The Commodity Futures Trading Commission goes after DeFi. On September 7, 2023, the CFTC announced it has filled charges against three U.S. companies in relation with three DeFi projects, Opyn, 0x (ZeroEx) and Deridex, and has reached a settlement with each of them.
Because of their loose similarities with traditional financial market instruments and actors, Deridex and Opyn have been charged with failing to register as a swap execution facility or designated contract market, failing to register as a futures commission merchant and failing to adopt a customer identification program.
ZeroEx, Opyn and Deridex are also charged with illegally offering leveraged and margined retail commodity transactions in digital assets.
The orders require that Opyn, ZeroEx, and Deridex pay a fine of $250,000, $200,000, and $100,000, respectively, and cease and desist from violating the Commodity Exchange Act and CFTC regulations. “Somewhere along the way, DeFi operators got the idea that unlawful transactions become lawful when facilitated by smart contracts,” the CFTC writes in its press release. Its Director of Enforcement, Ian McGinley, warns that “the Division of Enforcement will […]
aggressively pursue those who operate unregistered platforms that allow U.S. persons to trade digital asset derivatives”.
Despite the hostility of the CFTC’s position, one must salute its clarity, a feature in the uncertain waters of blockchain compliance in the U.S.
Dissenting Opinion From Within The CFTC
Not everyone at the CFTC agrees with these three actions, as shown by the dissenting statement of CFTC Commissioner Summer K. Mersinger. The latter disagrees with the merits of the CFTC actions as well as the confrontational nature of its rhetoric and messaging.
Mersinger distinguishes these cases from the Ooki DAO case, where a former centralized exchange which became decentralized to avoid legal liability was pursued for violation of the Commodity Exchange Act and CFTC rules. The CFTC stance was that decentralization will not erase prior unlawful centralized activities. Since all of its enforcements in the crypto space were historically targetting centralized exchanges, the recent DeFi cases, holding developers of decentralized marketplaces liable, are unprecedented and surprising.
Short of engaging with the public and innovators, the CFTC went straight to enforcement. It had in the past pledged for extensive stakeholder engagement regarding innovation, notably in its 2022-2026 Strategic Plan, underscoring that regulation in the space “requires striking a balance between protecting market participants and supporting innovation.” The novel approach is therefore hostile to DeFi market participants by its lack of understanding of the technology and lack of a balanced approach, perceived as making defi outright illegal: “today’s actions do not promote responsible innovation – they shut it down, banishing innovation from U.S. shores,” regrets Mersinger.
DeFi Is Now Effectively Illegal In The U.S.
As a result of these settlements, outside of the purview of the judiciary branch, developers may now be liable should they create code that is not only for unlawful purposes, but also if their code made for lawful purposes is used for unlawful ones, which could fall outside of their control. Combined with the recent Tornado Cash founders’ indictments, pursuing the founders of a popular blockchain privacy tool who had little control over the usage of the code they wrote, the U.S. has established itself as a jurisdiction to avoid for blockchain based innovation, especially in the decentralized finance and privacy space.
This illegality is also apprehended by the broader crypto community, as can be seen in this tweet by Gabriel Shapiro, General Counsel at Delphi Labs and seasoned crypto lawyer:
The merits of the CFTC approach is subject to much controversy, from the lack of alleged victims or harmed individuals to its understanding of the technology. The lawfulness of the CFTC position is questioned given that it appears to contradict judicial decisions, especially the one regarding Uniswap where the judge dismissed the case, saying that the developers were not liable for the harmful usage by third parties of their lawful code.
One wonders how civilians can constructively anticipate the scope and interpretation of laws and regulations, and therefore their own obligations when the government doesn’t even agree internally, as shown by the Mersinger’s dissent. Only time will tell what is the crypto long game played by the U.S.