Three decentralized finance (DeFi) companies agreed to settle charges filed by the US Commodity Futures Trading Commission (CFTC) that they illegally offered derivatives trading in cryptocurrency, the regulator said last Thursday.
The CFTC said the companies, Opyn, ZeroEx, Deridex, illegally offered leveraged and margined retail commodities transactions in cryptocurrency.
Deridex and Opyn were also charged with failing to register with the CFTC for digital asset derivatives trading and to have the know-your-customer programs that are required under the Bank Secrecy Act – a money-laundering law applicable to many financial services firms, including future commission merchants.
“Somewhere along the way, DeFi operators got the idea that unlawful transactions become lawful when facilitated by smart contracts.”
Ian McGinley, Director of Enforcement, CFTC
The three companies were also charged with illegally offering leveraged and margined retail commodity transactions in digital assets.
The orders require that Opyn, ZeroEx, and Deridex pay civil monetary penalties of $250,000, $200,000, and $100,000, respectively.
DeFi and unregistered platforms
“Somewhere along the way, DeFi operators got the idea that unlawful transactions become lawful when facilitated by smart contracts,” said Ian McGinley, the CFTC’s Director of Enforcement. “They do not.”
Blockchain-based software protocols and smart contracts, commonly referred to as DeFi, function similarly to trading platforms and are often advertised as offering users the ability to engage in transactions in a decentralized environment.
The CFTC said that the products offered by the firms and transacted on the blockchain were ones that must be offered to retail users only on a registered exchange in accordance with the Commodity Exchange Act and CFTC regulations. And it said the businesses either failed to have or had an insufficient customer identification program as part of a BSA compliance program.
The CFTC said it recognizes each respondents’ substantial cooperation with the Enforcement Division’s investigation of the matter in the form of a reduced civil monetary penalty.
Dissenting opinion
Commissioner Summer Mersinger issued a dissenting opinion, saying DeFi protocols per se weren’t an area that had previously been the subject of CFTC enforcement, as opposed to centralized digital asset exchanges, which have faced several such actions.
“These cases are especially concerning in that they represent a significant shift in position on the merits of engagement with DeFi market participants.”
Summer Mersinger, CFTC Commissioner
In these three cases, the agency didn’t provide any evidence that customer funds had been misappropriated or market participants harmed by the protocols, she said.
“I am concerned that the commission in these cases is taking another step down the path of bringing enforcement actions when we should be engaging with the public,” Mersinger said. “It is important to emphasize that ‘Enforcement First’ has not always been the CFTC’s default position. These cases are especially concerning in that they represent a significant shift in position on the merits of engagement with DeFi market participants.”
Remember Ooki DAO
In June, a US judge ruled that a decentralized cryptocurrency collective was liable for violating commodities exchange rules. Ooki DAO was ordered to pay a $643,000 fine and shut down operations after the judge ruled in favor of the CFTC in a decision involving decentralized autonomous organizations or DAOs.
In that case, Ooki DAO’s protocol operated on the Ethereum blockchain and allowed users to make investments and bet on the relative rise and fall of particular virtual currencies. The CFTC alleged the protocol was functionally the same as using a trading platform, and it thereby qualified as an exchange under the Commodity Exchange Act.