DeFi faces legal action from the Commodity Futures Trading Commission. The CFTC said on September 7, 2023, that it had filed charges against Opyn, 0x (ZeroEx), and Deridex, three U.S. corporations in connection with three DeFi projects, and reached settlements with each of them.
Deridex and Opyn have been accused of failing to register as a swap execution facility or designated contract market, failing to register as a futures commission merchant, and failing to adopt a customer identification programme due to their loose similarities with traditional financial market actors and instruments.
Charges against ZeroEx, Opyn, and Deridex include providing leveraged and margined retail commodities transactions in digital assets.
The orders demand that Opyn, ZeroEx, and Deridex cease and desist from breaking the CFTC rules and pay fines of $250 000, $200 000, and $100 000, respectively. The CFTC claims in its press release that “DeFi operators got the idea that unlawful transactions become lawful when facilitated by smart contracts somewhere along the way.” The Division of Enforcement will actively go after people who run unregistered platforms that let Americans trade derivatives of digital assets, according to Ian McGinley, the organization’s director of enforcement.
Despite the CFTC’s hostile stance, one must applaud its transparency, which is a strength in the hazy waters of blockchain compliance in the U.S.
Dissenting Opinion From Within The CFTC
The dissenting statement of CFTC Commissioner Summer K. Mersinger demonstrates that not everyone at the CFTC concurs with these three moves. The latter contests the legitimacy of the CFTC’s operations as well as the aggressiveness of its language and rhetoric.
Mersinger sets these situations apart from the Ooki DAO case, which had a formerly centralized exchange that decentralized in order to escape legal liability and was later prosecuted for violating the Commodity Exchange Act and CFTC regulations. Decentralization won’t undo earlier illegal centralized activity, according to the CFTC’s position. The recent DeFi actions holding developers of decentralized marketplaces liable are rare and surprising because all of its enforcements in the cryptocurrency field have typically targeted centralized exchanges.
The CFTC chose enforcement over interacting with the general public and innovators. In the past, it had committed to working closely with stakeholders on innovation, most notably in its 2022–2026 Strategic Plan, highlighting the need for regulatory balance in this area between safeguarding market players and fostering innovation. Therefore, the novel approach is hostile to DeFi market participants due to its lack of technological understanding and a balanced approach, which is perceived as making defi outright illegal: today’s actions regrettably do not promote responsible innovation – they shut it down, driving innovation away from American shores.
In the United States, DeFi is now practically prohibited
As a result of these agreements, developers might now be held accountable outside the purview of the judicial branch should they write code that is used for illegal as well as legal purposes, which could happen without their knowledge or consent. The United States has established itself as a jurisdiction to avoid for blockchain-based innovation, especially in the decentralized finance and privacy space, due to the recent indictments of the founders of Tornado Cash, pursuing the creators of a well-known blockchain privacy tool who had little control over the usage of the code they wrote.
The greater crypto community is also aware of this illegality, as evidenced by Gabriel Shapiro’s tweet, General Counsel at Delphi Labs and seasoned crypto lawyer.
From the lack of any victims or damaged parties to its comprehension of the technology, the merits of the CFTC approach are highly debatable. Given that it appears to contradict court rulings, particularly the one addressing Uniswap where the judge dismissed the lawsuit and stated that the developers were not responsible for the harmful use of its legal code by third parties, the legality of the CFTC position is called into doubt.
One is left to ask how citizens can responsibly anticipate the reach and application of laws and regulations, and consequently their own obligations, when the government itself, as demonstrated by the Mersinger’s dissent, cannot even come to an internal agreement. The U.S.’s long-term crypto strategy will only become clear with time.
