CFTC Settles Enforcement Actions Against Developers of DeFi Protocols
The CFTC settled enforcement actions against three developers of decentralized finance or "DeFi" protocols.
- The CFTC charged Opyn, Inc. with developing and deploying a digital asset protocol that permitted transactions that tracked the price of ETH squared and leveraged or margined retail commodity transactions. The CFTC found that the protocol constituted a swap execution facility ("SEF") and that Opyn engaged in activities only permitted by futures commission merchants ("FCMs") (i.e., by holding collateral). The CFTC also charged the firm with failing to adopt a customer identification program ("CIP") as part of Bank Secrecy Act compliance. The CFTC noted that the protocol took steps to exclude U.S. persons based on IP addresses, but the steps were not sufficient to actually block U.S. users from accessing the protocol.
- The CFTC charged Deridex, Inc. with developing and deploying a protocol on which persons traded "perpetual contracts," which the CFTC found to be leveraged derivatives. The CFTC charged Deridex for failure to register as an SEF and FCM as well as CIP failures.
- The CFTC charged ZeroEx, Inc. with developing and deploying a protocol that permitted trading in various digital assets, and permitted trading in products developed by unaffiliated third parties that included leveraged products only permissible on a registered exchange.
To settle the charges, the entities each agreed to (i) cease and desist from further regulatory violations, (ii) comply with the undertakings set forth in the orders and (iii) pay respective fines of $200,000, $250,000 and $100,000. The CFTC acknowledged in each of the orders the entities' "substantial cooperation" with the CFTC Division of Enforcement.
Statements
In a dissenting statement to the decisions, CFTC Commissioner Summer K. Mersinger argued that the CFTC had not previously taken enforcement action against trading platforms that were "decentralized in conception and operation." She said that while the CFTC would require the protocols to be CFTC-registered, there was, in fact, no way that the protocols would have been able to comply with the relevant requirements as the CFTC's "rules were written for centralized entities." Ms. Mersinger argued that it was inappropriate for the CFTC to bring these enforcement actions. Rather, she said, the CFTC should be considering whether there was not an appropriate way to regulate the protocols and provide clear rules and guidance to establish norms that market participants can follow before enforcement is sought.
Commissioner Kristen Johnson supported the enforcement actions, saying that while there may be valid reasons for decentralized finance protocols, the lack of transparency and information asymmetries in the platforms created a lack of transparency as to risks to customers. Ms. Johnson said that "in the absence of regulation," bringing the enforcement actions was merited given that the protocols were operating in CFTC-regulated markets without oversight or transparency.
Commentary
If it wasn't abundantly clear already, these cases are a reminder that it will take an act of Congress for any meaningful (legal) non-spot trading activity on decentralized protocols. Although Ms. Mersinger highlights a number of reasonable concerns as to the CFTC action and lack of clarity that ad hoc enforcement provides (rather than rules or clear guidance), the CFTC actions are brought under some basic core principles that are hard to ignore. The CEA and the CFTC rules are clear that swaps and leveraged products are only permitted between certain qualified persons and/or through certain qualified intermediaries. That some or all of the transactions on these DeFi platforms did not meet this core requirement is not really debatable. It is also not really debatable, as Ms. Mersinger points out, that complying with the rules and regulations associated with registration is not possible for the protocols that are the subject of the enforcement actions. What the CFTC seems to be implicitly saying with these enforcement actions is that: "if you can't do it as set forth in our rules, you can't do it at all."