CFTC Goes After Three DeFi Protocols
The CFTC gave an order to OPYN, ZeroEX and Deridex to stop their derivatives trading activities.
The three DeFi projects, OPYN, ZeroEX and Deridex, complied with the CFTC order.
There was cooperation between CFTC and the three DeFi firms, OPYN, ZeroEX and Deridex.
Keywords: DeFi market, DeFi protocols, CFTC issues, DeFi community, CFTC against DeFi, US Commodity Futures Trading Commission, digital asset derivatives trading, federal laws, crypto derivatives, DeFi derivatives
Introduction
The United States is one country with various crypto regulatory bodies which include the Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), Department of Justice (DOJ), the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and Commodity Futures Trading Commission (CTFC).
In this article, we discuss the role of the U.S Commodity Futures Trading Commission (CTFC) in supervising crypto activities in the United States. We will also analyze the CFTC’s order against three DeFi protocols namely OPYN, ZeroEX and Deridex.
Read also: New Crypto Bill: CFTC & SEC Collaboration
The Commodity Futures Trading Commission (CTFC) Issues Orders against Three DeFi Protocols
Recently the Commodity Futures Trading Commission (CTFC) issued orders against three DeFi protocols, OPYN, ZeroEX and Deridex, for offering unlicensed derivative trading. CFTC says that the three firms operate blockchain-based protocols as trading platforms that offer derivatives.
Since these trading platforms are unlicensed, the CFTC has ordered the three DeFi protocols to stop their operations. In addition, the three DeFi projects, OPYN, ZeroEX and Deridex, will pay fines of $250,000, $200,000, and $100,000, respectively.
Ian McGinley, the CFTC Director of Enforcement, made a brushing comment on the behaviours of various DeFi protocols including OPYN, ZeroEX and Deridex, on their unwillingness to comply with national laws, something that makes them prone to lawsuits and huge financial penalties.
He said, “Somewhere along the way, DeFi operators got the idea that unlawful transactions become lawful when facilitated by smart contracts. They do not.”
Nevertheless, the orders against OPYN, ZeroEX and Deridex do not imply that the three firms misappropriated customers’ funds. In connection to this Commissioner Summer Mersinger said, “The Commission’s Orders in these cases give no indication that customer funds have been misappropriated or that any market participants have been victimized by the DeFi protocols on which the Commission has unleashed its enforcement powers.”
Just to add more flesh to the allegations, OPYN was charged for failing to register its platform as a swap ution facility as well as failing to register as a merchant of the Futures Commission. It also failed to abide by the provisions of the Bank Secrecy Act compliance program that require trading platforms to institute customer identification programs.
OPYN, a California based company, offers a derivative called oSQTH that derives its price from an index that tracks the value of “ether squared relative to the USDC stablecoin.”
As such, the regulator said, “The order finds that oSQTH tokens are swaps and leveraged or margin retail commodity transactions and therefore can be offered to retail users only on a registered exchange in accordance with the CEA and CFTC regulations.”
The CFTC charged ZeroEX for offering “2:1 leveraged exposure to digital assets such as ether and Bitcoin.” Its Matcha, a front-end application, enables its users to trade different digital assets based on various blockchains. According to the CEA and CFTC regulations such products can only be traded on registered exchanges.
Similarly, Deridex, a company based in North Carolina whose trading platform exists on the Algorand blockchain, offers different DeFi derivatives.
Read also: What Is DeFi 2.0, And Why Does It Matter?
CFTC against DeFi Protocols: Exemplary Cooperation
Basically, the three DeFi protocols admitted that they committed the said offense, that is offering digital asset derivatives trading services without registering with the relevant authorities. The CFTC commended the three companies for their cooperation and willingness to resolve the sticking issues.
ZeroEx, through its Matcha X account, admitted that it has cooperated with the CFTC. It said, “0x, the developer of DEX aggregator Matcha, recently cooperated with the CFTC to resolve an inquiry regarding tokens constituting less than 0.1% of Matcha’s trading volume since inception.”
It added, “At 0x, strategic decisions are made with input from outside legal counsel. In this case, we are implementing additional processes after constructive dialogue with the regulatory agency.”
Read also: The Wild West of the Crypto World? Reasons Behind the U.S. SEC’s Lawsuits
Legal Basis for CFTC’s Involvement in DeFi
There is no question that the CFTC, a federal regulator body which regulates commodities and derivatives markets in the United States, has taken strong initiatives to stamp its authority and influence on DeFi.
For example, in March 2021 it explained that its jurisdiction includes cryptocurrencies it deems to be commodities. Its recent action against OPYN, ZeroEX and Deridex indicates its willingness to monitor the DeFi market. It achieves this through using the existing federal laws and courts laws, something the DeFi community should be aware of.
Now, it is clear that the CFTC has jurisdiction in DeFi as long as decentralized protocols offer digital assets and services which are classified as commodities or derivatives. For example, the CFTC has openly said that bitcoin and Ether (ETH) are commodities. Therefore, it will have control over all digital products, especially derivatives and futures contracts, related to these blockchains.
The CFTC’s claim was vindicated by the New York federal court ruling of 6 March 2018 that declared that the CFTC can regulate virtual assets that fall under the commodities category. Therefore, the Commodity Futures Trading Commission v. McDonnell (E.D.N.Y. Mar. 6, 2018) endorsed CFTC as a regulatory authority for specified digital assets.
Read also: 10 Best DeFi Protocols to Invest During Bear Markets
Implications of CFTC Order on DeFi Community
So far, many individuals and organizations have raised concern over the current crypto crackdown in the United States. They believe that such actions can stifle innovation.
It is beyond doubt that crypto regulations and oversight are essential for the development of the DeFi market. However, too many stringent restrictions may result in low growth of the DeFi sector in the United States.
Therefore, relying too much on regulatory punitive action, the way the CFTC and the SEC have been doing, may force DeFi developers to relocate to other countries to escape from regulatory uncertainty and difficulties in the USA. If that happens it may lead to loss of expertise and innovation in the blockchain and crypto sector in the United States.
Sustainable growth in the DeFi sector can exist if regulatory authorities collaborate, have open conversations and negotiate with the different players in the blockchain sector rather than taking a hard stance approach towards them.
Read also about other DeFi protocols like Venus, Pendle, StaFi.
Conclusion
Recently, the Commodity Futures Trading Commission (CTFC) issued an order against OPYN, ZeroEX and Deridex to stop operations as they have not registered their DeFi derivatives with the relevant regulatory authorities. Nevertheless, the three DeFi protocols complied with the CFTC’s order and promised to pay the stipulated penalties.
FAQs about DeFi
How many DeFi protocols are there?
There are over 17,000 DeFi protocols. These DeFi protocols consist of codes, standards and procedures that control financial applications. Also, they exist on different blockchains including Ethereum and Algorand.
What are the main DeFi protocols?
There are over 17,000 DeFi protocols that serve various functions. examples of main decentralized protocols are Compound, Aave, Uniswap, Sushiswap, Kyber Network, yEarn, MakerDAO, Synthetix, CurveDAO, Ren Protocol and Balancer.
What does the Commodity Futures Trading Commission do?
The Commodity Futures Trading Commission is a United States regulatory agency which controls and supervises commodities and derivative products and markets, consisting of futures contracts, options and swaps. It is made of a panel of commissioners that monitors the activities of various organizations which offer derivatives and commodities.
