As part of an effort to raise investor awareness, the Ohio Division of Securities has issued an advisory on Decentralized Finance (DeFi), a relatively new blockchain-based set of financial services gaining popularity and acceptance.

The advisory explains what DeFi is, the technology behind it, how DeFi lending works, potential risks for investors and how consumer can avoid becoming a victim of a scam.

“The growing popularity of cryptocurrencies is one of the main drivers behind the development of alternative banking and business opportunities that may rely on DeFi models,” said Dan Orzano, spokesman for the state division of securities.

Companies entering this space are now offering banking and investing services that rely on cryptocurrencies instead of conventional currencies, such as the U.S. or Canadian dollar or Mexican peso.

“Investors need to understand how DeFi works compared to traditional lending platforms,” Mr. Orzano explained.

“Alternative financial services providers distinguish themselves from mainstream companies by offering lending, banking and investing options that are ‘decentralized’ or not dependent on traditional financial markets.”

Because DeFi is an emerging technology, he noted the risks differ from those in traditional markets.

“There are no DeFi consumer protections currently in place,” Mr. Orzano said. “Users may have little recourse should a transaction go wrong. And the parties involved in the transaction could be located anywhere in the world.”

As with any new technology, he acknowledged, investors may see many opportunities for investment.

“However, the average retail investor may find it hard to distinguish between DeFi opportunities that have real value and those that are scams,” he added.

Before investing, contact the division of securities at 1-877-683-7841 to avoid losing money to fraud.