Navigating Web3 tides with focused insightsAuthors: Liu Honglin, Xu Yuewen
Last month, while Attorney Honglin attended the Web3 Summit in Bangkok, I had conversations with several entrepreneurs focused on on-chain DeFi aggregation services during the event. Through these discussions, I noticed that more than one founder seriously misunderstood the relationship between "decentralization" and "legal compliance."
For example, many teams building on-chain yield aggregators believe their projects are based entirely on decentralized smart contracts and never "touch" user assets—thus assuming they need not worry about compliance. As a result, they simply registered a company in Singapore and launched operations with nearly zero compliance expenditure.
Clearly, these friends hold significant misconceptions about compliance. So, taking advantage of a weekend at home, I've written this article to clarify key points and offer practical compliance advice and risk mitigation guidance for those planning to enter the on-chain wealth management space.
Industry Landscape and Revenue Model Analysis
Yield aggregators are a classic application within the DeFi ecosystem, primarily designed to help users optimize returns on their assets. In essence, a yield aggregator functions like an automated "wealth management bot." Users deposit crypto assets into the platform, which then continuously monitors yield rates across various DeFi protocols (such as Aave, Compound, Curve, etc.), dynamically reallocating funds according to market changes to maximize returns. The term "yield aggregator" is used metaphorically to illustrate its profit-seeking behavior, but fundamentally, it's exactly what the name suggests—"yield aggregation," or understood as an "asset scheduler driven by maximizing returns"—a strategy pool using intelligent allocation to achieve optimal yields.
From the user’s perspective, depositing capital (e.g., BTC, ETH, USDT) into an aggregator enables participation in liquidity mining across third-party DeFi projects. The platform switches funds to higher-yielding protocols based on real-time yield data, helping investors earn greater returns.
For the yield aggregator platform, revenue comes from several sources:
Firstly, service-based fees: Management fees, where the platform charges users a percentage (e.g., 1%-2%) of generated returns. This covers monitoring, data processing, and smart contract deployment involved in managing deposited funds.
Secondly, performance-based fees: Some platforms implement a carry structure, charging additional performance fees (typically 10%-20%) on returns exceeding a certain annualized threshold.
Lastly, platform incentives: Earning referral bonuses or commissions by directing user funds to partner protocols through cooperation agreements.
Theoretically, yield aggregators operate fully via on-chain smart contracts. User funds remain under control of the smart contract, and project teams do not possess users’ crypto assets or private keys. However, if the contract contains vulnerabilities, hackers—or even insiders—may exploit permissions to steal funds. Moreover, some centralized "yield aggregator" services require users to deposit assets directly into platform-controlled accounts, meaning the platform has direct control over user funds, introducing risks around fund safety and transparency—this stands in stark contrast to the non-custodial model of true decentralization.
Common Compliance Misconceptions Among Founders
1. Technological Decentralization ≠ Fund Security
Many entrepreneurs believe that as long as user assets are controlled by smart contracts, the team bears no responsibility for fund security. In reality, however, the security of the smart contract directly determines the survival of the project. If a contract has vulnerabilities, hackers can use reentrancy attacks or permission flaws to drain user funds, resulting in losses—and the project team cannot be fully absolved of liability. Therefore, even for decentralized projects, technical security remains critical. Teams must ensure smart contracts undergo rigorous third-party security audits, conduct regular vulnerability patching, and maintain open-source code to enhance community trust and transparency. Otherwise, even with decentralized technology, absolute user fund security cannot be guaranteed.
2. Decentralization ≠ No KYC Required
Many yield aggregator teams assume that because the platform does not custody user assets, they can bypass anti-money laundering (AML) and know-your-customer (KYC) requirements. Yet global regulators are intensifying scrutiny of DeFi, especially in markets like the U.S. and EU, where any entity offering financial services will likely face KYC obligations. Ignoring this exposes projects to heavy fines and legal liability.
3. Non-Custodial ≠ Zero Liability
"We never touch user funds"—this is a common defense among yield aggregator founders. However, even without direct custody of user funds, project teams may still face legal responsibility. If a smart contract suffers a bug or attack leading to user fund loss, the team could still be held accountable. Thus, teams must clearly disclose risks in platform interfaces and user agreements—including market volatility and potential smart contract vulnerabilities. Additionally, considering extra safeguards such as insurance mechanisms or compensation programs can not only reduce user losses but also strengthen platform credibility and trust.
4. Tax Compliance: Don’t Assume the ‘Gray Zone’ Will Last Forever
Some entrepreneurs believe the crypto industry remains in a “gray zone,” so tax compliance isn't urgent. But in fact, tax authorities worldwide have increased oversight of crypto. An increasing number of jurisdictions now require reporting of income and gains from crypto activities. Whether or not cross-border transactions occur, or whether some transactions are partially anonymous, tax compliance is a non-negotiable obligation. Failure to report timely may lead to substantial penalties, interest, or even criminal charges. Entrepreneurs should establish dedicated tax compliance teams to ensure all platform revenues, user earnings, and cross-border flows are reported legally and promptly. For cross-border operations, special attention must be paid to differences in national tax laws to avoid violations due to lack of local legal knowledge.
ManQin Law Firm Compliance Recommendations
The appeal of on-chain wealth management projects lies in innovation and technology, but compliance and security form the foundation for long-term success. Decentralization does not mean exemption from responsibility. Founders must go beyond smart contract design and prepare thoroughly for KYC, AML, tax compliance, and marketing practices. Technology may accelerate innovation, but only compliance ensures longevity.
We hope this article offers practical insights for aspiring blockchain entrepreneurs entering the on-chain finance space.
1. Strengthen Smart Contract Security: Security Is Not a One-Time Investment
Smart contracts are the core of yield aggregator projects, but security shouldn’t be treated as a one-off audit—it must be an ongoing process. Audits are just the starting point; regular security monitoring, vulnerability patching, and contract upgrades are equally crucial. Core functions like fund management and yield distribution are high-risk targets; once exploited, the damage can be catastrophic.
Therefore, teams must build a robust contract security framework, ensuring smart contracts evolve alongside market dynamics and technological advancements. Open-sourcing code allows community participation in reviewing contracts, enhancing both transparency and community trust. Furthermore, rapid response and recovery after a contract breach are essential to maintaining user confidence.
2. Conduct Compliance Due Diligence: Anti-Money Laundering Matters
Don’t count on “decentralization” to escape regulation. Before launching, engage qualified legal counsel to perform compliance due diligence, particularly regarding AML and KYC obligations. It’s far better to establish compliant frameworks early than to face regulatory investigations later, avoiding massive fines and legal disputes. Proactive compliance planning not only prevents penalties but also mitigates latent legal risks. Project teams should work with experienced legal advisors to ensure lawful operation across different jurisdictions.
3. Tax Compliance: After-Tax Income Is Real Income
You must cultivate tax compliance awareness! Ensure timely reporting of project income and user earnings. Globally, tax regulation of cryptocurrencies and DeFi projects is becoming a top priority, with tax authorities ramping up enforcement. Neglecting tax compliance may result in severe fines, interest, or even criminal liability, jeopardizing long-term sustainability. Be sure to properly report taxes on both project and user earnings to remain compliant and prevent unforeseen legal burdens.
4. Exercise Caution in Marketing: Authenticity and Transparency Enable Longevity
Avoid overstating returns in advertising—always truthfully represent platform risks and rewards. While short-term traffic is tempting, long-term user trust is foundational. Compliant marketing avoids regulatory risk and enhances brand reputation.
Particularly for DeFi applications like yield aggregators, return volatility and contract risks are inevitable. Platforms should accurately present key metrics including risk exposure, expected returns, and liquidity conditions, clearly informing users of potential dangers. Through compliant marketing practices, projects can avoid regulatory penalties and build a stable, trustworthy brand identity that supports sustainable growth.
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