CFTC's DeFi Crackdown

Martin Walker
Sep 10, 2023 at 11:49 am

The Commodity Futures Trading Commission (CFTC) has officially announced the commencement and subsequent successful resolution of intricate legal proceedings against the Opyn, ZeroEx, and Deridex platforms. These decentralized finance protocols, allegedly, and in a rather convoluted fashion, failed to properly register various derivatives trading offerings.

As has been exhaustively detailed in the painstakingly crafted official press release, both Deridex and Opyn stand accused of grievous infractions for their failure to formally register as either a swap execution facility (SEF) or a designated contract market (DCM). Furthermore, they have been found delinquent in their duty to register as a futures commission merchant (FCM), and have woefully neglected to implement a customer identification program, as per the ever-so-imposing Bank Secrecy Act compliance program, which is, of course, an obligatory mandate for FCMs.

CFTC Sounds a Cautious Note on DeFi Protocols

To shed even more light on this already rather labyrinthine narrative, the three aforementioned platforms have also been slapped with accusations of engaging in the nefarious act of illegally furnishing leveraged and margined retail commodity transactions in the world of digital assets. As a consequence of these grave misdeeds, Opyn, ZeroEx, and Deridex have been sternly instructed to reach into their coffers and deliver civil monetary fines, which cumulatively amount to a not-so-insignificant sum of $250,000, $200,000, and $100,000, respectively. Moreover, they have been unequivocally mandated to cease and desist from their relentless pursuits that flout the venerable Commodity Exchange Act and the sacred scrolls of CFTC regulations.

In a statement dripping with gravitas, Ian McGinley, the Director of CFTC's Division of Enforcement, intoned,

"At some point along this winding journey, DeFi operators found themselves under the misguided notion that their unlawful transactions could miraculously transmute into lawful ones, all courtesy of the venerable smart contracts. Let it be known that such is not the case. The DeFi realm, with all its novelty, intricacies, and perpetual evolution, should take heed - the Division of Enforcement shall remain steadfast in its evolution and shall relentlessly pursue those who dare to operate unregistered platforms that serve as conduits for U.S. denizens to dabble in the intricate realm of digital asset derivatives trading."

Dissenting Echoes in the Halls

While the CFTC, in its wisdom, did confirm that all the companies involved chose to cooperate in this elaborate investigation, thereby, quite understandably, earning themselves the privilege of a somewhat ameliorated financial penalty, it remains that the community at large is far from appeased. Some members of this august community perceive this recent incident as nothing less than a full-scale assault on the entire DeFi ecosystem.

Beyond the confines of the cryptocurrency industry, a dissenting voice, that of CFTC commissioner Summer Mersinger, also made itself heard during the enforcement vote. Commissioner Mersinger chose this moment to express her rather profound concerns regarding the agency's actions in these particular cases. Commissioner Mersinger rather astutely pointed out that, to the best of her knowledge, there is not a scintilla of evidence to suggest that customer funds were ever filched or that any market participants found themselves on the wrong side of these DeFi protocols that have attracted the steely gaze of the CFTC with its robust enforcement actions.

"In these trying times," she remarked, "I find myself deeply perturbed that the Commission, in these cases, seems to be taking yet another step down the winding path of resorting to enforcement actions when perhaps a more measured approach, one that embraces engagement with the public, should be our guiding principle. It is essential to underscore that the 'Enforcement First' doctrine has not, historically speaking, always been the default position of our venerable institution."

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