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DeFi security threats surged in 2024 with over $470 million lost, mostly from private key hacks targeting users directly.
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Legal compliance is critical for platforms to build trust and avoid issues, including adopting clear frameworks and AML measures.
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Raising user awareness about wallet safety, identity protection, and scams is essential for a secure DeFi ecosystem.
The DeFi sector, promising financial inclusivity, has encountered significant security threats, with 2024 reporting over $470 million in losses, stressing the need for legal compliance and user education.
The Evolving Risks in DeFi
The DeFi space has long struggled with vulnerabilities, but recent trends indicate a worrying shift in the tactics employed by malicious actors. According to Dr. Tavus, wallet safety has emerged as the most pressing risk.
Industry data from 2024 reveals that private key compromises accounted for 43.8% of all stolen crypto, stressing the critical need for robust wallet security practices. Hackers are increasingly targeting users directly rather than projects or smart contracts.
“The latest trends in native blockchain crimes show that hackers are focusing on users rather than projects or smart contracts. Stealing private keys is becoming more and more popular every day,” Dr. Tavus shared.
One key vulnerability arises from the transparent nature of blockchain transactions. While transparency is fundamental to blockchain technology, it can inadvertently expose users who link their identities through social media accounts or public profiles. This connection makes users more susceptible to targeted scams and other malicious activities.
“I highly recommend not using the same nickname on social media and wallet services. It’s an open invite to a hacker group: ‘Hello, you can find me on social media. If you can install malware and steal my private key, you know how much you will steal,’” he added.
Protecting sensitive information like seed phrases is another crucial part of staying secure in the crypto space. Restarting the modem and router before connecting to wallets adds an extra layer of protection by refreshing the network connection, making it harder for attackers to exploit potential vulnerabilities.
Equally important is selecting a secure device for managing digital wallets. Using a device solely dedicated to wallet transactions, with minimal exposure to other apps or online activity, significantly reduces the risk of malware or unauthorized access compromising sensitive data.
“It’s worth mentioning that users should rely on their own modems and routers, not the ones provided by service providers. I also don’t recommend using operating systems that allow apps to be installed without user consent. Ideally, an Apple device with no additional apps, dedicated solely to serving as a digital wallet, is the safest option,” Dr. Tavus added.
DeFi platforms need to strengthen their legal compliance to safeguard both users and their ecosystems from fraud and other risks. Dr. Tavus highlights the importance of transparency in this process, particularly when it comes to clearly outlining their legal structure and the jurisdiction they operate under. This level of openness helps build trust and ensures the platform is better prepared to address regulatory challenges.
“Users have the right to know the legal structure of the platform and which jurisdiction is preferred. At that stage of the ecosystem, there is no logic in fighting or resisting any regulatory authority. They should pick a jurisdiction and comply with local rules. If no jurisdiction is adopted, any government can intervene sooner or later,” he explained.
Ensuring Legal Safety
To stay legally protected in the DeFi space, users must take proactive steps. One of the most important is checking the jurisdiction of centralized platforms, as it plays a key role in determining their compliance and reliability.
“Weak compliance jurisdictions are a clear sign of the platform’s negligence toward its users,” Dr. Tavus noted.
For decentralized platforms, assessing the project’s management is vital. Users should verify that the leadership upholds industry standards and operates with transparency and accountability.
“If users notice red flags but continue using the platform, they may not receive legal protection. Courts might view this as acceptance of high-risk transactions,” he said.
Following Anti-Money Laundering (AML) rules is equally important. Exchanging cash for cryptocurrencies without proper KYC or licenses, especially in OTC or peer-to-peer deals, can cause legal trouble. Users should also watch out for the risk of receiving stolen or illicit funds, which could land them in serious problems.
“New regulations require transaction details to be archived for eight years, including invoices, customer KYC, the scope of work, and reasons for transactions. People might not realize they’re receiving traced illicit funds, which could make them part of a money-laundering scheme,” he warned.
Recovery Scams and Legal Recourse
Scams aimed at recovering lost cryptocurrency assets are on the rise, emphasizing the importance of caution when seeking such services. Many analytics firms advertise fast and secure recovery solutions, but Dr. Tavus pointed out that these promises are frequently misleading.
“Every jurisdiction and crypto exchange has a different methodology and understanding of criminal acts. A broader or instant promise of crypto recovery is a pure act of crime. Each case should be reviewed and analyzed separately. The most fun part is they never disclose the size they were able to recover because they didn’t have any amount, ever,” he stated.
Victims of scams should avoid depending solely on recovery firms and instead turn to law enforcement or qualified legal professionals for assistance. Proper representation of legal rights is strictly regulated in every jurisdiction, making experienced lawyers crucial for handling such cases effectively.
“The counterparty, whether a stablecoin issuer or a crypto exchange, is unable to verify your ‘property right’ claim, and without a proper court order, they won’t be able to take action on another person’s ‘property right.’ Without the proper assistance of an experienced lawyer, chances go down slowly,” he added.
For legitimate help, victims are encouraged to contact law enforcement agencies. Depending on the jurisdiction, federal or national agencies may offer better support, as they often have skilled agents experienced in dealing with crypto-related crimes.
Consulting an experienced crypto-crimes lawyer is also critical. Combining legal expertise with the support of enforcement agencies improves the chances of recovering lost assets and resolving fraud cases effectively.
“For some jurisdictions, Federal or national agencies outperform local law enforcement because of their crypto-experienced seasoned agents. However, in some other countries, local law enforcement performs better because federal or national agencies are overbooked with countless crypto cases and short on manpower,” he noted.
Long-term Compliance and Legal Preparedness in DeFi
Maintaining detailed transaction records for at least eight years is essential for DeFi projects, particularly DAOs, which often operate as informal partnerships. Dr. Tavus noted that disagreements among DAO co-founders are becoming more frequent, making thorough record-keeping critical. Without clear documentation, co-founders risk legal complications if disputes arise or authorities demand proof of past transactions.
“For personal safety, any transaction executed for a DeFi project should be booked somewhere. On a very unexpected day, a law enforcement agency or a court can ask for details you forgot years ago, and you can be accused of something you weren’t aware of,” he explained.
Sharing a real-life example, Dr. Tavus recounted an incident where a person casually funded a wallet with $1 for gas fees after seeing a request in a Telegram group. Unbeknownst to them, the wallet was later used to hack a DeFi protocol and steal $3 million. This highlights the potential risks of undocumented transactions.
To align compliance frameworks with international regulations and prevent money laundering accusations, Dr. Tavus stressed the necessity of implementing robust AML and KYC solutions.
“Hiring anonymous developers or paying without keeping records isn’t worth taking personal risks. The cheaper solution is using centralized payment solutions developed by third parties; in this way, projects will be responsibility-free as long as transactions are conducted through a third party,” he advised.
Future Challenges and the Role of Education
The legal framework surrounding DeFi is shifting, with a stronger focus on transparency and accountability. Dr. Tavus urged the industry to take these changes seriously, especially when addressing critical issues like market manipulation.
“Still, some big players are unable to understand the seriousness of the situation. Transparency should always be the first choice. Otherwise, gross negligence on disclosure can cause severe problems that the industry has never faced before,” he warned.
Education also plays a vital role in reducing risks, both for companies and individual users. An informed user base not only helps protect individuals but also eases regulatory pressures on companies by fostering a safer and more responsible ecosystem.
“The primary concern on the regulatory side is to protect retail. If retail is well educated about the risks they face when they execute a transaction and still insists on doing so, there won’t be any legal concerns,” he noted.
Dr. Tavus concluded that the future of DeFi hinges on the industry’s ability to address its flaws proactively. Transparency, proper record-keeping, and user education are not just safeguards — they are the foundation for building a resilient ecosystem that can thrive under scrutiny. Without these commitments, DeFi risks losing its credibility and the opportunity to define the future of finance on its own terms.
