CFTC issues guidance to address DeFi's risks to financial stability

What’s new? The US Commodity Futures Trading Commission (CFTC) has published a report on the results of a study of the decentralized finance (DeFi) sector. Officials cited a lack or complete absence of responsibility and accountability of DeFi protocols as the main problem, which threatens consumers and investors, as well as the financial stability and integrity of the market.

The CFTC’s report

What else is known? The report was formed by the CFTC’s Digital Assets and Blockchain Technology Subcommittee of the Technology Advisory Committee, led by Commissioner Christy Goldsmith Romero. She expressed hope that the report could serve as a first step toward creating a dialog between policymakers and the crypto industry, given that DeFi remains at the center of the risks of illicit financing, cyberattacks, and theft.

Thus, last April, the Treasury Department reported on illicit financing risks in DeFi and recommended that regulators continue to engage with the industry to clarify how relevant laws and regulations apply to DeFi services and to develop additional risk controls.

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In a new report, CFTC officials write that the lack of accountability does not imply a clear path to ensure users are protected from illegal use of the protocols, including exploits, money laundering, and terrorist financing.

To combat these risks, the CFTC recommended that authorities begin continuous monitoring of the sector and share information.

According to officials, assessing the technical potential of DeFi protocols and mapping existing projects will identify interconnections and possible threat vectors, including technical vulnerabilities, conflicts of interest, market manipulation, and risks associated with leverage and lack of liquidity.

These actions will also determine whether DeFi products and services fall under existing US financial laws and regulations and, if necessary, address regulatory gaps, the commission writes. Such actions could include report filing and independent audit requirements, as well as a restriction or prohibition on doing business in the United States.

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At the same time, the commission called for active cooperation with national and international regulators and DeFi protocol developers themselves.

In August, the US court dismissed a lawsuit against DeFi protocol Uniswap for scam tokens launched on its platform. The judge ruled that the smart contracts of the exchange’s core functions should be considered separately from the code underlying the liquidity pools developed by issuers that allow newly created tokens to be traded.

In September, the US Securities and Exchange Commission (SEC) said it would continue to investigate crypto exchanges and the DeFi industry. Earlier, the regulator sued the centralized platforms Coinbase and Binance.