Commodity Futures Trading Commission (CFTC) Commissioner Dan M. Berkowitz believes that DeFi derivatives platforms may violate the Commodity Exchange Act (CEA).
Berkowitz, speaking as part of the June 8 keynote address titled “Climate Change and Decentralized Finance: New Challenges for the CFTC” notes That:
“Not only do I think the unlicensed DeFi market for derivative instruments is a bad idea, but I also don’t see how they are legal under the CEA.”
Berkowitz stated that “the CEA is required to trade futures contracts on a designated contract market (DCM) that is licensed and regulated by the CFTC,” although he claims that no DeFi platform is registered as a DCM or SEF.
In his keynote address, the commissioner emphasized the need for regulators to become familiar with DeFi derivatives and other applications rapid development of the region.
He mentioned the large amount of liquidity pump in the market Over the past twelve months, noting that now “you’re talking real money” has required tighter regulation to protect DeFi consumers:
“Given the explosive growth of this sector, federal regulators should be familiar with this new technology and its potential uses and be prepared to protect the public from abuse.”
Interestingly, Berkowitz referenced the Wikipedia definition of DeFi, and noted that his research was based on a Google search. “If you type “DeFi” into a Google search, a top link to a CoinDesk article, ‘What is DeFi?’, he said.[It’s] An umbrella term for a variety of financial applications in cryptocurrency or blockchain to circumvent financial intermediaries.”
Coin Metrics co-founder Jacob Frank was quick to criticize the commissioner’s research, noting that he “needed to do more than just read a CoinDesk article”:
And if this is the final stage of the CFTC’s analysis – oh boy – we have something educated to do or the commissioner needs to do more than read a CoinDesk article. https://t.co/AERH4IOTUa
— jacob frank (@panekkkk) June 9, 2021
The commissioner warned that the rise of unregulated institutions shadow banking system Competition with regulated entities may result, causing them to either assume “more risk to generate higher yields” or seek less regulation to “level the playing field”.
“In my view it is impossible to allow an unregulated, unlicensed derivatives market to compete with a fully regulated and licensed derivatives market,” he said.
Berkowitz questioned DeFi proponents’ argument that cutting out the middleman could give investors better returns and “greater control over their investments.”
He argued that “intermediaries such as banks, exchanges, futures commission traders, payment clearing facilities and asset managers” have developed over 200 to 300 years a banking and finance model that reliably supports “the financial markets and the investing public”. We do.
“One of the key reasons why our financial system is so strong is the legal protection that investors have when investing their money in US markets, often through intermediaries,” he said.