The US Commodity Futures Trading Commission (CFTC) is cracking down on decentralised finance (DeFi) platforms as it tries to enforce rules more strongly on firms operating in this space.
CFTC, the US regulator, is taking legal action against three firms operating in the DeFi space for allegedly violating federal digital asset derivatives trading laws. The DeFi firms accused are Opyn Inc., a California-based cryptocurrency trading platform; ZeroEx Inc. (more commonly known as 0x), an Ethereum-based decentralised exchange; and Deridex Inc., a North Carolina-based blockchain protocol that offered “perpetual contracts”.
The three companies were given civil monetary penalties of $250,000, $200,000, and $100,000, respectively, and ordered each to cease violating the Commodity Exchange Act (CEA) and CFTC regulations.
CFTC explained that it took each respondent’s cooperation with the Division of Enforcement into account – by giving each a reduced civil monetary penalty.
Deridex and Opyn were charged with failing to register as a swap execution facility (SEF) or designated contract market (DCM), failing to register as a futures commission merchant (FCM), and failing to adopt a customer identification programme as part of a Bank Secrecy Act compliance programme, as required of all FCMs.
0x, Opyn and Deridex are also all charged with illegally offering leveraged and margined retail commodity transactions in digital assets.
Ian McGinley, Director of Enforcement at the CFTC, explained the perceived problem and hinted that more action could potentially be seen in the future: “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 US persons to trade digital asset derivatives.”
Too much too soon? Commissioner questions sanctions
June 2023 also saw CFTC win another lawsuit against Ooki DAO; as it set out to highlight that decentralised entities could face significant legal consequences.
A US federal judge ruled that Ooki DAO was guilty of operating an illegal trading platform and acting as an unregistered FCM. The punishment took the form of a penalty of $643,542 and saw the firm permanently close its doors and shut down its website.
Despite the potential for further action on DeFi firms to come, not all members of the CFTC currently back the course of action taken. Summer Mersinger, a Commissioner at the regulator, expressed concern regarding how the cases had been handled, and what this could mean for the future of the space: “I am concerned that the Commission in these cases is taking another step down the path of bringing enforcement actions when we should be engaging with the public.
“It is important to emphasise that ‘Enforcement First’ has not always been the CFTC’s default position. These cases are especially concerning in that they represent a significant shift in position on the merits of engagement with DeFi market participants.”
The recent action suggests that an enhanced crackdown on DeFi firms based in the US will continue, despite concerns that not enough has been done to clarify the rules and regulations for companies operating in the space.
Mersinger also explained: “The Commission’s Orders in these cases give no indication that customer funds have been misappropriated or that any market participants have been victimised by the DeFi protocols on which the Commission has unleashed its enforcement powers.”
With strong action being taken against firms that have not been found to commit fraud or misinformed their users, further firms may also receive similar punishments, despite supporting and protecting their users.