Understanding DePIN

Integrating the online activity with real-world infrastructure is remarkably captivating, especially in DePIN models. DePIN allows users to utilise blockchain and crypto tokens to construct and configure systems maintaining various networks, such as wireless telecommunication, power grids and data storage networks. Since it combines physical infrastructure and decentralized tech, understanding DePIN legal risks and compliance strategies is critical for any project operating in this area.

What is DePIN?

DePIN is a system that uses blockchain to create community-powered networks where individuals contribute real-world resources, such as storage, bandwidth, or computing power, in exchange for cryptocurrency rewards. These networks aim to build and maintain critical infrastructure in a decentralized, transparent, and user-owned manner.

Messari defines DePIN as "networks that use crypto-incentives to efficiently coordinate the buildout and operation of critical infrastructure”.

Rather than trusting resources owned by a single person or corporation, DePIN relies on decentralised networks where contributors can offer services like hosting a WiFi hotspot, operating a storage node, or powering energy grids and receiving rewards in the form of crypto tokens.

Origins of DePIN

The idea behind DePIN might seem new, however there are similar initiatives in the Web3 and crypto industry such as Filecoin and Helium which have been in operation since 2019 and 2020, which fall within this category. However, at the time, these projects were not recognized as DePIN since the definition has not yet existed.

In late 2022, following Messari's research report and Twitter poll, the term "DePIN" was formally recognised. In addition, these networks were previously classified under various names, such as EdgeFI, Proof-Of-Physical-Work (PoPW), and Token-incentivised Physical Networks (TIPIN). This led to uncertainty in the terminology. Messari's report has collectively merged under a single heading and given a unique identity with the new acronym ‘DePIN’. This clarity highlights DePIN as an emerging trend in infrastructure development within Web3 and crypto space.

Legal Risks and Challenges in DePIN Projects

The DePIN model operates across several complex regulatory frameworks. These frameworks include token rewards, decentralised management, and physical infrastructure, which may face scrutiny under the laws governing virtual currency, financial regulations, securities and data management laws, and various applicable infrastructure regulations.

Token Rewards and Regulatory Classification

DePINs reward users with native tokens to maintain network value, but the legal status of these tokens remains unclear. There is no unified or consistent regulatory framework across jurisdictions, so their classification and regulatory implications may differ dramatically. Some native tokens may be treated as utilities, others as securities or may even be prohibited altogether. In most of the jurisdictions, tokens may fall under securities (investment) laws if tied to profit expectations with no efforts from the network participant, including passive revenue or profit sharing. In certain scenarios, DePIN tokens may also raise concerns about unregulated fundraising and AML compliance. The tokens and their distributions should be therefore structured properly to avoid or mitigate regulatory risks.

Unauthorised Fundraising and Pyramid Schemes

DePIN projects must carefully consider financial regulations, as many jurisdictions prohibit public fundraising without proper authorisation or compliance with applicable rules. Marketing or structuring a project in a misleading way, especially if it misrepresents decentralisation while retaining centralised team control, can expose the project to fraud or misrepresentation allegations.

Referral systems also require close legal scrutiny. If token rewards are issued for user recruitment rather than actual network participation or product use, the model risks being classified as a multi-level marketing (MLM) or pyramid scheme. For example, offering tokens as incentives merely for onboarding others, without delivering real services (like network connectivity), may trigger enforcement actions and liability for deceptive or unfair trading practices.

Data Protection and Cross-Border Compliance

DePIN networks may process various types of sensitive data, such as personal information, confidential content, intellectual property, and trade secrets. Depending on the jurisdiction, the collection, storage, and transfer of such data may trigger obligations under data protection, IP, and cybersecurity laws. If compliance is not built into the system’s design, a DePIN may unintentionally violate applicable legal frameworks.

For instance, Hivemapper relies on user-generated content at 4K street-level video and geographic data to build decentralised maps. This data may capture identifiable individuals, restricted locations, or critical infrastructure, potentially implicating privacy laws, trade secret protections, or national security concerns, especially when such data is shared across borders. DePINs handling this kind of content must ensure compliance mechanisms are embedded from the outset to avoid legal exposure and regulatory enforcement.

Balancing Decentralisation and Legal Liability

While DePINs are designed to operate in a decentralised manner, eventually the service is offered, the infrastructure is managed, governance mechanisms are maintained by specific persons, groups, or entities. These actors can be exposed to potential legal liability, especially where responsibility for security practices, privacy safeguards, and contractual enforcement is unclear. A lack of clear operational and legal structures can create legal uncertainty, inconsistencies, and increased regulatory scrutiny. The project should strive for a balance between decentralisation that may limit control over individual actors and centralised impact, always moving towards real progressive decentralization.

DePIN Compliance Strategies and Risk Mitigation

To address and mitigate the major legal risks and challenges involved in DePIN projects, the teams and contributors should consider the proactive strategies described below.

Token Rewards and Project Structuring

A DePIN project must be properly structured, in legal terms, from the outset to avoid or mitigate the regulatory risk associated with the product and token issuance, particularly when operating without authorisation. This includes choosing an appropriate corporate structure that legalises the business and grants limited liability protection to its founders, and team members.

Structuring the native tokens primarily as utilities, strictly tied to genuine network contributions, rather than as passive revenue instruments, helps to prevent the token from being classified as securities. Token distribution must be properly designed to avoid triggering financial or securities obligations, unless the tokens are specifically structured as regulated instruments with compliance measures in place. This ensures that the tokens are not issued with the profit expectations with no efforts from network participants, which could lead to compliance securities (investment) laws scrutiny.

Implementing Compliant Fundraising Mechanisms and Referral Schemes

To mitigate the risks of unauthorised fundraising, DePIN projects ensure that the offerings and related fundraising activities must be properly authorised as required, comply with securities laws, VASP regulations, financial regulations and other applicable regulations, to avoid misleading claims or misrepresentations.

Depending on the project’s target users, the project should market its products to the right audience. For instance, consumer products should rather be offered to end users, rather than to investment funds.

Referral (affiliate) schemes must be carefully structured to ensure they promote genuine network contributions rather than merely incentivising user recruitment. These Referral schemes must comply with laws governing promotions, and marketing regulations, to prevent being classified as MLM or pyramid schemes.

Marketing activities must avoid profit claims, passive income claims, or misleading statements. All promotional materials should be fair, clear and not misleading and must comply with financial advertising standards.

Embedding Data Protection Measures

DePIN networks must integrate compliance mechanisms into the system’s design from the initial stage, ensuring compliance to the applicable laws, including data protection, IP, and cybersecurity. Compliance with such laws should be embedded in the design of the project to avoid unnecessary and untimely changes to the product structure. Compliance should be tailored to the specific type of data being collected, stored, and transferred under data protection, IP, cybersecurity laws and jurisdiction where users are located. For example, if users are based in the European Union (EU), the General Data Protection Regulation (GDPR) will apply; if in California, the California Consumer Privacy Act (CCPA) will be applicable. DePIN projects should consider various instruments and measures, such as collecting only necessary data, hiding or masking personal details, limiting access to restricted areas, avoiding unnecessary data capture, maintaining transparency with users, and managing cross-border data transfers.

Establishing Robust Governance Frameworks

DePIN projects must be structured with careful attention to both corporate and legal aspects, that supports decentralised operation while protecting core contributors from legal liability. This includes establishing appropriate legal entities to manage different functions in the ecosystem. Clear delineation of responsibilities, well-drafted user documentation, and strong internal governance are essential to ensure that the project operates smoothly and consistently. A thoughtful legal design helps to reduce the risk of liability for actions beyond the core team’s control while maintaining user trust and regulatory compliance.

Conclusion: Building Legally Resilient DePIN Projects

In conclusion, DePIN represents a transformative step forward in merging decentralised technologies with real-world infrastructure. By utilising blockchain and crypto incentives with physical or online infrastructure, the DePIN network introduces new ways to build scalable, user-driven networks across various sectors.

While DePIN projects may encounter unique legal challenges such as regulatory uncertainty, fundraising restrictions, data protection obligations, and governance challenges. These are not the roadblocks, but areas that require the right approach and careful handling. With the proper legal structuring, robust internal governance, and proactive compliance measures, DePIN projects can launch and operate effectively.

As the adoption of DePIN is still evolving, it’s crucial that all parties from developers to users adopt a forward-thinking approach to legal design. With a clear, compliant, and well-structured foundation, DePIN networks can build user trust, attract long-term participation, and scale confidently in the Web3 and crypto space.

How We Can Assist

The legal considerations around DePIN required careful attention, from token classification to meeting with the regulatory requirements, protecting data, incorporating clear governance. In addition, drafting robust user documentation and ensuring compliant fundraising practices are essential for mitigating the legal risks.

The Aurum team is here to assist you with these challenges and provide clear, practical legal guidance to help you navigate them effectively.

Contact us to discuss your project’s legal needs and learn how we can support you in building a compliant, secure, and scalable DePIN network.