During a speech on Tuesday (June 8), Dan M. Berkovitz, among the five commissioners of the Commodity Futures Trading Commission (CFTC), shared his worries regarding Decentralized Finance (DeFi).
The CFTC has been“an independent agency of the US government established in 1974, that modulates the U.S. derivatives markets, including futures, swaps, and particular sorts of choices“.
According to his bio page at the CFTC’s website, Berkovitz was nominated by President Trump to serve as a Commissioner on 24 April 2018. He was“unanimously confirmed“ from the U.S. Senate on 28 August 2018 and“sworn into office“ on 7 September 2018″for a last-minute expiring in April 2023″.
With Respect to this DeFi part of his speech, Berkovitz started with this definition of DeFi from Wikipedia:
„Decentralized fund (commonly referred to as DeFi) is a blockchain-based kind of fund that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to provide conventional financial instruments, and rather uses smart contracts on blockchains, the most common being ETH. DeFi platforms make it possible for individuals to borrow or lend money from others, speculate on price moves on a range of assets utilizing derivatives, commerce cryptocurrencies, insure against risks, and make interest in savings-like accounts. “
He then stated that the best Google search result for DeFi pointed him into some Coindesk post, which stated „DeFi is short for’decentralized fund,‘ an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries“.
Berkovitz asserts that although DeFi tries to remove financial intermediaries, these do provide the people with a valuable service:
„A threshold question is whether the people will gain from disrupting the present financial system which relies extensively on financial intermediaries. Supporters of DeFi argue that cutting out intermediaries provides users more control over their investments.
„However intermediaries such as banks, stocks, futures commission merchants, payment clearing facilities, and asset managers–for example many of you at this conference–have developed over the previous two or three hundred decades of modern banking and finance to reliably supply critical financial services to support the financial markets and the investment public.
„Intermediaries provide information, analyses, and advice to the public seeking access to financial markets. Intermediaries often have fiduciary or other legal duties to act in the best interests of their clients. They supply liquidity to the markets and support the stability of the financial system in times of stress. They supply custody of assets and protects for investments. They are responsible for averting money-laundering through financial markets. Regulated and licensed intermediaries must meet established standards of behavior and can be held legally responsible for failing to meet those standards of behavior. Intermediaries could be held accountable if things go wrong. “
He went on to mention that in contrast DeFi markets do not provide such protections:
„At a pristine’peer-to-peer‘ DeFi system, not one of these protections or benefits exist. There is not any intermediary to track markets for fraud and manipulation, prevent money laundering, safeguard deposited funds, ensure counterparty functionality, or create clients whole when procedures neglect. A platform without intermediaries is a Hobbesian market with each individual searching for themselves. “
He also contested the legality of“unlicensed DeFi markets for derivative instruments“:
„Not only do I think that unlicensed DeFi markets for derivative instruments are a terrible thought, but I also do not see how they are legal under the CEA. The CEA also provides it is unlawful for any individual aside from an eligible contract participant to enter into a swap unless the swap is entered into on, or subject to, the rules of a DCM. DeFi markets, platforms, or sites aren’t enrolled as DCMs or SEFs. The CEA does not contain any exception from registration for electronic monies, blockchains, or’smart contracts.‘ “
For these reasons, Berkovitz considers that the CFTC and other financial authorities must pay closer attention to the DeFi sector:
„besides the legality issue, in my view it is untenable to allow an unregulated, unlicensed derivatives marketplace to compete, side-by-side, with a fully regulated and accredited derivatives marketplace. Along with not having market safeguards and customer protections in the unregulated marketplace, it is unfair to enforce the obligations, limitations, and costs of regulation upon several market participants while allowing their unregulated competitors to function wholly free of such obligations, limitations, and costs.
„Experience with the evolution of this’shadow banking‘ system shows that competition between regulated and unregulated entities in the same market could result in the regulated entities assuming either more dangers in order to create the greater yields essential to contend with all the unregulated competition, or seeking less regulation for themselves to level the playing area. Both of these reactions can pose significant risks into the financial system.
„For all these reasons, we should not permit DeFi to become an unregulated shadow financial market in direct competition with regulated markets. The CFTC, together with other regulators, need to focus more attention to this growing area of concern and address regulatory violations appropriately. “
The views and opinions expressed by the author, or some people talked about in this article, are for informational purposes only, plus they do not constitute investment, financial, or other advice. Purchasing or trading cryptoassets comes with a probability of financial loss.
The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government established in 1974, which modulates the U.S. derivatives markets, which includes futures, swaps and certain kinds of options.