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(Kitco News) – The U.S. Commodity Futures Trading Commission (CFTC) has announced new enforcement actions against three decentralized finance (DeFi) protocols for allegedly failing to register various derivatives trading offerings, according to a release from the regulator.
The DeFi protocols in question are Opyn, Inc. and ZeroEx, Inc., both Delaware companies based in California; and Deridex, Inc., a Delaware company based in North Carolina.
Deridex and Opyn were charged with failing to register as a swap execution facility (SEF) or designated contract market (DCM), failing to register as a futures commission merchant (FCM), and failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program, as required of FCMs.
All three platforms were also charged with illegally offering leveraged and margined retail commodity transactions in digital assets.
“Each respondent engaged in these activities in connection with blockchain-based software protocols and smart contracts, commonly referred to as DeFi, that functioned similarly to trading platforms, and which purported to offer users the ability to engage in transactions in a decentralized environment,” the CFTC said.
Along with an order to cease and desist from violating the Commodity Exchange Act (CEA) and CFTC regulations as charged, civil monetary penalties were also handed down. Opyn has been ordered to pay $250,000, ZeroEx was fined $200,000, and Deridex was penalized $100,000.
“Somewhere along the way, DeFi operators got the idea that unlawful transactions become lawful when facilitated by smart contracts,” said Director of Enforcement Ian McGinley. “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 U.S. persons to trade digital asset derivatives.”
The enforcement actions came on the same day that CFTC Commissioner Caroline D. Pham called for the launch of a pilot program for crypto regulation.
“The United States is home to the world’s first trillion-dollar public company, borne out of Silicon Valley in 2018. And now, all five public companies with a market cap of over a trillion dollars are still U.S. tech companies,” Pham said. “But I am concerned that we have taken our past progress for granted. A ‘wait and see’ approach in the U.S. towards the potential opportunities of blockchain technology and digital assets falls short of the proactive measures needed in this rapidly evolving industry.”
Pham went on to propose the CFTC launch “the first-ever U.S. pilot program for digital asset markets.”
“Our principles-based framework is built for innovation in technology, new products, and market structure,” she said. “In waiting and seeing, we’re missing opportunities to capitalize on all the benefits of the technology before us, while others take a more strategic and long-term view. The U.S. may soon find ourselves constantly playing catch-up, unable to effectively leverage this technology for economic growth.”
She noted that jurisdictions around the world have launched “regulatory sandboxes” in an effort to keep pace with technological developments, but said that “while U.S. federal agencies have created offices dedicated to FinTech, true regulatory sandboxes have been limited to the states.”
“It’s time to take action,” she said. “A pilot program can create a safe framework for emerging technologies and market structures under our existing laws and regulations.”
“At their core, pilot programs provide a way to strategically introduce and refine new initiatives,” Pham said. “When thoughtfully designed, they can help minimize risks and maximize the chances of a new idea succeeding. Like regulatory sandboxes, pilot programs can be an effective tool to meaningfully facilitate innovation.”
“Staying ahead of the curve requires being ready to look to the future and preparing to embrace change,” she said. “As a regulator overseeing the largest financial markets in the world, we have a responsibility to proactively take on new challenges instead of passive observation. That’s why I’m recommending a time-limited CFTC pilot program to support the development of compliant digital asset markets and tokenization.”
“In line with our previous pilot initiatives, I am optimistic that this approach will ensure the integrity of our markets and impartial access, foster liquidity and competition, address potential conflicts and risks, and prevent fraud, abusive practices, and manipulation,” she added.
Pham called on the CFTC to host a roundtable to engage all stakeholders on the development and design of a successful pilot program.
She said after that, the regulator “should propose and adopt rules establishing a pilot program for a specific period of time that incorporates many of the components drawn from past pilot programs, including: registration and eligibility requirements; financial resources and other conditions; risk management; products and contract terms; and other requirements including disclosures and reporting.”
“At the conclusion of the pilot program, the Commission should examine the data gathered from the pilot and consider whether there should be a permanent change to our rules,” she said. “This proposal shows us how the CFTC can safely explore innovation while maintaining appropriate protections for our markets.”
Pham said it is her hope “that a pilot to test, gather data, and develop a pragmatic approach to digital assets and tokenization can ensure we continue to uphold our mandate of fostering open, transparent, competitive, and financially sound markets.”
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