Fintech & DeFi

> Shaping the Future of Finance

DESSMI IFI - 1st Semester 2023/24

Course designed by Benoît Courtois

 Introduction
“The biggest risk of all is not
taking one.”
- Mellody Hobson

Course designed by Benoît Courtois

 Course Modules
01 Intro & Fintech 04 Blockchain & DeFi

02 Blockchain Basics 05 Crypto AM

03 Blockchain Apps 06 Risks & Regulations

Teaching Style:
Face to face
Online
Online Async
Course designed by Benoît Courtois
 Course Modules
07 Crypto Valuation 10 Future of Finance

08 Fintech & DeFi

09 Blockchain in A&A*
Teaching Style:
Face to face
(*): This module may vary based on the instructor's expertise. Online
Online Async
Course designed by Benoît Courtois
 Learning Culture
Rules:
● There are no stupid questions. Ask your questions.
● Dare to take risks. “No risk no return”.
● Respect is key. We are all playing in the same team.
● No one will be left behind. We are all supportive.
● Please be careful about plagiarism and deadlines.
“A person who never made a mistake never tried anything new.”
- Albert Einstein

“Only those who dare to fail greatly can ever achieve greatly.”
- Robert F. Kennedy

Course designed by Benoît Courtois

 06
Risks &
Regulations
> By Benoît Courtois

IFI – Fintech & DeFi – Week 6

Course designed by Benoît Courtois

 Did You Say Risk?
Yes… Crypto projects and assets can be risky!

Work in teams to answer the following questions:

● What are the main risks relating to crypto assets and
blockchain projects?
● What is the link between risk and regulation?
You have 10 minutes.

Course designed by Benoît Courtois

 Risk Overview
Crypto assets and projects, while presenting immense
opportunities, are also accompanied by a unique set of
risks that investors and participants should thoroughly
understand.

Main risks:
● Market risks
● Technology risks
● Technical and utilization risks
● Fraud and security risks
● Regulatory and compliance risks

Course designed by Benoît Courtois

Source: Compact
 Market Risks
Investopedia: “Market risk is the possibility that an
individual or other entity will experience losses due to
factors that affect the overall performance of
investments in the financial markets.”

Main risks:
● Price volatility: High fluctuations
● Liquidity: Convert crypto into cash
● Market manipulation: “Pump and Dump”
● Macroeconomics: Central banks, inflation, etc.
● Geopolitics: Sanctions, conflicts, etc.

Course designed by Benoît Courtois

 Technology Risks
RiskOptics: “Technology risk (also known as information
technology risk) is a type of business risk defined as the
potential for a technology failure (e.g. blockchain) to
disrupt a business.”

Main risks:
● Smart contracts: Bugs/Breach in code (e.g. bridges)
● Consensus and network: Algorithm and nodes
● Interoperability: Between IT systems or blockchains
● Scalability: Issues to process lots of transactions
● Centralization: Nodes, risks of centralization (51%)
● Functional requirements: IT/Blockchain options

Course designed by Benoît Courtois

 Technical & Utilization Risks
Using blockchain and crypto carries the risk of not fully
understanding the technical aspects or processes, which
could result in misuse of tools and loss of money.

Main risks:
● Wallet losses: Misplaced private keys
● Incorrect transactions: Wrong network/address selection
● Smart contracts: Unintended executing of scams (e.g.
swaps, bridge)
● Platforms/dApps: Connect to unsecured platforms/dApps

Course designed by Benoît Courtois

 Fraud & Security Risks
Fraud and security risks in the crypto/blockchain realm
are intertwined; vulnerabilities in security protocols can
open the door to fraudulent activities, putting user
assets at jeopardy.

Main risks:
● Phishing attack
● Ponzi and pyramid schemes
● 51% attacks
● Shitcoins/NFTs (e.g. rug pulls)
● Fake platform/exchange
● Social media scams

Course designed by Benoît Courtois

 Reg. & Compliance Risks
PlanetCompliance: “Compliance risk is the possibility
that you might break current laws or regulations.
Regulatory risk happens when new changes to laws
and regulations might cause losses to your business.”

Main risks:
● No or unclear regulations
● New laws and regulations: MiCA, TFR etc.
● AML/CTF compliance
● Licencing and registration
● GDPR compliance (in Europe)
● Crypto bans: In certain countries

Course designed by Benoît Courtois

 What’s Risk Management?
Investopedia: “Risk management is the process of
identification, analysis, and acceptance or mitigation of
uncertainty in investment decisions.”

Main risk management steps:

1. Identification
2. Analysis and assessment
3. Mitigation
4. Monitoring and review
5. Reporting

Course designed by Benoît Courtois

Source: Hicx Solutions
 Crypto Risk Management
Crypto investments can be risky right?

Work in teams to answer the following questions:

● How would you perform a project/asset review to
identify the risks before a potential crypto investment?
● How would you mitigate and manage the identified
risks?

You have 10 minutes.

Course designed by Benoît Courtois

 Risk Identification
Reviewing crypto projects is crucial to identify potential
risks before investing or participating, to avoid financial
losses or unforeseen project-related issues.

Main elements of review:

1. White paper/Project documentation
2. Team/Experience/Achievements
3. Platform/Technology
4. Tokenomics/Funding
5. Community/Social media
6. Feedback/Critiques
7. Security/Audit/Compliance
8. Roadmap
9. Partners
Course designed by Benoît Courtois
Source: Journalducoin
 Risk Assessment
Risk analysis determines the likelihood of a risk event
and its potential impact. Risk evaluation then ranks
these risks based on their significance and outcomes.

Levels of risk:
1. Low
2. Moderate
3. Medium
4. High
5. Very high

Course designed by Benoît Courtois

Source: WallStreetMojo
 Risk Mitigation
Risk mitigation involves creating methods and plans to
reduce threats. A team might use these strategies to
identify, track, and assess risks.

Mitigation strategies:
● Risk avoidance
● Risk reduction
● Risk sharing
● Risk transfer
● Risk hedging
● Risk acceptance/retention
What’s residual risk?
Course designed by Benoît Courtois
Source: Silverbullet
 Crypto Risk Management
Addressing risks associated with crypto projects and
investments requires a comprehensive strategy:

● Project research and review

● Investment diversification
● Education/Courses
● Security (wallets, smart contracts, scams, etc.)
● Sceptical and rational mindset (FOMO or panic)
● Clear investment strategies (entry, exit, etc.)
● Laws and regulation updates

Course designed by Benoît Courtois

 Did You Say Regulation?
Yes… It may be vital for the growth of the crypto sector.

Financial regulation encompasses the rules that financial

institutions, like banks, insurers, and brokers, must adhere to.
Beyond mere rule-setting, it involves continuous monitoring
and enforcement of these guidelines.

But what about crypto regulation?

Work in teams to explain why regulation is necessary and

what needs to be regulated (or not) in the crypto industry.

You have 10 minutes.

Course designed by Benoît Courtois
 Regulation Overview
As cryptocurrency has grown significantly in the global
investment landscape, countries have adopted varied
strategies to oversee this asset class.

Course designed by Benoît Courtois

 Is Regulation Needed?
Method Pros Cons

Regulation - Clarity: Defines crypto rules
- Security: Boosts trust and reduce
fraud/scams
- Protection: Protect investors against
market manipulations
- Mainstream adoption: Attract
institutions
- Global: Promotes international
collaboration
- Innovation: Strict rules could stifle
creativity/innovation
- Centralization: Risks deviating from
crypto's decentralized spirit
- Restrictions: Some new financial
products could face barriers
- Costs: High compliance costs may
discourage newcomers
- Regional variance: Differing
regulations add complexity

Course designed by Benoît Courtois

 Regulatory Bodies
Financial regulators are established by countries to
regulate and oversee the financial markets. Some of the
most prominent regulatory bodies include:

● US: Securities and Exchange Commission (SEC)

● EU: European Securities and Markets Authority (ESMA)
● France: Authorité des Marchés Financiers (AMF)
● UK: Financial Conduct Authority (FCA)

Main goals:
1. Prevent and investigate fraud
2. Keep markets efficient and transparent
3. Make sure customers and clients are treated fairly and
honestly
Course designed by Benoît Courtois
 Any Crypto Regulation?
Crypto regulations serve as foundational guidelines within
the digital asset landscape, addressing concerns ranging
from consumer protection to market integrity.

Emerging regulations such as the Markets in Crypto-

Assets (MiCA) Regulation in Europe and the Token
Taxonomy Act in the US are reshaping the crypto
framework, reflecting the industry's evolution and the need
for standardized practices.

Let’s have a look at the EU regulations.

Course designed by Benoît Courtois

 EU Regulations
Following extensive debates and deliberations, the Markets
in Crypto Assets Regulation (MiCAR) and the Transfer of
Funds Regulation (TFR) were officially published in the
European Official Journal on 9 June 2023.

MiCA regulates crypto assets issuers and services

providers >> Regulation (EU) 2023/1114 of 31 May 2023 on
markets in crypto assets.

The revised TFR requires service providers to obtain

information regarding originators and beneficiaries of
crypto asset transfers.

Course designed by Benoît Courtois

 What’s MiCA Regulation?

What for? To harmonize the European crypto assets markets’

regulation.

Entry into force 30/06/23 - Applicable as of 30/12/24.

Main objectives:
1. Support innovation and fair competition
2. Create protection for retail investors
3. Ensure integrity of markets in crypto assets

Applicable to crypto assets:

● Issuers
● Service providers
Course designed by Benoît Courtois
 MiCA: Main Articles
Article # Topic Article #

Art 2 Scope Art 56 Significant E-money class

Art 3 Definitions Art 59 CAPs authorization
Art 6 Utility token white paper Art 60 Provisions of services
Art 7 Marketing communications Art 73 CAPs outsourcing
Art 16 ARTs authorization Art 75-82 Crypto services
Art 19 ARTs white paper Art 85 Significant CAPs
Art 35 ARTs issuers – own fund Art 86-92 Prevention of market abuse
requirements
Art 36 Reserve of assets Art 93-138 Authorities: Coordination,
supervision, inspection, fines, etc.
Art 43 Significant ARTs classification Annex 1-3 White paper disclosures

Art 51 E-money white paper Annex 4 MCR CAps

Course designed by Benoît Courtois

 MiCA: Scope and Taxonomy

Scope: MiCAR covers all crypto assets not already covered

by other financial services regulations.

Crypto asset types:

1. E-money tokens (EMTs): Pegged to a single currency.
2. Asset-referenced tokens (ARTs): Pegged to a basket of
assets.
3. Utility tokens: Do not represent money or assets.

Scope exclusions
● NFTs, collectibles (e.g. art) and financial instruments
● ECB, EIB, non-life/life products etc.
Course designed by Benoît Courtois
 MiCAR: Provisions

To provide any crypto services, an authorization as Crypto

Asset Service Provider (CASP) is required.

Key provisions:
1. Licensing requirements for crypto asset service
providers.
2. Conduct of business standards, including conflict of
interest management and complaint handling.
3. Enhanced disclosure requirements, ensuring
transparency for investors.
4. Market abuse rules to prevent unfair practices and
manipulations.

Course designed by Benoît Courtois

 Regulated Services

MiCAR impacts various crypto-related entities, categorized

by their services. Here's a brief overview:

● Crypto asset issuers

● Stable coin issuers
● Crypto exchanges
● Crypto wallet providers
● Crypto custodians
● Crypto trading platforms
● DeFi platforms
● Tokenization platforms

Course designed by Benoît Courtois

 MiCAR Challenges

While MiCAR aims to foster the growth of the crypto

ecosystem, it is not without its challenges:

● Balancing innovation and regulation.

● MiCA scope: Quite broad and DeFi is not covered as
there are no intermediaries.
● Rapid technology changes vs MiCA updates. It took
years for EU members to reach an agreement.
● Global nature of crypto (borderless) while MiCA = EU.
● EU and global harmonization (e.g. tax).

Course designed by Benoît Courtois

 What’s Compliance?
Investopedia: “Compliance is the set of processes and
procedures that a company has in place in order to make
certain that the company and its employees are
conducting business in a legal and ethical manner.”

Compliance is crucial to avoid:

● Legal actions and financial penalties
● Reputational damage
● Decrease of the operational efficiency
● Loss of licence/permit
● Temporary/Definitive shutdown

Course designed by Benoît Courtois Source: VictorVirunea

 Crypto Compliance
Crypto compliance is on the rise with the recent
establishment of regulations like MiCA. Consequently, the
crypto ecosystem needs to implement rules and
processes to adhere to these new regulations.

Main factors:
● Crypto and blockchain adoption/growth
● New regulations and scrutiny
● More transactions: Anti Money Laundering
(AML) and Know Your Customer (KYC) checks.

Course designed by Benoît Courtois Source: Klippa

 Compliance Program
To ensure regulatory adherence and as part of the
compliance program, crypto compliance procedures
must be implemented and followed across the entire
industry.

Main compliance checks:

● ID/Biometric verification
● Address verification
● Source of funds investigation
● AML data base check
● Withdrawal/Deposit limits review

Course designed by Benoît Courtois Source: ComplyEthic

 Compliance Officer
A compliance officer assists a company in
adhering to industry regulations by establishing
and overseeing policies. Their responsibilities
might involve setting communication
standards, such as email disclaimers, and
ensuring facility safety and accessibility.

Let’s have a look at a typical day’s work >>

Course designed by Benoît Courtois Source: OneEducation

 Legal & Ethical Challenges
The crypto industry faces legal and ethical challenges as it
navigates the balance between innovative technology,
regulation and maintaining its core values.

Main legal and ethical challenges:

● Taxation: Tax evasion + global harmonization
● Customer protection: Scams, fraud, etc.
● Illicit activities: Money laundering and pseudo-anonymity
● Environmental concerns: Energy consumption
● Financial exclusion/inclusion: Risk linked to technology
● Private vs Public: All information available (e.g. China)

Course designed by Benoît Courtois Source: EthicMax

 Course Opening
The Blockchain revolution will radically transform the financial
sector, creating numerous opportunities in:
● Banking
● Asset Management
● Insurance
● Audit and Accounting
● Trading
● Laws and Regulations
● Real Estate
● Private Equity
”In law a man is guilty when he violates the rights of others. In ethics he is
guilty if he only thinks of doing so.”
- Immanuel Kant
Course designed by Benoît Courtois
 Course Wrap Up

● Course summary: Recap of the main concepts covered

● Questions & Answers
● Reflections and feedback
● Mandatory readings to prepare the next module

Time: 10min

Course designed by Benoît Courtois

 Thank you!

Course designed by Benoît Courtois