1. What is Banking Exposure to DeFi Fraud?

US banking fraud $2.8B in H1 2025 vs DeFi exploits $1.1B - but DeFi recovery is near zero.

2. Regulatory Position

India - Supreme Court - IAMAI vs RBI (2020): Landmark.

• RBI circular 6 April 2018 banned banks from providing services to crypto businesses - de facto ban
• Supreme Court held circular unconstitutional. RBI failed to actually demonstrate damage that use of cryptocurrencies had on banking and financial institutions in India, and had specifically argued cryptocurrencies were not actually banned under Indian law. Completely denying banking access to otherwise lawful business activity was excessively harsh measure amounting to fatal blow.
• Current RBI Push 2024-25: RBI now wants Parliament, not circular, to write separation into law. Containment strategy that would bar banks and regulated entities from dealing in crypto and privately issued stablecoins while blocking use of such assets in payments and settlements. Wants to shield banks from crypto exposure.

US - SEC: If you're paying interest on someone's crypto holdings, you're running a brokerage. Lending products = unregistered securities.

3. Case Laws - Detailed

CASE 1: Risley v Uniswap Labs - Second Circuit - Feb 2025 - Foundation Case - DeFi Developers NOT Liable

Facts: Class action 2022 alleged Uniswap enabled scam tokens / rug pulls causing losses, platform facilitated fraud.

Lower Court: Judge Failla dismissed federal securities claims Aug 2023 - operating decentralized protocol does not make Uniswap liable for third-party scam tokens.

Second Circuit Affirmed Feb 2025: Court ruling in favor of Uniswap Labs has significant implications. Platform itself cannot be held liable for fraudulent actions of third parties using decentralized protocol. Writers of neutral, decentralized software cannot be held liable for third-party abuse. Compared holding Uniswap liable for swaps to holding Nasdaq or NYSE responsible for fraudulent stock purchases.

Impact: DeFi protocol is neutral software like Venmo, not financial intermediary. VC defendants also not liable. But bank that lists token IS liable - distinction crucial for banking exposure.

CASE 2: FTX / Alameda - Sam Bankman-Fried - Conviction Upheld Second Circuit June 2026 - $8B Fraud - Banking Exposure Template

Facts: FTX exchange once valued $32B, collapsed Nov 2022 when balance sheet of Alameda built on FTX own token. Disclosure triggered run that ripped open $8B hole. Funds transferred from FTX customers to Alameda, false financial statements to lenders, backdated documents.

Charges: Prosecutors argued defrauded FTX customers of $8B, investors $1.7B, Alameda lenders $1.3B, total $10B+. Altered balance sheets to hide borrowing $10B from FTX customers.

Second Circuit June 2026 Decision: Customers were defrauded as soon as Bankman-Fried transferred money to Alameda regardless of how strongly he believed he might later return money. It was immaterial whether he had funds. Conviction on 7 fraud conspiracy counts, 25 years prison. Ellison pleaded guilty, 2-year sentence.

Banking Lesson: Signature Bank, Silvergate, Moonstone Bank exposed to FTX - had to write off. Banks failed to do source of funds check on Alameda.

CASE 3: Celsius Network + Voyager + BlockFi - CeFi Lending - SEC Securities Fraud

Timeline:

• Paused withdrawals June 12 2022 Celsius, July 1 Voyager. Filed bankruptcy July 2022. Celsius 1.7M customers, Voyager 975,521.
• Independent examiner Jan 2023: Employee described model as very Ponzi-like - paying early users with later users deposits

SEC Action: SEC filed complaint charging violating registration and anti-fraud provisions. Celsius prohibited from offering product to deposit, exchange, invest, or withdraw any. FTC and SEC charged fraud and unregistered securities.

Holding: Yield products looked like unregistered securities to regulators. If you're paying interest on crypto holdings, you're running brokerage.

Bank Exposure: Banks provided credit lines to Celsius/Voyager - Metropolitan Commercial Bank $300M exposure. Lost.

CASE 4: Blockchain Credit Partners d/b/a DeFi Money Market - SEC First DeFi Case - $30M

SEC charged so-called DeFi company for allegedly fraudulent $30M offering. First involving securities using DeFi technology. Promised 6.25% from car loans, actually used funds for personal.

CASE 5: HASH vs ICHI / Rari Pool 136 - 2025 - $16.2M Governance Fraud

Collapse of Rari Pool 136 in 2025 pivotal incident in HASH vs ICHI DeFi governance fraud case resulted in over $16.2M losses. Exposed systemic vulnerabilities. Fraud via governance proposal - attacker gained voting power and drained pool.

Banking Lesson: Institutional due diligence needed - code audit not enough, governance centralization risk.

CASE 6: Peraire-Bueno - MIT Ethereum Heist - MEV as Fraud - 2024-25

Prosecutors framed MEV rearrangement as fraud, citing wire fraud and money laundering. Defense claimed honest validator theory - Ethereum decentralized structure makes fraud invalid. Prosecution's dismissal of honest validator theory - rearranging transactions to extract value still breaches anti-fraud laws.

Implication: Banks running validators or MEV bots can be charged with wire fraud.

CASE 7: Jones v Persons Unknown - UK High Court - Constructive Trust

High Court provided several firsts including creating constructive trust between cryptocurrency exchange to which stolen Bitcoin traced and victim of alleged crypto fraud. Wang v Darby indicated digital assets could in principle be held on trust.[2021]

Use for Banks: Victim can claim constructive trust over funds held in exchange, freeze.

CASE 8: Delhi HC vs SBI - Cyber Fraud - Bank Responsibility - 2024-25

Delhi HC directs SBI to compensate customer Rs 2.60 lakh in cyber fraud incident emphasizing banks responsibility in digital security. Case of Hare Ram Singh academician fell victim to vishing attack.

Justice Dharmesh Sharma observations regarding banks obligations and customer protection in digital banking.

Holding: Bank liable for digital security failure even if fraud originated in DeFi / crypto vishing. Must compensate.

This is key for Indian banks - if customer tricked to transfer to DeFi scam via UPI, bank may be liable if failed to implement anomaly detection.

4. Banking Controls to Avoid Exposure

RBI Containment Checklist:

1. No direct exposure: RBI advised prohibiting crypto for payments and settlements while imposing tight limits on direct banking-sector exposure
2. Enhanced Due Diligence on Crypto Clients: Source of wealth, blockchain analytics - proof of not mixing
3. DeFi Governance Check: Before lending to DeFi firm, check if protocol admin keys held by 1 person = centralization risk
4. Smart Contract Audit: Require 2 audits + bug bounty
5. Legal Opinion: Is token security? If yes, no banking
6. Transaction Monitoring: Flag rapid transfers to Tornado Cash, mixers = STR