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DeFi Derivatives May Be Illegal: CFTC Commissioner
Federal law "does not contain any exception" for decentralized finance markets, Dan Berkovitz said.
By Nikhilesh De
Updated Sep 14, 2021, 1:08 p.m. Published Jun 8, 2021, 10:36 p.m.
Unlicensed decentralized finance (DeFi) markets may be illegal in the U.S., a top commodities regulator said Tuesday.
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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), 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.
DeFi has been drawing more scrutiny since taking off last summer. The Financial Action Task Force (FATF), a global financial watchdog, published guidance in March recommending regulators impose certain restrictions on the sector, and the World Economic Forum published a white paper early Tuesday hoping to educate policymakers about this portion of the crypto sector.
Read more: World Economic Forum Hopes to Explain DeFi for Regulators With White Paper
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," Berkovitz 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," he noted, adding:
"A system without intermediaries is a Hobbesian marketplace with each person looking out for themselves. Caveat emptor – 'let the buyer beware.'"
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Coinbase Sees Crypto Recovery Ahead as Liquidity Improves and Fed Rate Cut Odds Climb
The crypto exchange also took note of a so-called AI bubble that continues to go strong and a weaker U.S. dollar.
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- Coinbase Institutional is seeing a potential December recovery in crypto, citing improving liquidity and a shift in macroeconomic conditions that could favor risk assets like bitcoin.
- The firm's optimism is driven by rising odds of Federal Reserve rate cuts, with markets pricing in a 93% chance easing next week, and improving liquidity conditions.
- Several recent institutional developments, including Vanguard's crypto ETF policy reversal and Bank of America's greenlighting of crypto allocations, have contributed to bitcoin's rebound from recent lows.
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