Commodity Futures Trading Commission Enforces Decentralized Finance

The CFTC has announced three enforce­ment actions this month that fur­ther cement the CFTC’s juris­dic­tion over the decen­tral­ized finance space (“DeFi”). Back in 2022, the CFTC filed its first DeFi cas­es, includ­ing the Poly­mar­ket enforce­ment action and the Ooki DAO enforce­ment action where the CFTC alleged for the first time that DeFi plat­forms as well as decen­tral­ized autonomous orga­ni­za­tions (“DAOs”) could be deemed a “per­son” under the Com­mod­i­ty Exchange Act of 1936 (“CEA”) and would there­fore be sub­ject to CFTC’s regulations.

This month’s three enforce­ment actions, involved oper­a­tors of DeFi plat­forms, specif­i­cal­ly Opyn, Inc., ZeroEx, Inc., and Deridex, Inc. each of which the CFTC has alleged to be engaged in offer­ing ille­gal dig­i­tal asset deriv­a­tives trad­ing. With respect to these actions, Direc­tor of Enforce­ment, Ian McGin­ley remarked, “Some­where along the way, DeFi oper­a­tors got the idea that unlaw­ful trans­ac­tions become law­ful when facil­i­tat­ed by smart con­tracts. They do not. The DeFi space may be nov­el, com­plex and evolv­ing, but [we] will con­tin­ue to evolve with it and aggres­sive­ly pur­sue those who oper­ate unreg­is­tered plat­forms that allow U.S. per­sons to trade dig­i­tal asset derivatives.” 

McGin­ley lat­er pro­vid­ed com­ments at the Prac­tic­ing Law Institute’s White Col­lar Crime con­fer­ence on (Sep­tem­ber 11, 2023) sum­ma­riz­ing the enforce­ment actions and explain­ing that “[e]ach of these three plat­forms was offer­ing and con­firm­ing off-exchange lever­aged or mar­gin­ed retail com­mod­i­ty trans­ac­tions … [and] we will do every­thing in our pow­er to ensure that dig­i­tal asset com­mod­i­ty trans­ac­tions that should be con­duct­ed on reg­u­lat­ed deriv­a­tives exchanges are in fact con­duct­ed on those exchanges.”

Dig­ging into the three enforce­ment actions, each of the orders iden­ti­fies the fol­low­ing activ­i­ties as being vio­la­tions of the CEA:

• The DeFi plat­forms offered, or made avail­able for trad­ing, con­tracts that were based on var­i­ous cryp­tocur­ren­cies and dig­i­tal assets, such as Ether. These con­tracts qual­i­fy as “com­modi­ties” under the CEA.    The CFTC has enforce­ment juris­dic­tion over inter­state trans­ac­tions involv­ing “com­modi­ties”.
• Some of the con­tracts offered on these plat­forms, no mat­ter how sophis­ti­cat­ed and nov­el they were (e.g., using smart con­tracts to effec­tu­ate the trades on the blockchain) qual­i­fied as “swaps”, as defined in § 1a(47) of the CEA (e.g., “per­pet­u­al” con­tracts with­out the deliv­ery of a com­mod­i­ty), which gives the CFTC exclu­sive reg­u­la­to­ry juris­dic­tion over their activities.
• Some of these com­mod­i­ty con­tracts were offered on lever­aged basis, with­out actu­al deliv­ery of a com­mod­i­ty with­in 28 days, to traders that did not qual­i­fy as “eli­gi­ble com­mer­cial enti­ties” or “eli­gi­ble con­tract par­tic­i­pants” as defined in § 1a(17) and (18), respec­tive­ly of the CEA, and there­fore these com­mod­i­ty con­tracts qual­i­fied as “retail com­mod­i­ty” con­tracts that are deemed to be “futures.”
• The plat­forms facil­i­tat­ed the trad­ing of swaps on a plat­form that offered match­ing between mul­ti­ple par­tic­i­pants, which means such plat­form must be reg­is­tered as a “swap exe­cu­tion facil­i­ty” (“SEF”), and none of the three plat­forms were reg­is­tered as such.
• The plat­forms also facil­i­tat­ed the trad­ing of retail com­mod­i­ty con­tracts, which, again, are deemed to be futures con­tacts, and which must be trad­ed only on a “des­ig­nat­ed con­tract mar­ket” (“DCM”), i.e., a reg­is­tered com­mod­i­ty exchange. None of the three DeFi plat­forms were reg­is­tered as DCMs.
• When any enti­ty that acts as a bro­ker or solic­its for deposit assets (includ­ing dig­i­tal assets) in con­nec­tion with mar­gin­ed or lever­aged retail com­mod­i­ty trans­ac­tions, that enti­ty must be reg­is­tered as a futures com­mis­sion mer­chant (“FCM”).
• None of the plat­forms had appro­pri­ate anti-mon­ey laun­der­ing con­trols in place, as required by the Bank Secre­cy Act, and in the alter­na­tive, nor did the plat­forms have effec­tive sys­tems to pre­vent U.S. per­sons from trad­ing on the platforms.

Direc­tor of Enforce­ment McGin­ley lat­er pro­vid­ed com­ments at the Prac­tic­ing Law Institute’s White Col­lar Crime con­fer­ence on (Sep­tem­ber 11, 2023) sum­ma­riz­ing the enforce­ment actions and explain­ing that “[e]ach of these three plat­forms was offer­ing and con­firm­ing off-exchange lever­aged or mar­gin­ed retail com­mod­i­ty trans­ac­tions … [and] we will do every­thing in our pow­er to ensure that dig­i­tal asset com­mod­i­ty trans­ac­tions that should be con­duct­ed on reg­u­lat­ed deriv­a­tives exchanges are in fact con­duct­ed on those exchanges.