DeFi Venues Face Scrutiny From U.S. Regulators

June 14, 2021 04:15 PM
Crypto Story of the Day

Crypto Story of the Day




Crypto was on balance higher with BTC outperforming. BTC spot volumes were about 2/3 of their 30-day average this morning.

Crypto Story of the Day

Last week CFTC Commissioner Dan Berkovitz said DeFi exchanges offering derivatives aren’t legal and that “we should not permit DeFi to become an unregulated shadow financial market.”

Berkovitz, who was speaking at a derivatives forum about the challenges facing the CFTC, described DeFi as a “rapidly-expanding technology related to cryptocurrency and the blockchain.” According to Berkovitz, DeFi disrupts incumbent financial actors by offering financial services with fewer intermediaries. However, “[i]n a pure ‘peer-to-peer’ DeFi system,” the perceived “benefits and protections” from regulated intermediaries that “monitor markets for fraud and manipulation” don’t exist. 

As such, Berkovitz described DeFi derivatives markets as “a bad idea” and said that he’s not able to “see how they are legal under the CEA [Commodity Exchange Act].”

The CEA requires derivatives to be traded on a designated contract market (DCM) licensed venue and regulated by the CFTC. According to Berkovitz, DeFi venues aren’t registered to offer derivatives and it’s “untenable to allow an unregulated, unlicensed derivatives market to compete, side-by-side, with a fully regulated and licensed derivatives market.”

The Commissioner concluded that the CFTC and other regulators “need to focus more attention to this growing area of concern and address regulatory violations appropriately.” 

U.S. regulators have precedent in bringing enforcement actions against crypto businesses for unregistered derivatives and against DeFi venues. For example, in 2020, the CFTC charged derivatives venue BitMEX with “operating an unregistered trading platform,'' among a range of violations, while in 2018 the SEC settled charges with decentralized venue EtherDelta for offering unregistered securities. 

Berkovitz’s remarks come as Ethereum-based DeFi venues have lost USD 26 billion in deployed capital since reaching an all-time high of USD 86 billion in May. Several DeFi tokens have seen drawdowns in excess of 50% from all-time highs. For example, Compounds’s COMP has lost 67% of its market cap, SushiSwap’s SUSHI 66%, Uniswap’s UNI 53%, and Yearn.Finance’s YRN 60%. 

U.S. regulators have affirmed on a number of occasions that new technological approaches won’t shield crypto businesses from noncompliance. For example, dozens of 2017 ICO issuers have seen enforcement actions from the SEC, despite the use of novel tech and the presenting of coins as “utility tokens.” 

Furthermore, U.S. regulators have remained comfortable in applying existing rules to crypto. As such, it’s reasonable to expect DeFi venues to receive the same amount of scrutiny as ICOs and offshore trading venues have to date.

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