CFTC calls DeFi exchanges an ‘obvious threat’.

Unregulated exchanges in the DeFi space pose an ‘obvious threat’ to markets and clients, said Ian McGinley, the CFTC’s enforcement director.

In a speech at a Practising Law Institute conference, the official noted that DeFi protocols often offer clients derivatives trading, which, in most cases, falls under regulatory registration.

According to McGinley, such platforms are a collection of smart contracts that operate without compliance with rules KYC, adequate disclosure, separation of corporate and user assets and other norms. In many cases, the financial products offered may be traded only by clients of a certain category on platforms that comply with the rules.

McGinley also noted that even minor errors in the smart contracts of decentralized platforms lead to exploits resulting in losses of tens or hundreds of millions of dollars of client funds.

“The existence of unregulated DeFi exchanges poses an obvious threat to regulated markets and customers protected by the CFTC, and we take this very seriously,” the official stressed.

McGinley also recalled cases involving Polymarket and Ooki DAO, which the Commission had pursued earlier.

Last week, the CFTC settled charges against three more DeFi platforms, he noted. Opyn, ZeroEx and Deridex offered clients derivatives trading, retail margin trading, leveraged products, and engaged in other activities requiring registration with the Commission, McGinley clarified.

Opyn, ZeroEx and Deridex will pay civil penalties of $250,000, $200,000 and $100,000 respectively.

In response to this case, Coinbase CEO Brian Armstrong said he hoped DeFi projects would sue the regulator, prove their case, and set a precedent.

“The CFTC should not be taking enforcement actions against decentralized protocols. These are not financial services businesses, and it’s highly unlikely that the Commodity Exchange Act even applies to them,” he commented.

The CFTC should not be creating enforcement actions against decentralized (DeFi) protocols. These are not financial service businesses, and it’s highly unlikely the Commodity Exchange Act even applies to them.

My hope is these DeFi protocols take these cases to court to…

— Brian Armstrong ?️ (@brian_armstrong) September 13, 2023

Coinbase itself is facing a lawsuit against it brought by another regulator—the U.S. Securities and Exchange Commission.