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DeFi vs the CFTC: “The Latest Frontier” of Enforcement Action — Coinbase CEO Weighs In

Published September 14, 2023 5:08 PM
James Morales
Published September 14, 2023 5:08 PM
  • The CFTC has settled charges against Deridex, Opyn and ZeroEx.
  • In a recent speech, CFTC Enforcement Director Ian McGinley called DeFi “the latest frontier” for regulatory enforcement.
  • Brian Armstrong commented on the developments and hopes the DeFi protocols go to court and set a new precedent.

Until recently, decentralized crypto exchanges largely avoided the regulatory scrutiny their centralized peers have been subjected to. But in June, the United States Commodity Futures Trading Commission (CFTC) won a lawsuit against OokiDAO, setting the stage for further clashes with the world of DeFi.

As the CFTC ramps up the pressure of DeFi protocols, Coinbase CEO Brian Armstrong has called for decentralized entities to make a stand in court.

The CFTC Cracks Down on Decentralized Exchanges

During a speech  on Monday, September 11, CFTC Enforcement Director Ian McGinley suggested his agency’s war on DeFi was only just beginning. 

Calling DeFi, “the latest frontier” of regulatory enforcement, he said that the CFTC’s efforts in the space had been boosted by the OokiDAO win.

Last Thursday, September 7, the CFTC announced that it had settled charges against the operators of three DeFi protocols. The settlements require Opyn, ZeroEx, and Deridex pay to pay fines of $250,000, $200,000, and $100,000, respectively. 

They have also agreed to cease and desist from violating the Commodity Exchange Act and CFTC regulations,” a press release  stated.

“Somewhere along the way, DeFi operators got the idea that unlawful transactions become lawful when facilitated by smart contracts,” McGinley said at the time.

“The Division of Enforcement will continue to evolve with it and aggressively pursue those who operate unregistered platforms that allow US persons to trade digital asset derivatives,” he added.

Coinbase CEO Backs DeFi

In a counterargument to the CFTC’s position, Brian Armstrong suggested the charges amounted to a misapplication of the Commodity Exchange Act.

He said he hopes DeFi protocols take such cases to court so as to establish an important legal precedent in their favor. Otherwise, he implied the CFTC’s enforcement action risked pushing the industry offshore.

The Limits of Enforcement

Armstrong is rightly suspect of the CFTC’s use of the Commodities Exchange Act, which was initially passed in 1936, after all. But until someone puts forward a strong legal argument limiting its applicability to crypto exchanges, the regulator will continue using it as a tool to go after DeFi platforms.

However, contrary to the Coinbase CEO’s comments, the DeFi space was never onshore to begin with.

By design, decentralized entities transcend national borders, and their ownership cannot be pinned to a single identifiable actor.

In the case of OokieDAO vs the CFTC the CFTC won an important judgement that Decentralized Autonomous Organizations can be treated as legal persons by the US legal system. But it was only half a victory.

Three months later, the Ookie protocol is still alive and well, and DAO members appear to have shown little interest  in ever paying the CFTC’s penalty. (Although the looming threat of further litigation has made them more secretive.)

OokiDAO, Ooki DEx, Telegram, cftc fine
  Comment in an Ooki Telegram channel

Of course, the DAO suffered significant losses. Its token was delisted by US centralized exchanges and it lost access to its .com domain.

But the OOKI token is still listed on major offshore exchanges, including Binance. Likewise, ooki.cc  may not have the SEO credentials of its predecessor, but the website is up and accessible to anyone who wants to use it.

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