DeFi in Regulatory Crosshairs: CFTC Charges Cast Doubts on Legality in the US

Charges Highlighted
Penalties and Consequences

In a move that has sent ripples through the decentralized finance (DeFi) community, the U.S. Commodity Futures Trading Commission (CFTC) has launched actions against three major DeFi companies, namely Opyn, ZeroEx, and Deridex.

The CFTC, with its recent actions, appears to be signaling a stricter stance on DeFi operations within the United States, raising questions about the future legality of such projects in the country.

Has DeFi Become Illegal in the US? CFTC Case Against Opyn, ZeroEx, Deridex Suggests So pic.twitter.com/eanwI7lWMJ
— Bradicoin (@Bradicoin10) September 9, 2023

Charges Highlighted

Both Deridex and Opyn are primarily charged with failing to register their services as either a swap execution facility (SEF) or a designated contract market (DCM). Additionally, these companies have been highlighted for not instituting a customer identification program, a clear violation of the Bank Secrecy Act.

ZeroEx, on the other hand, is facing charges for illegally offering leveraged and margined retail commodity transactions involving digital assets.

The allure of DeFi lies in its blockchain-backed protocols and smart contracts, which allow users to execute transactions in a decentralized setting without the need for traditional financial intermediaries. However, as evidenced by these CFTC actions, even groundbreaking technologies are not exempt from regulatory oversight.

Penalties and Consequences

The CFTC’s orders have commanded Opyn, ZeroEx, and Deridex to pay civil monetary penalties of $250,000, $200,000, and $100,000, respectively. Beyond the fines, these companies are also required to desist from further violations of both the Commodity Exchange Act (CEA) and any applicable CFTC regulations.

“Somewhere along the way, DeFi operators got the idea that unlawful transactions become lawful when facilitated by smart contracts. They do not. The DeFi space may be novel, complex, and evolving, but 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,” said Director of Enforcement Ian McGinley.

Gabriel Shapiro, the general counsel at Delphi Labs, opined on the matter, signaling that other DeFi projects might have to tread more cautiously in the future. His sentiments, shared by many in the industry, suggest that the US might be gearing up for tighter regulatory measures concerning DeFi.

“If you run any kind of interface for a DeFi credit protocol, block the US. Many people told me I was crazy when I said that the CFTC’s case against OokiDAO simply makes DeFi illegal under the CFTC’s view of US law. I was right–they were wrong,” Shapiro said.

Given this new regulatory environment, DeFi firms operating or looking to venture into the US market are now faced with the challenge of revisiting and potentially overhauling their operational strategies.

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