Dan M. Berkovitz, commissioner of the Commodity Futures Trading Commission (CFTC), believes DeFi derivatives platforms may contravene the Commodity Exchange Act (CEA).
Speaking as part of a Tuesday keynote address dubbed “Climate Change and Decentralized Finance: New Challenges for the CFTC,” Berkovitz noted that:
“Not only do I think that unlicensed DeFi markets for derivative instruments are a bad idea but I also do not see how they are legal under the CEA.”
Berkovitz noted that the “CEA requires futures contracts to be traded on a designated contract market (DCM) licensed and regulated by the CFTC.” However, he asserted that no decentralized finance platforms are registered as DCMs or SEFs.
During the keynote, the commissioner emphasized the need for regulators to become familiar with DeFi derivatives and other applications amid the booming growth of the sector.
He referenced the huge amount of liquidity pumped into the market over the past 12 months, noting that now that “you’re talking real money”; there needs to be stringent regulation in place to protect DeFi consumers:
“Given the explosive growth of this sector, federal regulators should become familiar with this new technology and its potential uses and be prepared to protect the public against misuse.”
Interestingly, Berkovitz references a Wikipedia definition of DeFi and notes that his research was based in part on a Google search. “[It’s] an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries.”
Jacob Franek, co-founder of Coin Metrics, was quick to criticize the commissioner’s research, noting that he “needs to do more,” adding:
@CFTCberkovitz I'm not sure which supporters of DeFi you spoke with, but the core value proposition is absolutely *not* to cut out intermediaries simply to offer investors more control over investments.— Jacob FranΞk (@panekkkk) June 9, 2021
Further, you seem confused about what DeFi actually is and how it operates. pic.twitter.com/LyKnHBBJEn
The commissioner warned that the emergence of the unregulated entities from the shadow banking system may result in competition with regulated entities, leading them to assume either “more risks in order to generate higher yields“ or to seek less regulation to “level the playing field.”
“In my view, it is untenable to allow an unregulated, unlicensed derivatives market to compete, side-by-side, with a fully regulated and licensed derivatives market,” he said.
Berkovitz questioned the argument put forth by DeFi proponents that cutting out intermediaries can offer investors better returns and more “control over their investments.”
He argued that intermediaries such as “banks, exchanges, futures commission merchants, payment clearing facilities, and asset managers” have developed a banking and finance model over 200–300 years that reliably support “financial markets and the investing public.”
“One of the key reasons our financial system is so strong is the legal protections that investors enjoy when they invest their money in U.S. markets, most often through intermediaries,” he said.