US Commodities Regulator Shouldn’t Launch Enforcement Actions Against DeFi Protocols, Says Coinbase CEO

September 15, 2023 The Daily Hodl

Coinbase CEO champions DeFi, calls for court action to set legal precedent

September 14, 2023 Coin Telegraph

CFTC

Coinbase CEO Brian Armstrong cautioned the United States Commodities and Futures Trading Commission (CFTC) to avoid taking enforcement actions against (DeFi) protocols.

Coinbase CEO Brian Armstrong has expressed his endorsement of decentralized finance (DeFi) protocols. In a recent social media post, Armstrong urged the DeFi protocols to consider legal proceedings in court to set a precedent, as the legal system has consistently demonstrated its dedication to upholding the rule of law. The current approach is mainly pushing a crucial industry toward overseas jurisdictions, he said.

According to his post on X (formerly Twitter), the United States Commodities and Futures Trading Commission (CFTC) should avoid taking enforcement actions against (DeFi) protocols, as they do not function as conventional financial service businesses, and it's questionable whether the Commodity Exchange Act is even applicable to them.

The CFTC should not be creating enforcement actions against decentralized (DeFi) protocols. These are not financial service businesses, and it’s highly unlikely the Commodity Exchange Act even applies to them.

My hope is these DeFi protocols take these cases to court to…
— Brian Armstrong ️ (@brian_armstrong) September 13, 2023

In the previous week, the U.S. CFTC took action against three DeFi companies for engaging in alleged unauthorized trading of cryptocurrency derivatives. According to the regulator, these platforms enabled the illicit trading of crypto derivatives without the necessary registration.

In addition to Brian Armstrong, certain legislators have also shown their backing for DeFi protocols. Republican Commissioner Summer Mersinger underscored the importance of the CFTC concentrating on establishing transparent regulations for DeFi, rather than swiftly resorting to enforcement measures. She voiced her apprehension that the commission appears to be leaning towards enforcement actions, whereas she believes that engaging with the public and setting clear guidelines should be the primary focus.

The U.S. CFTC recently achieved a legal triumph in a case against Ooki DAO for operating an illicit trading platform and contravening other regulatory guidelines. In June 2023, a federal judge similarly ruled in favor of the CFTC, resulting in the closure of Ooki DAO and the imposition of a fine exceeding $600,000.

In recent months, cryptocurrency companies have encountered increased scrutiny from U.S. regulatory authorities. Notably, regulatory bodies like the U.S. SEC have initiated investigations into major players such as Coinbase and Binance.

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?

CFTC Commissioner plans to modernize investor protection with technology

September 12, 2023 Coin Telegraph

CFTC

To minimize the damages caused by financial fraud, Romero proposed the formation of the National Financial Fraud Registry — a centralized record of all crimes and fines related to financial fraud.

CFTC Commissioner Christy Goldsmith Romero recommended regulators modernize its protection measures using technological advances as she warned that failure to do so would have a negative impact on American investors.

Romero, speaking at the North American Securities Administrators Association’s annual meeting in San Diego, California, said that the government’s inability to keep pace with technology would affect the most vulnerable investors. She added:

“As regulators are making policy decisions on next-generation technology, it is critical that we have a foundational understanding of the technology, and its implications for finance and law.”

Spearheading this effort to amp up investor protections and guardrails, Romero appointed technology experts in FinTech, responsible artificial intelligence, cryptocurrency, blockchain, and cybersecurity into the CFTC’s Technology Advisory Committee (TAC).

Thank you @NASAA for a warm welcome. Read here to see my re-proposal for a National Financial Fraud Registry. I proposed this in 2019 as @SIGTARP after conducting hundreds of fraud investigations. https://t.co/mjErLobTmY
— Commissioner Christy Goldsmith Romero (@CFTCcgr) September 12, 2023

The CFTC Commissioner revealed that the TAC experts are tasked with identifying ways to instill Know Your Customer (KYC) and Anti-money Laundering (AML) processes into decentralized finance and crypto investment avenues.

The TAC is also tasked with promoting responsible artificial intelligence (AI) development. According to Romero:

“Federal regulators are just getting started when it comes to AI. A good place to start is governance in making important decisions that impact investors and markets.”

Federal crypto investigations have shifted away from primarily backtracking trade activities to monitoring social media platforms such as X (formerly Twitter), Reddit and Facebook. However, Romero recommended the use of tools to aid such investigations:

“Tracing funds, tracing crypto, using the blockchain, using link analysis, using social media, and data analytic tools should all be in a regulators’ tool kit.”

The statements (tweets/posts) one shares on social media platforms “can be strong evidence of intent,” Romero added. The same platforms can be used by regulators to issue warnings about scams and protect investors.

To minimize the damages caused by financial fraud, Romero proposed the formation of the National Financial Fraud Registry — a centralized record of all crimes and fines related to financial fraud. The registry would help investors background check for any ongoing investigations or fines for fraud imposed on the companies. Romero first proposed the creation of this registry in December 2019:

“Once established, each federal agency would register its convictions, sentencings, civil fines and resolved enforcement actions. State and local agencies could join to achieve a true national fraud registry.”

Romero believes that such a one-stop-shop platform could help investors deter financial frauds. On an end note, the CFTC Commissioner stated that together, federal and state officials can improve investors’ safety.

In April, Romero urged crypto companies to verify the digital identity of users, as she believed that reducing anonymity in crypto could ease managing the associated risks. She added:

“It is possible for all crypto companies to distance themselves from mixers and anonymity-enhanced technology, while still appropriately providing financial privacy for customers.”

Romero encouraged the verification of digital identity, urging exchanges as well as decentralized finance (DeFi) platforms to verify the digital identity of users.

Magazine: 6 Questions for Kei Oda: From Goldman Sachs to cryptocurrency

CFTC Commissioner Dissents Against Regulator’s Anti-DeFi Agenda After Trio of Enforcement Actions

September 10, 2023 The Daily Hodl

US Regulator Slaps Trading Firm With $1,700,000,000+ Penalty for Defrauding Thousands of 29,420 Bitcoin

September 9, 2023 The Daily Hodl

BIS thinks DeFi has no use cases, but CZ is bullish: Finance Redefined

September 8, 2023 Coin Telegraph

Binance

Binance CEO Changpeng Zhao says DeFi will outpace CeFi in the next bull run, but the Bank for International Settlements is skeptical.

Welcome to Finance Redefined, your weekly dose of essential decentralized finance (DeFi) insights — a newsletter crafted to bring you the most significant developments from the past week.

The past week in the DeFi ecosystem was filled with ups and downs, from the United States Commodity Futures Trading Commission’s (CFTC) investigation into multiple DeFi protocols to Binance CEO Changpeng “CZ” Zhao’s forecast that DeFi would outgrow centralized finance (CeFi) in the next bull run.

While CZ anticipates a bright future for DeFi, a report from the Bank for International Settlements (BIS) argues that a pure form of DeFi cannot survive independently and has little use case in the real world.

The Shiba Inu ecosystem’s layer-2 network, Shibarium, has continued its rapid growth post-relaunch, with over one million wallets created; however, its progress has yet to impact the price of the Shiba Inu (SHIB) token.

The top 100 DeFi tokens had a late Friday surge, with most of the tokens posting positive weekly gains.

Binance CEO CZ forecasts DeFi outgrowing CeFi in the next bull run

Binance CEO Changpeng Zhao predicts that DeFi has the potential to surpass centralized CeFi in the next bull run.

During a Sept. 1 live X (formerly Twitter) Spaces, titled CZ AMA, Zhao shared his thoughts on the future of DeFi. “I think the more decentralized the industry becomes, the better,” he declared, adding that it may not be long before it takes over CeFi trading volumes.

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CFTC cracks down on DeFi protocols Opyn, ZeroEx and Deridex

The U.S. CFTC is taking regulatory action against three DeFi protocols for allegedly failing to register various derivatives trading offerings. The U.S. commodities regulator announced it had issued orders against protocols Opyn, ZeroEx and Deridex in a Sept. 8 statement.

Deridex and Opyn were charged for failing to register as a swap execution facility or designated contract market and failing to register as a futures commission merchant. The two protocols also failed to comply with customer provisions set out in the Bank Secrecy Act, the CFTC said.

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“Pure” DeFi has little chance for real-world use because of need for oracles: BIS

The need for an oracle in DeFi is a major impediment to adoption in the real world, according to the authors of a Bank for International Settlements bulletin. The problems with oracles are both practical and principled, and the study’s authors saw no way around them.

An oracle is a third party that provides real-world data flowing to or from a DeFi protocol. An oracle is centralized by nature, and its presence means a protocol is not fully decentralized — if that is tolerated, then trustlessness is lost, the authors said. That is likely to be a fatal flaw for use with real-world assets, the authors wrote.

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Binance to reimburse users $1 million for Cyber Earn incident

Crypto exchange Binance is refunding users $1 million of Tether (USDT) over its handling of the CyberConnect (CYBER) token incident.

As described by the exchange on Sept. 7, a price discrepancy on listed CYBER tokens occurred the week prior due to a liquidity crunch constricting CYBER cross-chain bridges on the Korean cryptocurrency exchange Upbit. This led to arbitrageurs borrowing CYBER from Binance to profit from the difference. In turn, Binance users who staked CYBER in its Flexible Earn Program were barred from redemptions, as the staked assets had been borrowed, reaching the loan limit.

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Shibarium hits one million wallets amid meteoric growth, SHIB yet to catch up

The total number of wallets on Shiba Inu’s newly launched layer-2 network, Shibarium, has surpassed the one million mark in a meteoric rise since its relaunch.

The milestone — announced in a Sept. 3 blog post by the official Shibarium team — means there were at least 900,000 wallets created since Shibarium’s relaunch on Aug. 28, and only two weeks after the Shibarium network first went live — albeit with some technical hiccups.

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DeFi market overview

Data from Cointelegraph Markets Pro and TradingView shows that DeFi’s top 100 tokens by market capitalization had a late bullish surge, with most tokens trading in the green on the weekly charts. The total value locked into DeFi protocols touched $49.73 billion.

Thanks for reading our summary of this week’s most impactful DeFi developments. Join us next Friday for more stories, insights and education regarding this dynamically advancing space.

Collect this article as an NFT to preserve this moment in history and show your support for independent journalism in the crypto space.

CFTC fines Mirror Trading $1.7B for Bitcoin-related forex fraud

September 8, 2023 Coin Telegraph

CFTC

The CFTC has brought or resolved ten fraud cases involving digital assets or forex since June 2023, Commissioner Kristin Johnson said.

The United States regulators have finally taken steps to resolve an enforcement case against the collapsed Mirror Trading International (MTI).

The United States District Court for the Western District of Texas has ordered MTI to pay $1.7 billion in restitution to victims for operating a fraudulent scheme involving digital assets and forex, the Commodity Futures Trading Commission (CFTC) announced on Sept. 7.

The CFTC noted that MTI and its CEO, Cornelius Steynberg, were engaged in an “international multi-level marketing scheme” which accepted nearly 30,000 Bitcoin (BTC) from at least 23,000 people in the United States. According to the announcement, MTI and Steynberg promised to provide access to an unregistered commodity pool in exchange for BTC contributions, which had never taken place.

“MTI misappropriated virtually all of the money instead,” the CFTC wrote, adding that the latest court order and restitution effectively conclude a case that the authority filed in June 2022.

As previously reported by Cointelegraph, MTI went into provisional liquidation in late 2020 after one of its directors allegedly escaped the country, grabbing all Bitcoin that investors had entrusted to MTI.

In January 2021, MTI claimed to have over 260,000 members in 170 countries, with investors losing roughly $1 billion at the time of the liquidation. The MIT fraud is believed to be one of the biggest Ponzi schemes involving digital assets in history.

“I strongly encourage all members of the public to stay informed about the potential scams and abuses in digital assets markets by visiting our investor advisory page,” CFTC Commissioner Kristin Johnson wrote in the announcement. She added that the CFTC has brought or resolved ten fraud cases involving digital assets or forex since June 2023, adding:

“I commend the Division of Enforcement for continuing to stay vigilant, and sending a strong message to the market that the Commission will do what is necessary to protect its markets from fraud.”

The news comes as CFTC Commissioner Caroline Pham is advocating for a limited pilot program to address cryptocurrency regulation in the United States. The commissioner on Sept. 7 said that she planned to propose a pilot program for digital asset markets, claiming the U.S. may soon need to “play catch-up” to crypto-friendly jurisdictions.

On the same day, another CFTC Commissioner, Summer Mersinger, also voiced concerns over enforcement actions related to decentralized finance protocols. The commissioner argued that the CFTC should engage with the public and stakeholders instead of relying primarily on enforcement actions.

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DeFi enforcement sparks dissenting opinion from CFTC commissioner

September 8, 2023 Coin Telegraph

CFTC

The commissioner advocates public and stakeholder engagement through rulemaking, not just enforcement.

Commodity Futures Trading Commission (CFTC) Commissioner, Commissioner Summer K. Mersinger, has said that he is concerned that the United States CFTC is considering enforcement actions related to decentralized finance (DeFi) protocols rather than engaging with the public.

In a public statement issued on Sept. 7, the dissenting commissioner expressed his misgivings about the approach taken by the CFTC in these cases, arguing that enforcement actions are not the most suitable means of addressing novel DeFi technology. The commissioner believes that the CFTC should engage with the public and stakeholders through rulemaking and other regulatory tools instead of relying primarily on enforcement actions.

Mersinger said,

“I am concerned that the Commission in these cases is taking another step down the path of bringing enforcement actions when we should be engaging with the public.”

Mersinger expressed openness to applying CEA and CFTC rules to innovative situations, especially when necessary to protect market participants from fraud and abuse, in line with the congressional mandate. However, he noted that the Commission's orders in these cases didn't indicate any misappropriation of customer funds or victimization of market participants by the DeFi protocols subject to enforcement actions.

The commissioner raised questions about the regulatory jurisdiction over DeFi protocols, the need for clear rules and the potential consequences of enforcement in the absence of transparent rulemaking. Despite the challenges, the CFTC's Spring 2023 regulatory agenda does not include any rulemaking activities related to DeFi, leaving these issues largely unaddressed.

The United States Commodity Futures Trading Commission announced that it is taking regulatory action against three decentralized finance protocols for allegedly failing to register various derivatives trading offerings. The exchanges are namely, Opyn Inc., ZeroEx Inc., and Deridex Inc.

Deridex and Opyn faced charges for not registering as a swap execution facility or designated contract market, as well as failing to register as a futures commission merchant. Additionally, the CFTC accused the two protocols of non-compliance with customer provisions outlined in the Bank Secrecy Act.

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?

CFTC commissioner calls for crypto regulatory pilot program

September 7, 2023 Coin Telegraph

CFTC

Commissioner Caroline Pham called for the pilot program to kick off with a stakeholder roundtable and for the CFTC to propose and adopt rules on the risks retail investors face.

Caroline Pham, a commissioner with the United States Commodity Futures Trading Commission (CFTC), has suggested a limited pilot program in an effort to address crypto regulation.

In a pre-recorded message for a Cato Institute event on Sept. 7, Pham said that following public roundtable discussions she planned to propose a pilot program for digital asset markets, claiming the U.S. may soon need to “play catch-up” to crypto-friendly jurisdictions. She suggested that the program would be similar to regulatory sandboxes previously introduced at the state level.

“A pilot program can create a framework for emerging technologies and market structures under our existing laws and regulations,” said Pham. “It is my hope that a pilot to test, gather data, and develop a pragmatic approach to tokenization can ensure we continue to uphold our mandate to fostering open, transparent, competitive and financially sound markets.”

.@CarolineDPham calls on @CFTC to launch a pilot program for digital asset markets.

Watch: https://t.co/lEAPm9CQLS #CatoEcon pic.twitter.com/ohpeAmcas2
— Cato CMFA (@CatoCMFA) September 7, 2023

Pham called for a stakeholder roundtable and for the CFTC to propose and adopt rules on the risks of crypto based on previous pilot programs. At the conclusion of the program, the commission would determine whether to implement the changes permanently.

Serving at the CFTC since April 2022, Pham is one of five commissioners who has called for greater clarity on crypto regulation. In addition to sponsoring the commission’s Global Markets Advisory Committee, she has suggested initiatives aimed at protecting crypto retail investors.

The proposed pilot program came following U.S. lawmakers’ attempts to clarify the roles of the CFTC and Securities and Exchange Commission on crypto regulation. In July, the House Financial Services Committee approved the Financial Innovation and Technology for the 21st Century Act, setting the bill up for a full House vote possibly before 2024.

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?

Crypto may see second wind in the US as courts ‘rein in the SEC’ — Lawyer

August 31, 2023 Coin Telegraph

America

Crypto-focused lawyer Jeremy McLaughlin said the U.S. digital asset industry may re-ignite as the country's securities regulator racks up court losses.

There are hopes that the United States could see a new crypto resurgence after several rulings this year have seen court judges “rein in the SEC,” according to a digital asset lawyer from K&L Gates.

On Aug. 31, Jeremy McLaughlin, a partner at the global law firm, noted that multiple U.S. court cases have stomped on arguments from Securities and Exchange Commission chair Gary Gensler — who has said that almost all digital assets are securities.

McLaughlin was speaking on a panel at Intersekt23 in Melbourne alongside payment services firm Novatti chief Effie Dimitropoulos and Invest Hong Kong fintech head King Leung.

He said early crypto regulation happened at the state level and was “pretty clear what you needed to do” but after the SEC and the Commodity Futures Trading Commission got involved “a lot of the market started to close up.”

“People delisted tokens, some companies pulled out of the U.S. because they saw how aggressive the SEC was being, and continues to be,” McLaughlin said.

“Now that the courts are starting to rein in the SEC a bit, I think there's some hope that the industry is kind of igniting again in the U.S.”

In recent months the SEC has been handed a loss in a suit it brought against a crypto firm and also lost a suit a crypto firm brought against it.

On Aug. 29 a U.S. District Court judge ruled against the SEC over Grayscale Investments being denied its application to convert its flagship Bitcoin (BTC) fund into an exchange-traded fund.

*Dimitropoulos (center-left), McLaughlin (center-right) and Leung (right) speaking on a panel regarding crypto regulation. Source: Tom Mitchelhill/Cointelegraph*

In July, the SEC also took a partial loss in its case against Ripple Labs over XRP (XRP) sales when a judge ruled it wasn’t a security when sold to retail traders.

“To be a lawyer in the space, it’s quite difficult to advise clients,” McLaughlin remarked. He added he it was also frustrating that he couldn’t give clients clear answers.

He does see hope, however, that crypto regulations are emerging from the “pit of chaos.”

“Finally, there are cases that are being filed and the decisions have been going strongly in the favor of the digital asset industry,” McLaughlin added.

Aussies ‘lagging’ while others gain

In another part of the discussion, the panelists were asked about their thoughts on the state of Australia’s crypto legislation, compared to others. Novatti’s Dimitropoulos had one word: “Lagging.”

Dimitropoulos pointed to new regulatory frameworks in Hong Kong and the European Union as proof Australia’s crypto regulations were falling behind.

“It's very clear to say that Australia is lagging. What that means [...] Is how that affects on-the-ground businesses that are operating with digital assets.”

She highlighted the overhead needed for local crypto firms to get legal advice “that could be defunct in three minutes' time.”

“We hear the Treasurer is going to come out with regulation, [the Australian Securities and Investments Commisson] is going to do something, Senator Bragg's bill in play,” she said.

“There are so many pieces that are still in play with no clear resolution as to when it's going to happen. So that supports my word: ‘Lagging.’”

Magazine: Crypto regulation — Does SEC Chair Gary Gensler have the final say?

CFTC

Binance CEO CZ forecasts DeFi outgrowing CeFi in the next bull run

CFTC cracks down on DeFi protocols Opyn, ZeroEx and Deridex

“Pure” DeFi has little chance for real-world use because of need for oracles: BIS

Binance to reimburse users $1 million for Cyber Earn incident

Shibarium hits one million wallets amid meteoric growth, SHIB yet to catch up

DeFi market overview

Aussies ‘lagging’ while others gain

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