After a boom in decentralized financial applications (DeFi) regulators are increasingly looking into the young subsector of the crypto industry. The US Commodity Futures Trading Commission (CFTC) chief has talked about DeFi in a critical manner and mentioned that some apps might be illegal.
Commissioner Dan M. Berkovitz of the US CFTC made comments on Decentralized Finance (DeFi) during a keynote titled "Climate Change and Decentralized Finance: New Challenges for the CFTC". Putting DeFi in the same category as climate change emphasizes how serious policymakers are taking what they might perceive as a threat to their own financial system.
DeFi as an upcoming financial sector
Berkovitz defined Decentralized Finance (DeFi) as an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries. During the speech, the CFTC commissioner referred to the DeFi boom over the past year that has resulted in billions of dollars flowing into various protocols.
“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.” - Dan M. Berkovitz, CFTC Commissioner
He argued that intermediaries such as banks, exchanges, asset managers, and payment clearing facilities have developed over the past two or three hundred years. For this reason, according to Berkovitz, they can provide financial services, reliable information, custody, prevent money laundering, and be held accountable if something goes wrong. In his opinion, these protective measures could not exists in a decentralized, peer-to-peer system.
Decentralized derivatives markets
The commissioner even said that unregulated derivatives markets could be illegal under the Commodity Exchange Act (CEA). This federal act requires futures contracts to be traded on a designated contract market (DCM) licensed and regulated by the CFTC. Due to its nature, Berkovitz seems to have more of a bone to pick with the derivatives side of DeFi rather than other financial applications.
“Apart from the legality issue, 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.” - Dan M. Berkovitz, CFTC Commissioner
Berkovitz concluded that the CFTC, which investigated Binance and Coinbase in March, needs to focus more attention on this “growing area of concern” and address regulatory violations appropriately. He does not want DeFi to become an "unregulated shadow financial market" in direct competition with regulated markets.
