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  • Writer's pictureS Pettigrove and M Bacina

US CFTC targets DeFi platforms, Commissioner dissents noting impossibility of compliance

The Commodity Futures Trading Commission (CFTC) has issued orders against three decentralised finance (DeFi) companies for alleged violations of the Commodity Exchange Act (CEA) and CFTC regulations. The companies in question are Opyn, Inc., ZeroEx, Inc., and Deridex, Inc., all registered in Delaware but operating out of California and North Carolina.

The CFTC's enforcement action focuses on several key areas:

  • Failure to Register: Both Deridex and Opyn are charged with failing to register as a swap execution facility (SEF) or designated contract market (DCM), as well as failing to register as a futures commission merchant (FCM).

  • Bank Secrecy Act Violations: All three companies are accused of failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program, a requirement for FCMs.

  • Illegal Offerings: ZeroEx, Opyn, and Deridex are charged with illegally offering leveraged and margined retail commodity transactions in digital assets.

The companies have been ordered to pay civil monetary penalties ranging from $100,000 to $250,000 and to cease and desist from further violations.

In a press release, CFTC Director of Enforcement Ian McGinley took a swipe at DeFi operators for failing to comply with laws that were drafted before DeFi existed and are virtually impossible for DeFi companies to comply with:

Somewhere along the way, DeFi operators got the idea that unlawful transactions became lawful when facilitated by smart contracts...they do not.

Interestingly, CFTC Commissioner, Summer Mersinger has dissented against the enforcement actions against Opyn, Deridex and ZeroEx. In a statement of the same date as the press release, Ms Mersinger noted that the handling of these three cases through enforcement:

obscures that one of the cases before us is not like the others

With respect to the ZeroEx charge, Ms Mersinger rightly outlines that ZeroEx's offering enabled users to execute spot trades in different digital asset pairs and that the CFTC does not have regulatory jurisdiction over spot trading, which is lawful under the CEA.

The CFTC nonetheless proceeded with this charge because the ZeroEx protocol, Matcha, was used to trade leveraged digital assets issued by unaffiliated third parties through smart contract technology developed by other unaffiliated third parties and automatically executed on other DeFi lending platforms.

Ms Mersinger plainly and bleakly points out the reality of the continued enforcement by the CFTC:

Enforcement is inherently ill-suited to balancing our competing mandates of protecting customers and promoting responsible innovation. By contrast, that is the essence of agency rulemaking.
Customers, market participants, stakeholders, and the Commission itself benefit from clear, transparent, and comprehensible rules adopted with public engagement through a notice-and-comment rulemaking process.Yet, today's actions do not promote responsible innovation - they shut it down, banishing innovation from U.S. shores.

The general incoherence of the charges were neatly summarised by X user 'Rodrigo' in a thread, which noted that Opyn was charged despite taking steps to excluding United States customers and that the CFTC's reasoning is inconsistent with the recent opinion dismissing the Uniswap class action where Uniswap was not found liable for the actions of third parties using their technology for activities which Uniswap did not control.

US Crypto litigator Jason Gottlieb said:

In Australia, the similar risk of companies leaving the country in search of digital asset regulatory clarity exists, but for different reasons. The industry has been patiently waiting for centralised exchange custody and licensing consultation from Treasury while a private member's bill seeking to licence exchanges being rejected by a Senate Committee any many other jurisdictions are moving ahead with licensing and clarity for projects.

There is a clear opportunity for DeFi guidance to be issued by regulators in Australia, informed by the substantial learnings from overseas actions. Unfortunately, current consultation from IOSCO is treating DeFi as if it was not decentralised, with recommendations proposed that responsible persons be sought and held responsible for DeFi protocols.

This enforcement action also is worthy of note as the most recent move in the tug-o-war for digital asset regulatory jurisdiction between the CFTC and the Securities and Exchanges Commission and marks a continuation of regulation by enforcement that has targeted innovative Web3 companies who as a result are travelling to greener pastures.

By Michael Bacina, Steven Pettigrove and Luke Misthos


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