Decentralized finance to be examined at inaugural CFTC tech advisory meeting

CFTC

A panel at an upcoming advisory meeting for the financial regulator will “explore issues in decentralized finance.”

The United States commodities regulator is set to take a close look at the decentralized finance space at an upcoming meeting of its tech committee, where it has also invited crypto industry executives to present.

The Commodities Futures Trading Commission (CFTC) announced on March 1 that the agenda for the March 22 meeting of its Technology Advisory Committee will include a panel on “exploring issues in decentralized finance.”

Other panels will explore responsible Artificial Intelligence (AI) development and possible threats arising from AI along with cybersecurity threats to financial markets.

CFTC commissioner Christy Goldsmith Romero said in a statement the panel has an opportunity “to look past labels and examine the issues presented by DeFi thoughtfully and holistically,” adding:

“A discussion about DeFi, including cyber vulnerabilities, indicators of ‘decentralization,’ digital identity and unhosted wallets, will contribute to ongoing policy discussions in Washington, D.C. and beyond the beltway.”

The panel will include presentations that provide an overview of the DeFi ecosystem and will discuss decentralization issues, digital identity, noncustodial crypto wallets and exploits.

Join us 3/22 (webcast) to hear presentations from experts on Cybersecurity: The ION Markets Attack and Beyond, Exploring Decentralized Finance, and Responsible Artificial Intelligence https://t.co/iwQvR6fSv2
— Commissioner Christy Goldsmith Romero (@CFTCcgr) March 1, 2023

Executives from crypto companies including crypto custody platform Fireblocks, security company Trail Of Bits, venture capital firm Terranet Ventures and blockchain intelligence firms TRM Labs and Metrika are slated to present during the meeting.

The meeting agenda will also include a session that considers a subcommittee on crypto and blockchain technology in another move to help cement its bid to win regulatory jurisdiction over crypto.

*The CFTC's DeFi-related panels agenda for the meeting. Source: CFTC*

Last month, the CFTC’s Global Markets Advisory Committee discussed digital asset markets at its inaugural meeting.

Commissioner Caroline Pham, who oversaw the Feb. 13 meeting, said that crypto markets are “truly borderless” and urged policymakers to “understand what is happening” so the policy approach by the U.S. “does not leave Americans behind and playing catch-up.”

The CFTC has been edging for regulatory control of the burgeoning crypto sector from the Securities and Exchange Commission, with CFTC commissioners urging Congress to give the regulator oversight overcrypto.

CFTC chairman Rostin Behnam has similarly attempted to justify why the regulator should have authority over the space, saying the commission was “well positioned” to address regulatory shortfalls.

BaFin

Highlighting Germany’s crypto license as an example of attractive regulation, Birgit Rodolphe writes that similar frameworks should be the same throughout the EU to “prevent a fragmented market.”

Birgit Rodolphe, an executive director at Germany's Federal Financial Supervisory Authority (BaFin) has called for innovative and uniform regulation of the decentralized finance (DeFi) space throughout the European Union (EU).

BaFin is Germany’s financial regulatory body responsible for regulating banks, insurance firms, and financial institutions including cryptocurrency companies. BaFin is the issuer of “crypto custody licenses,” a permit required for firms wanting to offer cryptocurrency services within Germany.

In an article on BaFin’s website Rodolphe warned of the risks to consumers of the unregulated DeFi space and called for standardized regulatory considerations across EU member countries.

*Birgit Rodolphe, Executive Director Processing and Prevention of Money Laundering at BaFin.*

“One thing is clear: the clock is ticking. The longer the DeFi market goes unregulated, the greater the risk for consumers, and all the greater is the danger that critical offers that have systemic relevance will establish themselves.”

She cited risks to consumers of “technical issues, hacks, and fraudulent activity” that have seen millions lost and claimed that DeFi isn’t as “democratic and altruistic” as its fans say, and that DeFi products are “difficult for many to grasp.” She concluded that DeFi protocols aren’t at liberty to operate outside of regulations simply because they use new technologies.

“Utopia? Or rather dystopia? Who do I contact if I want to defer my crypto loan? What happens if my crypto assets suddenly disappear altogether? In any case, there is no deposit protection fund for such cases.”

She added that lending, borrowing, insurance, and other products outside of the traditional financial system are subject to licensing and supervision where they’re offered, and called on regulators to set rules which will give DeFi providers legal clarity.

Rodolphe highlighted BaFin’s “crypto custody business” license introduced in January 2020 as a regulatory regime that is “attractive” to crypto businesses.

The license permits companies to offer crypto services in Germany. Currently only four providers are approved but many financial institutions have submitted an application. Rodolphe wrote regulatory frameworks should be the same in different European countries:

“Ideally, such requirements would of course be uniform throughout the EU in order to prevent a fragmented market and to leverage Europe's entire innovation potential.”

Germany rose to the top spot as the most “crypto-friendly” country in the first quarter of 2022 due in part to its zero-tax policy on long-term crypto capital gains. A March 2022 report found that almost half of Germans are interested in investing in crypto.

Germany also made many moves related to crypto across its government in 2021 with law reforms to embrace blockchain and the tightening of regulations on crypto businesses. The country’s central bank took a leading role in testing a European central bank digital currency.

Rodolphe concluded that new DeFi regulations can’t be weaker than the standards already in place with traditional financial products as it could make DeFi products more attractive for businesses to pursue from a regulatory point of view.

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