The Commodity Futures Trading Commission today filed charges against BitMEX and its owners and operators including CEO Arthur Hayes for operating a trading platform without CFTC approval, and for failing to implement know-your-customer procedures, a customer information program, and anti-money laundering procedures.
At first glance this is concerning for DeFi, a financial system which hails open access—read: lack of KYC and AM—at its core.
But the key here is enforceability. For most DeFi protocols, the goal is to become decentralized enough that no entity or group of persons are solely responsible for the running of a financial application, and instead that power is distributed among many users. Another difference is that these protocols are non-custodial and as such, never touch users’ funds.
The problem lies when these goals are only met halfway, with teams still holding control over the project or custody over users’ private keys. One potential effect of the CFTC’s move will be to push blockchain-based finance to become increasingly and actually decentralized, in a quest to reduce regulatory risk.
The CFTC’s complaint against BitMEX highlights some of the key elements of regulated futures commission merchants that generally don’t apply in DeFi, said Jake Chervinsky, Compound Finance’s general counsel.
“Most governance token holders don’t ‘operate’ a protocol in the way that owners of a centralized exchange company ‘operate’ a trading platform. DeFi protocols are autonomous, self-executing code.” Chervinsky told The Defiant, adding that exchange operators hold customers’ funds, which is also not the case in DeFi.
Test for DeFi
The BitMEX case will probably cause centralized projects which are not compliant with US regulators to consider moving down the decentralization spectrum and it will make existing DeFi projects “re-evaluate how insulated they think they are from issues like this,” said Anil Lulla, co-founder of Delphi Digital.
“In the long term, I think this is bullish for DeFi but it will still be interesting to see whether or not DeFi products can really dodge KYC/AML in the future,” Lulla told The Defiant. “They may be hard to shut down, but regulators could adapt with different types of penalties.”
It’s worth noting that another reason why regulators are coming after centralized exchanges is because “they do insider trading and market manipulation, which isn’t possible on an open-source DEX,” said Lasse Clausen of crypto venture fund 1Kx. “To be more precise, there is no privileged positions for the operator to cheat.”
Clausen said DeFi projects are likely protected from regulators, but only if the projects are truly decentralized.
“That’s another reason why real decentralization matters,” he said. “Not just decentralization theater.”
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