US Commodity Futures Trading Commission Targets Three DeFi Providers, Coinfund Says Regulation by Enforcement is Catastrophic

The US Commodity Futures Trading Commission (CFTC) announced charges targeting three DeFi, or decentralized finance, operations yesterday. These included Deridex, ZeroX, and Opyn. The CFTC alleges the offering of illegal derivatives trading.

The CFTC charged Deridex and Opyn with failing to register as a swap execution facility (SEF) or designated contract market (DCM), failing to register as a futures commission merchant (FCM), and failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program, as required of FCMs.

ZeroEx, Opyn, and Deridex are also charged with illegally offering leveraged and margined retail commodity transactions in digital assets.

The CFTC has assessed monetary penalties on these DeFi operators, requiring Opyn, ZeroEx, and Deridex to pay civil monetary penalties of $250,000, $200,000, and $100,000, respectively. At the same time, a cease and desist was issued, demanding these DeFi operators from violating the Commodity Exchange Act (CEA) and CFTC regulations.

CFTC Director of Enforcement Ian McGinley said that somewhere along the way DeFi operators began to believe that actions executed by Smart Contracts were lawful. McGinley said, “The DeFi space may be novel, complex, and evolving, but the Division of Enforcement will continue to evolve with it and aggressively pursue those who operate unregistered platforms that allow U.S. persons to trade digital asset derivatives.”

In the aftermath of the charges, Chris Perkins, President and Managing Partner at CoinFund, who is also a member of the Global Markets Advisory Committee and the Digital Assets Markets Subcommittee of the CFTC.

“As a member of the CFTC Global Markets Advisory Committee (GMAC) and its Digital Asset Markets Subcommittee, we believe engagement and dialogue followed by clear, consistent, and principles-based rule-making that is fully supported and empowered by nuanced and proactive legislation is the best path forward to deliver responsible innovation.  A regulation-by-enforcement regime is catastrophic for entrepreneurs and as Commissioner Mersinger aptly stated in her dissent will result in “banishing innovation from U.S. shores.”

Perkins said that legacy market operations are not keeping up with innovation, and a failure to adapt will leave US market participants behind. DeFi promises to unlock new and improved ways to deliver core market functionality that can reduce systemic risk while offering a more inclusive financial system.

“Punishing the trailblazers, in the absence of clear rules, is a major setback for American competitiveness,” Perkins said.  “We will continue to work tirelessly on behalf of our entrepreneurs and for the benefit of the U.S. economy, to constructively engage the CFTC, other regulatory bodies and policymakers to advance a principles-based approach to digital asset policy.”

Perkins was not alone in pushing against the CFTC’s enforcement action against these DeFi providers. CFTC Commissioner Summer K. Mersinger publicly dissented against the charges, lambasting the action as heavy-handed. Mersigner said:

“These cases represent another example of the CFTC swinging its enforcement hammer when other, more precise tools would be a better fit for the job, I respectfully dissent.”

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