Connecticut issues a DeFi warning, following a $200,000 loss to a resident

Connecticut Warning: Risk of unregulated offshore decentralized exchanges

Connecticut issued a warning about unregulated offshore decentralized finance (DeFi) exchanges after a resident was fraudulently induced to deposit $200,000 on a platform and was unable to retrieve funds.

Summary of the case

A Connecticut resident was unable to recover the $200,000 he sent to an unnamed unregulated DeFi exchange. Although state officials listed seven offshore platforms, they did not confirm that they were directly linked to the loss. Some offshore exchanges offer leverage of up to 250 times and allow investors to gain comprehensive exposure to assets such as U.S. stocks. The Commodity Futures Trading Commission (CFTC) recommends that U.S. citizens choose a registered exchange when trading with crypto-perpetual contracts.

Fraud and lack of supervision

The Connecticut Attorney General's Office said on September 3 that a person who claimed to know the resident persuaded him to deposit $200,000 on an unregulated decentralized financial exchange. The office did not disclose the identity of the person involved, the specific platform used or the time when the transfer occurred.

Due to the inability to recover the funds, the resident became the leading case in a consumer alert issued by Attorney General William Tong and State Banking Commissioner Jorge Perez. Officials warn that users using offshore platforms often lack practical ways to recover funds when encountering fraud, security breaches, platform failures or disputes.

Tong said these platforms may attract customers with easy access and higher return promises, but fail to provide sufficient protection when problems arise. "This is not innovation, it's exploitation. Please do your research before handing over any funds and understand what protections are in place if problems arise."

The seven offshore platforms named

The state alert points to GMX, Gains Network, dYdX, Aevo, Drift Protocol, Vertex Protocol and Hyperliquid as examples of offshore DeFi platforms, saying they operate outside U.S. regulatory safeguards. Connecticut has not charged any of the seven platforms with receiving $200,000 from the resident. Listing these names in the alert does not mean that any of the companies processed transfers or participated in alleged fraud.

According to state government information, some services claim to be "decentralized" because traders interact through digital wallets and software-based systems. Officials note that some parts of its operations may still rely on corporate entities, private management teams, administrators or other centralized controls.

warns that several offshore exchanges only require connection to crypto-wallets and do not perform identity verification like U.S. registered financial institutions. State officials have linked limited identification to money laundering, sanctions evasion and transfer risks associated with state-sponsored hacking groups.

Perez advises residents to confirm that the service is registered before sending money. He said platforms operating outside the scope of U.S. regulation could not provide the safeguards required by regulated financial institutions.

Huge risks posed by high leverage

Perpetual contracts are the focus of this warning, as many offshore DeFi exchanges allow traders to open leveraged positions without purchasing reference assets. Unlike standard futures, perpetual contracts do not have a fixed maturity date and are paid regularly to bring their prices close to the underlying market.

Connecticut officials say some offshore platforms offer leverage of 50, 100 or even up to 250 times. Taking 100 times leverage as an example, when the price fluctuates in the reverse direction by about 1%, the trader's initial margin may be completely exhausted before considering differences in handling fees and platform clearing processes.

However, leverage is not a necessary feature of perpetual contracts. The Commodity Futures Trading Commission (CFTC) noted in a May briefing that perpetual contracts could be offered under federal supervision by CFTC-registered exchanges, with leverage limits determined by each venue's risk management framework. The CFTC recommends that traders use a registered exchange, carefully review contract rules and pricing methods, and understand how margin requirements affect clearing. Its guidelines also state that offshore locations with high leverage are mostly outside the agency's jurisdiction.

A July report explained how HIP-3 works, including the role of independent market deployers and their choice of price prophets. The report pointed out that the quality of the oracle may vary in different markets, and leveraged perpetual positions may be liquidated within minutes.

Synthetic stock contracts do not confer ownership rights

Connecticut's warning also covers sustainable products that track Apple, Tesla, Nvidia, SpaceX, foreign currencies and commodities. Based on the warning, customers may mistakenly believe that such contracts are equivalent to buying reference stocks, but in fact they only receive composite price exposure.

Perpetual contracts linked to a company typically do not confer shareholder rights, dividends, voting rights or legal claims on company assets. Traders gain profit and loss exposure through contract prices, funding rates, collateral rules and clearing terms.

Previous reports on blockchain-based stock perpetual contracts have found that such products can provide round-the-clock trading, short exposure without borrowing stocks, and high leverage. The same report pointed out that since there was no actual share transfer, users relied on the venue's solvency and the integrity of its oracle.

Connecticut's warning further states that carriers with centralized control may change pricing systems, remove products, suspend transactions or stop withdrawals. Officials advise investors to review who controls the platform and the remedies available before connecting to their wallets or depositing collateral.

Access issues for U.S. users and international regulatory developments

Access rights for U.S. users remain a regulatory concern. The state said offshore platforms typically claim to block Americans, but some users bypass restrictions through virtual private networks (VPNs) or public application programming interfaces (APIs). Citing network traffic data, the alert estimates that 22.6% of Hyperliquid's traffic comes from the United States.

In the UK, the UK's Financial Conduct Authority (FCA) classified Hyperliquid as an unauthorized institution in May 2026 and said the platform may target British people. The FCA advises consumers to avoid dealing with the agency. According to the FCA, UK users who transact through unauthorized companies cannot complain to the Financial Ombudsman Service. If the company fails, they also lack the protection of the Financial Services Compensation Plan (FSCS), making the possibility of recovering funds in such circumstances extremely low.

Connecticut's warning also cited a decision by the Monetary Authority of Singapore (MAS) to add it to the investor warning list because Hyperliquid engaged in unauthorized derivative activities. Neither the UK nor Singapore warnings linked Hyperliquid to the loss of Connecticut residents.

Limited recourse options and secondary fraud warnings

At the state level, Connecticut has implemented protective measures for cryptocurrency vending machines, another channel used in digital asset fraud. A recent review of the state's cryptocurrency vending machine rules found that Connecticut has banned the use of these machines since January 2026, while federal rules still require operators to register with the Financial Crimes Enforcement Agency (FinCEN) and maintain anti-money laundering controls.

The FBI's 2025 Internet Crime Report records show that U.S. cryptocurrency investment fraud caused reported losses of US$7.2 billion, making it the largest source of financial losses in this fraud category. The bureau said scammers often contact victims through social media, text messages, advertising or dating apps and then direct them to fake investment platforms.

After suffering initial losses, victims may face a second wave of fraud, in which someone claims to help them recover their funds. In a July warning, the FBI said fraudsters posing as their Internet Crime Complaint Center (IC3) had contacted previous victims and falsely claimed to have recovered their funds or provided recovery assistance.

Connecticut advises residents not to pay fees to so-called restoration experts or fake lawyers, especially if they ask for up-front fees. The state also requires users to retain wallet records, transaction details, messages, emails and other communications before reporting suspected fraud to the Attorney General's Office.