Fears of Shady Financial Market Prompt CFTC Commissioner’s Calls for DeFi Crackdown

A commissioner of the Commodity Futures Trading Commission is calling for a crackdown on decentralized finance (DeFi) platforms.

In a recent speech titled “Climate Change and Decentralized Finance: New Challenges for the CFTC” Commissioner Dan Berkovitz referenced his concerns regarding the DeFi boom.

“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.”

Berkovitz added,

“Not only do I think that unlicensed DeFi markets for derivative instruments are a bad idea, I also do not see how they are legal under the CEA.”

Decentralized finance is an umbrella term that refers to several financial activities, such as borrowing and lending money. However, unlike traditional finance, DeFi platforms allow participants to make peer-to-peer transactions by using blockchain technology, bypassing legacy financial intermediaries such as banks and brokerages. By using smart contracts instead of central financial intermediaries, DeFi also allows users to speculate on price movements, engage in crypto and derivatives trading, and earn interest on crypto assets.

Berkovitz highlighted the benefits of dealing with regulated banks, exchanges and asset managers that not only “reliably provide critical financial services to support the financial markets ” but also can be held accountable if something goes wrong.

“Today, the United States has the most effective and efficient capital formation and risk management markets in the world. When people the world over want to invest their money or manage their risks in safe ways, they come to the U.S. financial system. 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. We have a system in which intermediaries are legally accountable for protecting customer funds. In many instances, such as in the clearing system, if a counterparty fails to perform, an intermediary will make the customer whole.

In a pure ‘peer-to-peer’ DeFi system, none of these benefits or protections exist.”

Berkovitz concluded that the CFTC, which investigated Binance in March, should pay careful attention to this “growing area of concern” and address regulatory violations appropriately.

“We should not permit DeFi to become an unregulated shadow financial market in direct competition with regulated markets.”

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