According to the following statement from Dan M. Berkovitz, Defi (Commissioner of the Commodity Futures Trading Commission) may need to consider Commodity Exchange Act (CEA) and the CFTC regulations:
In a pure “peer-to-peer” DeFi system, none of the benefits or protections exist. There is no intermediary to monitor markets for fraud and manipulation, prevent money laundering, safeguard deposited funds, ensure counterparty performance, or make customers whole when processes fail. A system without intermediaries is a Hobbesian marketplace with each person looking out for themselves. Caveat emptor—“let the buyer beware.”
Not only do I think that unlicensed DeFi markets for derivative instruments are a bad idea, I also do not see how they are legal under the CEA. The CEA requires futures contracts to be traded on a designated contract market (DCM) licensed and regulated by the CFTC. The CEA also provides that it is unlawful for any person other than an eligible contract participant to enter into a swap unless the swap is entered into on, or subject to, the rules of a DCM. The CEA requires any facility that provides for the trading or processing of swaps to be registered as a DCM or a swap execution facility (SEF). DeFi markets, platforms, or websites are not registered as DCMs or SEFs. The CEA does not contain any exception from registration for digital currencies, blockchains, or “smart contracts.”
Apart from the legality issue, in my view it is untenable to allow an unregulated, unlicensed derivatives market to compete, side-by-side, with a fully regulated and licensed derivatives market. In addition to the absence of market safeguards and customer protections in the unregulated market, it is unfair to impose the obligations, restrictions, and costs of regulation upon some market participants while permitting their unregulated competitors to operate wholly free of such obligations, restrictions, and costs. Experience with the development of the “shadow banking” system shows that competition between regulated and unregulated entities in the same market can result in the regulated entities assuming either more risks in order to generate the higher yields necessary to compete with the unregulated competition, or seeking less regulation for themselves to level the playing field. Either of these reactions can introduce significant risks into the financial system. For all these reasons, we should not permit DeFi to become an unregulated shadow financial market in direct competition with regulated markets. The CFTC, together with other regulators, need to focus more attention to this growing area of concern and address regulatory violations appropriately.
Do you think Defi is endangering the financial system? the CFTC may think it does.
Dapplication tech is committed to helping users to build efficient smart contracts on Ethereum, Binance, Polkadot, Cardano and others blockchains. We solve the problems taking over the DeFi space by developing ethical tools that prioritise the user’s protection. There are many exciting things coming your way!