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Dan M. Berkovitz, Commissioner of the Commodity Futures Trading Commission, has advocated for a crackdown on unregulated DeFi derivatives markets.
The Commodity Futures Trading Commission’s (CFTC) Commissioner Dan M. Berkovitz believes DeFi derivatives systems may violate the Commodity Exchange Act (CEA).
Speaking as part of a June 8 keynote address dubbed “Climate Change and Decentralized Finance: New Challenges for the CFTC,” Berkovitz notes 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 asserts that no DeFi 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 twelve months, noting that now that “you’re talking real money” there needs 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. “If you type “DeFi” into Google search, a top link is to a CoinDesk article, ‘What is DeFi?’;” he said.”[It’s] an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries.”
The Co-founder of Coin Metrics Jacob Franek was quick to criticize the commissioner’s research, noting that he “needs to do more than read a CoinDesk article”:
So, I won’t admonish many who wrote it off. So long as they understand the risks they are shouldering and are making an informed decision, that’s their choice. As outside counsel, my duty is to make sure they’re making those choices with as much relevant information as possible.
— Collins Belton (@collins_belton) June 9, 2021
The commissioner cautioned that the rise of unregulated organisations from the shadow banking system may result in rivalry with regulated companies, pushing them to either take “more risks in order to generate higher yields” or seek less regulation in order 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 premise advanced by DeFi supporters that eliminating middlemen can provide investors with higher returns and more “control over their investments.”
He contended that middlemen such as “banks, exchanges, futures commision merchants, payment clearing facilities, and asset managers” had created a banking and finance industry.
model over 200 to 300 years which 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.