In an order issued on Thursday, the U.S. commodities regulator filed and settled charges against three decentralized exchanges (DEXs), imposing fines and issuing “cease and desist” orders.
The Commodities and Futures Trading Commission (CFTC) acted against three DeFi protocols, Opyn, ZeroEx (0x) and Deridex, for “illegally offering leveraged and margined retail commodity transactions in digital assets,” among other charges.
The charges against the three projects primarily revolved around their failure to obtain the appropriate licenses for operating in the U.S.
Deridex and Opyn also faced charges for failing to “register as a swap execution facility (SEF) or designated contract market (DCM), and failing to register as a futures commission merchant (FCM).”
The two exchanges were also held liable for not blocking U.S. users and violating anti-money laundering laws under the Bank Secrecy Act.
The CFTC orders stipulate that Opyn, ZeroEx, and Deridex must pay civil monetary penalties of $250,000, $200,000, and $100,000, respectively. All three companies were based in Delaware and located in North Carolina.
The CFTC released a detailed report on respective violations of all exchanges individually.
ZeroEx was charged for offering a “2:1 leveraged exposure to digital assets such as ether and bitcoin” which can be offered only on a “registered exchange in accordance with the CEA and CFTC regulations.”
The developers of ZeroEx and its front-end operator Matcha tweeted that the leveraged product constituted “less than 0.1% of Matcha’s trading volume since inception.”
Decrypt has reached out to the exchanges and will update this article should they respond.
‘Constructive dialogue’ with CFTC
The Matcha team said that they are “implementing additional processes after constructive dialogue with the regulatory agency.”
In its press release, the CFTC stated that it “recognizes each respondents’ substantial cooperation with the Division of Enforcement’s investigation of this matter in the form of a reduced civil monetary penalty.”
It remains to be seen if these exchanges will be allowed to operate in the future.
“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 in the official press release.
McGinley added, “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.”
Opposition to CFTC ruling
The ruling met with significant opposition from at least one CFTC commissioner and other crypto proponents.
CFTC Commissioner Summer K. Mersinger published a public dissent statement against the regulator’s actions yesterday.
Mersinger argued that these enforcement actions do not align with the Commission’s mandate to promote responsible innovation, instead hindering innovation in the DeFi space and failing to engage with market participants effectively.
Mersinger also brought up the Ooki DAO enforcement action, stating that in that case it was a “centralized exchange” that acted “in violation of the Commodity Exchange Act (“CEA”) and CFTC rules.”
However, in the “three matters before us now” the protocols were “decentralized in conception and operation—an area that has not previously been the subject of a CFTC enforcement action.”
Perhaps we should lay to rest the idea that the CFTC is “a better regulator” for crypto than the SEC.
Today, the CFTC violated the court’s opinion in the Uniswap class action—and its own principles—in an attack on DeFi.
Read @cftcmersinger‘s dissent: https://t.co/iJJrT7Px7y
— Jake Chervinsky (@jchervinsky) September 7, 2023
Lawyer Jake Chervinsky, Chief Policy Officer at the Blockchain Association, referenced the “court’s opinion in the Uniswap class action,” saying that the CFTC has violated its own principles and that of the court’s—”in an attack on DeFi”
In late August, Southern District of New York Judge Katherine Polk Failla found that Uniswap’s investors and developers were not liable under federal securities laws for so-called scam tokens that burned a trader. Failla’s decision differentiated centralized crypto exchanges from decentralized ones.
However, the CFTC’s action today has renewed fears of a regulatory crackdown on DeFi protocols.
Gabriel Shapiro, General Counsel at Delphi Labs tweeted that, “if you run any kind of interface etc. for a DeFi credit protocol, block the U.S.”
