CFTC questions the legality of DeFi derivatives markets

Decentralized platforms for trading derivatives may violate the United States’ Commodities Exchange Act (CEA), according to CFTC Commissioner Dan Berkovitz.

Speaking at the Asset Management Derivatives Forum 2021 with the докладом “Climate Change and Decentralized Finance: New Challenges for the CFTC,” he said:

“I not only think that unlicensed DeFi derivatives markets are a bad idea, I also don’t understand how they would be legal under the CEA.”

Berkovitz noted that the foundational idea of DeFi is the removal of intermediaries, which supporters say gives consumers greater control over their investments.

However, the commissioner is convinced that intermediaries play a crucial role in the current financial system. They provide critically important services and are responsible for client funds, he emphasised.

“In the United States, the most efficient and effective markets for capital formation and risk management in the world. When people want to invest their money or safely manage their risks, they turn to the U.S. financial system. One of the main reasons for its strength is the legal protection investors enjoy when they put their money to work, most often through intermediaries,” Berkovitz said.

According to him, the DeFi system lacks such protection:

“There is no intermediary to monitor markets for fraud and manipulation, to prevent money laundering, to safeguard deposited funds, to ensure counterparties’ performance, or to reimburse clients for losses in case of process failures. A system without intermediaries is a Hobbesian market, where everyone looks after themselves.”

Regarding legality, he reminded that under the CEA, futures trading must be conducted by entities registered with the CFTC as a designated contract market (DCM) or swap execution facility (SEF).

“The CEA contains no registration exemptions for digital currencies, blockchains or smart contracts,” the Commissioner said.

He is confident that licensed markets should not be allowed to compete with unlicensed derivative markets. Berkovitz cited the shadow banking experience, where competition between regulated and unregulated institutions led the former to take on more risk to sustain profitability.

“For these reasons we should not allow DeFi to become an unregulated shadow financial market in direct competition with the regulated,” he concluded.

As reported in the press, named the frontrunner for the post of CFTC chairman, Georgetown University economist Chris Brammer. At the time of writing, Rostin Behnam was the acting head of the regulator.

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