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DeFi Protocol Legal Review

Does Georgia regulate DeFi protocols as financial institutions?

Currently, pure DeFi protocols (non-custodial smart contracts) fall into a regulatory grey area. However, if there is a legal entity or identifiable group exercising control (e.g., admin keys, updating contracts) and offering crypto services, they fall under the VASP regulation by the National Bank. Our review determines your degree of decentralization and regulatory exposure.

What is the risk of issuing a Governance Token?

If a governance token is sold to raise capital with a promise of future profits (e.g., sharing protocol revenue), it risks being classified as an unregistered security. This can lead to heavy fines and criminal liability. We analyze tokenomics to structure the token as a utility instrument rather than an investment contract.

Do I need Terms of Service for a DeFi website?

Absolutely. The frontend interface (website) is the point where users interact with the blockchain. A robust Terms of Service (ToS) limits your liability for smart contract bugs, impermanent loss, and user errors. Without it, you are exposed to consumer protection lawsuits.

How to handle AML compliance in DeFi?

While strict KYC might not be possible for every wallet connecting to a DEX, implementing wallet screening tools (to block OFAC-sanctioned addresses) is becoming an industry standard. Our legal review suggests compliant solutions that balance privacy with regulatory requirements regarding money laundering prevention.

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Decentralized Finance (DeFi) offers innovative financial instruments without intermediaries, but a question often arises: how do these protocols comply with existing legislation? DeFi Protocol Legal Review is a comprehensive analysis that evaluates a project's business logic and code functionality through the lens of financial regulations. The implementation of VASP (Virtual Asset Service Provider) regulations by the National Bank of Georgia has placed many DeFi projects before a legal dilemma. The audit aims to determine whether a specific protocol is subject to licensing, violates securities laws, or contains money laundering risks.

What Does the DeFi Protocol Legal Review Cover?

This service goes beyond technical audits and focuses on legal compliance:

  • Regulatory Status Determination: Analyzing whether the protocol is considered a "financial institution" or VASP under Georgian law. Is the project truly decentralized, or does it have a central administrator?
  • Token Qualification (Howey Test analogy): Evaluating the protocol's Governance or Utility token — does it bear the characteristics of a security?
  • AML/KYC Risk Analysis: Checking liquidity pools and exchange mechanisms for money laundering risks.
  • Consumer Protection: Compliance of the protocol's Terms & Conditions with consumer rights protection standards.
  • Intellectual Property: Verifying code licensing (Open Source vs Proprietary) and brand protection.
  • Cross-border Regulations: If the protocol serves users from other countries (USA, EU), a general overview of compliance.

Common Real-World Scenarios

A legal audit is necessary in the following cases:

  • When a Georgian startup launches a DEX (Decentralized Exchange) or Lending platform and wants to know if it needs a license from the NBG.
  • When a project plans an ICO/IDO (Initial DEX Offering) and wants to avoid violating securities laws.
  • When an investor intends to put a large sum into a DeFi protocol and requests an independent Legal Opinion.
  • When a protocol implements a "Liquidity Mining" program and its tax and legal consequences need assessment.
  • When an existing protocol undergoes rebranding or changes its governance model (transitions to a DAO).

Georgian Legislation and Regulations

The DeFi sector is impacted by the Organic Law of Georgia on the National Bank of Georgia and NBG President's orders regarding VASP registration. The main criterion is "providing services for the benefit of another." If the protocol is fully autonomous code without an intermediary, it might fall outside regulation, but if there is a team collecting fees or managing the platform, it will likely be considered a VASP. Also important is the Law on Securities Market — if a token promises profit to an investor based on the efforts of others, it may qualify as a security. The Law on Protection of Consumer Rights obliges projects to provide users with full information about risks.

Service Process

DeFi audit with Legal.ge specialists involves:

  1. Documentation Review: Analyzing the Whitepaper, technical documentation, and business model.
  2. Team Interview: Detailed clarification of processes (Who controls admin keys? Where do fees go?).
  3. Legal Qualification: Preparing a conclusion on the status of the token and activity.
  4. Recommendations: Developing a risk mitigation plan (e.g., Geo-blocking interface for certain jurisdictions).
  5. Legal Opinion: Issuing an official legal opinion for partners or exchanges (Listing Opinion).

Why Legal.ge?

DeFi is the intersection of technology and finance. It is difficult for an ordinary lawyer to understand the difference between an AMM and an Order Book. Legal.ge features lawyers who understand the principles of smart contracts and financial regulations. With their help, you can launch an innovative product without breaking the law and gain investor trust.

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