Commissioner Dan M. Berkovitz of the Commodity Futures Trading Commission (CFTC) thinks DeFi derivatives platforms might contravene the Commodity Exchange Act (CEA).
Speaking as part of a June 8 keynote address called “Climate Change and Decentralized Finance: New Challenges for the CFTC,” Berkovitz keeps in mind that:
“Not only do I think that unlicensed DeFi markets for derivative instruments are a bad idea, but I also do not see how they are legal under the CEA.”
Berkovitz kept in mind that the “CEA requires futures contracts to be traded on a designated contract market (DCM) licensed and regulated by the CFTC,” nevertheless he asserts that no DeFi platforms are signed up as DCMs or SEFs.
During the keynote, the commissioner highlighted the requirement for regulators to end up being knowledgeable about DeFi derivatives and other applications in the middle of the flourishing development of the sector.
He referenced the substantial quantity of liquidity pumped into the marketplace over the previous twelve months, keeping in mind that now that “you’re talking real money” there requires be strict policy in location to secure DeFi customers:
“Given the explosive growth of this sector, federal regulators should become familiar with this new technology and its potential uses and be prepared to protect the public against misuse.”
Interestingly, Berkovitz recommendations a Wikipedia meaning of DeFi, and keeps in mind that his research study was based in part on a Google search. “If you type “DeFi” into Google search, a top link is to a CoinDesk article, ‘What is DeFi?’;” he stated.”[It’s] an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries.”
The Co-founder of Coin Metrics Jacob Franek was quick to criticize the commissioner’s research, noting that he “needs to do more than read a CoinDesk article”:
And if this is the end stage of the CFTC’s analysis — ooh boy — we have some educating to do or the Commissioner needs to do more than read a Coin Desk article. https://t.co/AERH4IOTUa
— Jacob FranΞk (@panekkkk) June 9, 2021
The commissioner cautioned that the introduction of the uncontrolled entities from the shadow banking system might lead to competitors with managed entities, leading them to presume either “more risks in order to generate higher yields “ or to seek less regulation to “level the playing field.”
“In my view it is untenable to allow an unregulated, unlicensed derivatives market to compete, side-by-side, with a fully regulated and licensed derivatives market,” he stated.
Berkovitz questioned the argument presented by DeFi supporters that eliminating intermediaries can provide financiers much better returns and more “control over their investments.”
He argued that intermediaries such as “banks, exchanges, futures commission merchants, payment clearing facilities, and asset managers” have actually established a banking and finance design over 200 to 300 years which dependably support “financial markets and the investing public.”
“One of the key reasons our financial system is so strong is the legal protections that investors enjoy when they invest their money in U.S. markets, most often through intermediaries,” he stated.