The Commodity Futures Trading Commission is heading down the wrong path.
Throughout its history, the CFTC has prided itself on being an innovation-friendly regulator that engages 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 focus on enforcement in the digital asset decentralized finance (DeFi) space” – constitute a significant departure from this precedent.
At a time when DeFi offers opportunities to foster more inclusive markets, improve 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 U.S. 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-oriented approach.
Ironically, just days after a federal judge threw out a civil action against DeFi software developer Uniswap Labs for third-party actions, CFTC announced coercive measures against these three DeFi protocol operators.
THE coercive measures come even after a a federal judge reasoned in the Uniswap case that it was not possible to hold a DeFi platform responsible for the actions of its users, believing that this amounted to “trying to hold an application like Venmo or Zelle responsible for a drug trade that used the platform to facilitate the transfer of funds.”
But in the new CFTC cases, the agency held 0x responsible for tokens issued by a third party that represented leveraged positions. The CFTC orders also conflated software development and protocol operational control activities. Additionally, Opyn had previously blocked US IP addresses, but the CFTC alleged these measures were insufficient.
Above all, a CONTESTATION by the CFTC’s own 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 and intermediated entities.
In summary, the CFTC’s current new reasoning could arguably sweep DeFi and other development activities fall under the jurisdiction of the CFTC. And since software clearly cannot comply with outdated rules, this move could effectively end DeFi in the United States.
Today, market structure and regulation simply are not keeping pace with innovation. Intermediaries, required by current CFTC regulations, are dieback. Like it or not, the risk management realities of 24/7 markets have arrived, but aging technology and regulations have failed to keep pace. Income inequality The crisis threatens our financial system, and the failure to adapt to recent technological realities leaves U.S. market participants behind, unable to hedge risks.
Some of our brightest entrepreneurs have sought to solve these problems by developing new decentralized and open source DeFi protocols that can truly promote global financial stability and enable equitable access to safe and affordable financial services: two fundamental bipartisan principles put into practice. evident in the “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 scared to foreign jurisdictions.
Questions continue to circulate about whether regulatory agencies currently have the authority to regulate cryptocurrency markets, based on recent case law and law. Doctrine of major questions. However, it is already clear that the ideal solution would be for Congress to pass proactive, nuanced legislation that actually empowers and allows the CFTC to engage in what it does best – rulemaking based on principles – which could help cutting-edge technologies, like DeFi, achieve their goals. their promise.
However, in the absence of this hypothetical legislation, the CFTC should immediately end its self-proclaimed campaign against DeFi and take the following actions:
- Engage its five advisory committees and seek advice and feedback from members and the general public on effective, principled DeFi regulatory design.
- Cease enforcement action against protocol developers who write code and engage in other core software development activities, while providing fair and reasonable guidelines on the demarcation between software development and software control protocols.
- Dedicate its valuable resources to rooting out perpetrators of fraud, manipulation and abuse, consistent with its current legislative mandate.
- To the extent that the CFTC has clear legislative authority to prohibit certain activities, it should provide transparent and reasonable geofencing guidelines.
- Through CFTC Laboratoryor via new regulations sandboxes As proposed by Commissioner Caroline Pham, the CFTC should bring together top DeFi and industry professionals, provide a safe harbor, and encourage innovation and experimentation – without fear of retaliation.
- The CFTC should work with other government agencies to better protect and defend U.S. crypto entrepreneurs from state-sponsored hostile attacks and hacking activities.
The CFTC should promote technological leadership and encourage economic competitiveness. A new and unusual approach to “regulation by enforcement” will have catastrophic consequences and cause irreparable harm to the U.S. economy for generations to come. There is a better way.
Christopher Perkins is President of CoinFund, a Web3-focused registered investment advisor. He is also a member of the CFTC’s Global Markets Advisory Committee and its Digital Asset Markets Subcommittee.
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