Consumers promised high returns and safe investments lost big in the UST-luna collapse, which in turn has caused DeFi entities like the Celsius Network to freeze withdrawals. Alongside the general crypto market downturn, the damage is tangible, giving urgency to efforts to regulate crypto with basic guardrails.

The questions of what happens to crypto held hostage by an exchange or a DeFi lender are puzzling for many of the new investors drawn to crypto recently.

• In the context of DeFi lenders like Celsius, it’s unlikely consumers will be able to access their crypto deposits unless they are unfrozen by the lenders themselves.
• How existing investor protection laws might apply to digital assets is largely untested, and the global and decentralized nature of many DeFi entities makes it hard to figure out where to start in pursuing a claim.

But risky behavior by crypto companies isn’t flying under regulators’ radar. A look at the ongoing investigations Terraform Labs is under after the UST-luna stablecoin collapse gives an idea of the repercussions a DeFi company can face from causing losses for investors.

• Federal legislation and regulations could be expected in the next few years, with the introduction of the Responsible Financial Innovation Act in Congress and Biden’s executive order outlining how federal agencies should be working together for a regulatory framework for the crypto industry, federal legislation and regulations could be expected in the next few years.

In the meantime, SEC Commissioner Hester Peirce, a frequent critic of the agency’s scant rulemaking on crypto, gave one piece of advice to consumers back in May. “I think no matter what you're doing with your money as an individual, you need to be using your own brain, first and foremost. You need to be looking out for red flags,” she told Protocol.

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— Lindsey Choo (email | twitter)