The Commodity Futures Trading Commission is heading in the wrong direction.
Throughout its history, the CFTC has prided itself as a pro-innovation regulator that works constructively with industry, academia and the public to achieve principles-based regulatory outcomes.
Unfortunately, some of the agency’s recent enforcement cases – or what they call their “continued enforcement focus in the decentralized finance sector for digital assets” [DeFi] space” – constitute a material departure from this precedent.
In an era where DeFi offers opportunities to foster more inclusive markets, provide better risk management, and improve price discovery, the CFTC’s self-proclaimed enforcement campaign against DeFi is a step in the wrong direction. Its stance on DeFi threatens to force innovation abroad, undermining American competitiveness and leadership in the global financial system.
The recent CFTC cases against Opyn, ZeroEx (0x), and Deridex are emblematic of the problems with this new enforcement approach.
Ironically, just days after a federal judge dismissed a civil claim against DeFi software developer Uniswap Labs over the actions of a third party, the CFTC announced enforcement actions against these three DeFi protocol operators.
The enforcement actions come even after a federal judge in the Uniswap case reasoned that it was not possible to hold a DeFi platform liable for the actions of its users, reasoning that it was akin to “an attempt to… application such as Venmo or Zelle”. liable for a drug deal in which the platform was used to facilitate the transfer of money.”
But in the CFTC’s new cases, the agency held 0x responsible for tokens issued by a third party that represented leveraged positions. The CFTC’s orders also brought together the activities of software development and operational control of protocols. In addition, Opyn had already blocked US intellectual property addresses, but the CFTC claimed these steps were insufficient.
Importantly, a dissent from CFTC Commissioner Summer Mersinger notes that an “enforcement first” approach does not provide guidance on how a DeFi protocol could comply with existing regulatory requirements, which are designed for centralized entities with intermediaries .
In short, the CFTC’s new, current reasoning could arguably mean that DeFi and other developer activities fall under the CFTC’s jurisdiction. And since software clearly cannot comply with outdated regulations, this move could effectively end DeFi in the US.
Today, the old market structure and regulation simply cannot keep pace with innovation. Intermediaries, required by current CFTC regulations, are withering away. Like it or not, the risk management reality of 24/7 markets has arrived, but aging technology and regulations have failed to keep pace. Income inequality plagues our financial system, and the failure to adapt to recent technological realities is leaving U.S. market participants behind and unable to hedge risk.
Some of our best and brightest entrepreneurs have tried to solve these problems by developing new decentralized, open source DeFi protocols that can actually advance global financial stability and enable fair access to secure and affordable financial services: two fundamental, bipartisan principles highlighted in the Biden administration’s report. Executive Order to Ensure Responsible Development of Digital Assets.” The lifeblood of our economic future – our innovators – must be welcomed, encouraged and defended, not banished or chased away to foreign jurisdictions.
Questions continue to arise as to whether regulators currently have the authority to regulate cryptocurrency markets, based on recent case law and the Major Questions Doctrine. However, it is already clear that the ideal solution would be for Congress to pass proactive, nuanced legislation that effectively authorizes and enables the CFTC to do what it does best – principles-based regulation – that can help to make advanced technologies, such as DeFi, a reality. their promise.
However, absent this hypothetical legislation, the CFTC should immediately end its self-proclaimed campaign against DeFi and take the following steps:
- Engage its five advisory committees and seek guidance and insight from members and the general public on effective and principles-based DeFi regulatory design.
- Stop enforcement actions against protocol developers for writing code and performing other core software development activities, while providing fair and reasonable guidance on the boundary between software development and protocol control.
- Dedicate its precious resources to rooting out perpetrators of fraud, manipulation and abuse, in accordance with the current legislative mandate.
- To the extent that the CFTC has clear legislative authority to prohibit certain activities, it must provide transparent and reasonable geofencing guidelines.
- Through LabCFTC, or through new regulatory sandboxes as proposed by Commissioner Caroline Pham, the CFTC should bring together the best DeFi and industry professionals, provide a safe haven, and encourage innovation and experimentation – without fear of reprisal.
- The CFTC should work with other government agencies to better protect and defend U.S. crypto entrepreneurs against hostile, state-sponsored attacks and hacking activities.
The CFTC must promote technology leadership and encourage economic competitiveness. A new and unusual approach to “regulation by enforcement” will have catastrophic consequences and irreparably damage the American economy for generations to come. There is a better way.
Christopher Perkins is president of CoinFund, a Web3-focused registered investment advisory firm. He is also a member of the CFTC’s Global Markets Advisory Committee and the Digital Asset Markets Subcommittee.