The United States Commodity Futures Trading Commissiona (CFTC) has issued regulatory action against three decentralized finance (DeFi) protocols – Opyn, ZeroEx and Deridex, for allegedly failing to register various derivatives trading offerings.
According to an official statement from the CFTC, the three decentralized protocols face a number of accusations based on their use of blockchain-based protocols and smart contracts to function as trading platforms along with illegally offering leveraged and margined retail commodity transactions in digital assets.
— CFTC (@CFTC) September 7, 2023
CFTC Starts Targeting Decentralized Protocols
Deridex and Opyn were charged for failing to register as a swap execution facility or designated contract market and failing to register as a futures commission merchant. The two protocols also failed to comply with customer provisions set out in the Bank Secrecy Act.
Meanwhile, ZeroEx developed and deployed a blockchain-based digital asset protocol – the 0x Protocol and a front-end application called “Matcha” that offered users the ability to trade digital assets through the use of various blockchains.
Among the digital assets permitted to trade on Matcha were multiple tokens, developed and issued by a third party unaffiliated with ZeroEx, that provided traders approximately 2:1 leveraged exposure to digital assets such as Ethereum (ETH) and Bitcoin (BTC).
As per the US commodities regulator, these leveraged tokens are leveraged or margined retail commodity transactions and therefore can be offered only on a registered exchange in accordance with the Council of Economic Advisers (CEA) and CFTC regulations.
In response to the violations, the CFTC ordered Opyn, ZeroEx, and Deridex to pay penalties of $250,000, $200,000, and $100,000, respectively, and to cease and desist from violating the Commodity Exchange Act and the CFTC’s regulations. As per the official statement, CFTC Director of Enforcement Ian McGinley, stated that unlawful transactions do not become lawful when facilitated by smart contracts. He added,
“Somewhere along the way, DeFi operators got the idea that unlawful transactions become lawful when facilitated by smart contracts. They do not. 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.”
US Government Amplifies Ongoing Digital Asset War
Not just the CFTC but the United States Securities and Exchange Commission is also increasingly targeting DeFi and its anonymity. On July 7, BarnBridge Decentralized Autonomous Organization (DAO), a cross-platform risk management decentralized finance protocol that attempts to tackle inflation risk and interest rate volatility, was instructed to halt all project-related activities in the face of an investigation from the SEC.
— BarnBridge (@Barn_Bridge) July 7, 2023
After declaring war on the crypto industry, it seems United States financial regulators such as the CFTC and SEC are now turning up the heat for DeFI protocols, drawing a line in the sand for the entire digital asset ecosystem, signaling “It’s our way or the highway.”
Why do Financial Regulators Hate Crypto and DeFi?
Ever since Bitcoin (BTC) broke onto the scene, the US government has been embroiled in a constant battle with the digital asset economy. The present attack on privacy-enhancing technologies is not a new phenomenon, but rather a continuation of the U.S. government’s decades-long effort to limit and criminalize the use and distribution of such technologies by its citizens.
It seems things that make crypto special such as faster, cheaper, more secure, immutable and decentralization, are exactly the type of things financial regulators hate. Adding fuel to the fire was the arrival of Gary Gensler at the SEC in 2021. As SEC Chair, Gensler was quick to dub crypto the “Wild West” and called on Congress to give him more power to regulate the market.
In early April, the US Treasury Department published a report outlining various ways that DeFi presents risks to national security, as the industry fails to implement appropriate sanctions and money laundering controls.
Recently, Berenberg, an investment bank, said the US government’s war on crypto could now engulf stablecoins and DeFi, highlighting the SEC is weakening the entire DeFi ecosystem with its blatant and irrelevant crypto policing.