DeFi Projects May Violate US Law – CFTC Commissioner


DeFi markets may be illegal in the US, the CFTC Commissioner said in a speech to the Asset Management Derivatives Forum.

June 9, 2021 | AtoZ MarketsDecentralized platforms for trading financial derivatives may violate the US Commodity Exchange Act (CEA), according to Commissioner of the Commission on Futures Trading (CFTC) Dan Berkowitz.

Speaking at the Asset Management Derivatives Forum 2021 on Climate Change and Decentralized Finance: New Challenges for the CFTC, he stated:

Not only do I think unlicensed DeFi derivatives markets are a bad idea, I also don’t understand how legal they are under the CEA.”

Berkowitz noted that the core idea behind DeFi is to eliminate middlemen, which, according to proponents, gives consumers more control over their investments.

However, the Commissioner is confident that intermediaries play a key role in the current financial system. They provide critical services and are responsible for customer funds, he stressed.

The United States has the most efficient and effective capital accumulation and risk management markets in the world. When people want to invest their money or safely manage their risks, they turn to the US financial system. One of the main reasons for its power is the legal protection that investors enjoy when they invest their money, most often through intermediaries,” said Berkowitz.

According to him, there is no such protection in the DeFi system:

There is no intermediary to monitor markets for fraud and manipulation, prevent money laundering, protect deposited funds, ensure the operation of a counterparty or reimburse the client for losses in the event of a process failure. A system without intermediaries is a Hobbesian marketplace where everyone takes care of themselves.”

CFTC says competing with DeFi could hurt the regulated market

Regarding legality, he recalled that in accordance with CEA requirements, futures must be traded in objects registered by the CFTC as a designated contract market (DCM) or swap execution mechanism (SEF).

The CEA does not contain any registration exemptions for digital currencies, blockchains or smart contracts,” the commissioner said.

He is confident that the unlicensed derivatives market cannot be allowed to compete with the regulated one. Berkowitz referred to the development of shadow banking, when competition between legal and unregulated institutions led to the fact that the former began to take more risks to maintain profitability.

For these reasons, we must not allow DeFi to turn into an unregulated shadow financial market in direct competition with a regulated one,” he concluded.

Recall, the media named the main contender for the vacant position of CFTC chairman, academician of Georgetown University Chris Brammer. At the time of writing, the interim head of the regulator is Rostin Behnam.

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