Unlicensed decentralized finance (DeFi) markets may be illegal in the U.S., a top commodities regulator said Tuesday.
DeFi markets for derivative instruments – meaning futures contracts, for example – may not be legal under the Commodity Exchange Act, a U.S. law that governs such products and requires them to trade only on regulated designated contract markets (DCMs), the Commodity Futures Trading Commission (CFTC) Commissioner Dan Berkovitz said in a speech to the Asset Management Derivatives Forum.
“DeFi markets, platforms, or websites are not registered as DCMs or SEFs [swap execution facilities]. The CEA does not contain any exception from registration for digital currencies, blockchains, or ‘smart contracts,’” he said.
Legality aside, Berkovitz also expressed concerns that DeFi markets trading derivatives may not share the same protections that their centralized counterparts offer.
Regulated financial institutions are legally bound to protect customer funds, and intermediaries exist to help ensure customers don’t lose their money should one entity in the market fail, he said.
“In a pure ‘peer-to-peer’ DeFi system, none of these benefits or protections exist,” he said. “There is no intermediary to monitor markets for fraud and manipulation, prevent money laundering, safeguard deposited funds, ensure counterparty performance or make customers whole when processes fail,” adding:
“A system without intermediaries is a Hobbesian marketplace with each person looking out for themselves. Caveat emptor – ‘let the buyer beware.'”
