The Commissioner Dan M. Berkovitz of the Commodity Futures Trading Commission (CFTC) believes that DeFi derivatives platforms may contravene the Commodity Exchange Act (CEA).
In his June 8 speech, entitled “Climate Change and Decentralized Finance: New Challenges for the CFTC,” Berkovitz notes that:
“Not only do I think unlicensed DeFi markets for derivatives are a bad idea, I don’t think they’re legal under the CEA either.”
Berkovitz noted that the “CEA requires that futures contracts be traded on a designated contract market (DCM) authorized and regulated by the CFTC”However, it claims that no DeFi platform is registered as DCM or SEF.
During his speech, The Commissioner emphasized the need for regulators to familiarize themselves with DeFi derivatives and other applications amid the burgeoning growth of the sector..
He mentioned the enormous amount of liquidity injected into the market in the last twelve months, noting that now that “real money is being talked about” strict regulation needs to be put in place to protect consumers from DeFi:
“Given the explosive growth in this sector, federal regulators should become familiar with this new technology and its possible uses, and be prepared to protect the public against misuse.”
Curiously, Berkovitz references a definition of DeFi on Wikipedia, noting that his research was based in part on a Google search.. “[Es] a fan term for a variety of cryptocurrency or blockchain financial applications aimed at eliminating financial intermediaries. “
Coin Metrics co-founder, Jacob Franek was quick to criticize the commissioner’s investigation, noting that he “needs to do more“, adding:
@CFTCberkovitz I’m not sure which DeFi supporters you’ve spoken to, but the main value proposition isn’t cutting out middlemen simply to offer investors more control over their investments.
Also, you seem confused about what DeFi really is and how it works. pic.twitter.com/LyKnHBBJEn
– Jacob FranΞk (@panekkkk) June 9, 2021
The commissioner warned that the emergence of unregulated entities from the “shadow banking system” may lead to competition with regulated entities, leading them to take “more risks to generate higher returns” or to seek less regulation to “level the playing field.”
“In my opinion, it is unsustainable to allow an unregulated and unlicensed derivatives market to compete side by side with a fully regulated and licensed derivatives market “, He said.
Berkovitz questioned the argument advanced by DeFi advocates that cutting out intermediaries can offer investors better returns. and more “control over your investments.”
He argued that the intermediaries, such as “banks, exchanges, futures commission traders, payment clearing facilities and asset managers”, have developed a banking and financial model over 200 to 300 years that reliably supports “financial markets and the investing public”.
“One of the main reasons why our financial system is so strong is the legal protection that investors enjoy when they invest their money in the US markets, most of the time through intermediaries.”, he claimed.