CFTC Commissioner Thinks “DeFi Derivatives Are Bad Idea”

Crypto Derivatives Are Thriving, and There's Still More Room For Growth
  • Unlicensed DeFi is not only a bad idea but illegal too, says Berkovitz.
  • Any platform that trades or processes swaps be registered as DCM or SEF.
  • Allowing unregulated derivatives will compete with fully regulated entities.

Dan M. Berkovitz, Commissioner of the Commodity Futures Trading Commission (CFTC), thinks that DeFi derivatives are not only a bad idea but illegal too. These platforms violate the Commodity Exchange Act (CEA).

Keynote Address of Commissioner Dan M. Berkovitz Before FIA and SIFMA-AMG, Asset management derivatives forum 2021 on June 8 titled “Climate Change and Decentralized Finance: New Challenges of CFTC” shared his views on unlicensed entities.

Berkovitz notes that DeFi is rapidly expanding technology relative to blockchain and cryptocurrencies. Besides, since January 2021, investors have invested in DeFi for about $20.5 billion in cryptocurrency.

Moreover, DeFi had massive growth over a year and gained many investors. As a result, federal regulators should become aware of this new technology and its potential applications, as well as be ready to protect the public from mishandling.

The CEA requires futures contracts to swap on a CFTC-licensed and regulated designated contract market (DCM). The CEA also makes it illegal for anyone other than an eligible contract participant to enter into a swap only if it is entered into on or subject to the rules of a DCM or SEF.

Additionally, the commissioner shared his analysis on DeFi based on a Google search. “If you type “DeFi” into Google, the first link is to a CoinDesk article titled ‘What is DeFi?’. It shows, [It’s] an umbrella term for a wide range of financial applications based on cryptocurrency or blockchain that aims at disrupting financial intermediaries.”

Responding to this Jacob Franek, the co-founder of Coin Metrics, was quick to criticize the commissioner’s research. He states that the “commissioner needs to do more than read a CoinDesk article.”

Berkovitz warns that allowing unregulated DeFi derivatives may end up competing with the fully regulated and licensed derivatives market.

In addition, he requests the CFTC as well as other regulators to closely watch this growing area of concern. And wants to tackle regulatory violations properly.

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