CFTC believes that DeFi Identity should be prioritised by policymakers

The Commodity Futures Trading Commission (CFTC) has urged policymakers to prioritise the identification of individuals involved in DeFi.

Coindesk attributed the information to a report released on 8 January 2024, which emphasised the importance of policymakers identifying and prioritising projects with the highest concerns. The report underscored the necessity of focusing on digital identity, Know Your Customer (KYC), and Anti-Money Laundering (AML) protocols, along with addressing privacy calibration within the DeFi space. 

As regulators work to alter the perception among participants that DeFi operates outside the scope of regulatory oversight, they are faced with challenges attributed to the prevalent use of pseudonyms to conceal user identities. Moreover, the decentralised structure of the industry makes it challenging to assign responsibility to specific individuals. 

The report highlights the serious concerns policymakers face regarding the pseudonymity and disintermediation in most DeFi systems. These aspects pose challenges to Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regimes, raising questions about their effectiveness and providing adequate protection and recourse for consumers. 

In June 2023, the CFTC, competing with the Securities and Exchange Commission for primary regulatory authority in the crypto industry, won a lawsuit against the decentralised autonomous organization (DAO) Ooki DAO for offering unregistered commodities.  

A CFTC Commissioner cited by Coindesk.com expressed a central concern about the lack of clear lines of responsibility and accountability in DeFi systems. She emphasised the absence of a defined mechanism for victim recourse, defense against illicit exploitation, or the ability to implement necessary changes and controls during periods of crisis and network stress. 

The Financial Crimes Enforcement Network (FinCEN) is also exploring ways to identify individuals active in decentralised finance. Specifically, FinCEN recently introduced a beneficial ownership reporting system, requiring many US-based companies to disclose direct or indirect ownership and control information.

The CFTC filed lawsuits against three DeFi companies

In September 2023, Coindesk reported that the Commodity Futures Trading Commission has taken legal action against three decentralised finance (DeFi) entities, namely Opyn, Inc., ZeroEx (0x), Inc., and Deridex, Inc. At the time, the CFTC alleged that these organisations engaged in illegal derivatives trading, employing blockchain-based protocols and smart contracts as trading platforms. 

According to the CFTC's official statement, Opyn, ZeroEx, and Deridex faced various accusations related to their use of decentralised technologies for trading purposes. In response to the regulatory charges, the CFTC has mandated that the three entities cease these violations and pay penalties. Opyn has agreed to a penalty of USD 250,000, ZeroEx USD 200,000, and Deridex USD 100,000, and the settlement terms have been accepted by the companies.