CFTC Cracks Down On DeFi: ‘Illegal Derivatives Trading’ Lands 3 Protocols In Hot Water

Mila September 8, 2023

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The Commodity Futures Trading Commission (CFTC) intensified its focus on the digital asset decentralized finance (DeFi) space, issuing simultaneous orders against Opyn, ZeroEx, and Deridex, Inc.

The charges stem from allegations of offering illegal digital asset derivatives trading and failure to comply with regulatory requirements.

CFTC Targets DeFi Operators

Opyn, a Delaware-registered company based in California, is accused of failing to register as a swap execution facility (SEF) or designated contract market (DCM), failing to register as a futures commission merchant (FCM), and neglecting to adopt a customer identification program as part of a Bank Secrecy Act compliance program.

ZeroEx, also based in California, and Deridex, Inc., a Delaware company based in North Carolina, are also charged with illegally offering leveraged and margined retail commodity transactions in digital assets.

These charges revolve around the activities of the companies within the DeFi ecosystem, specifically their blockchain-based software protocols and smart contracts.

These protocols, which function similarly to trading platforms, offered users the ability to engage in transactions within a decentralized environment.

The CFTC’s orders require Opyn, ZeroEx, and Deridex to pay civil monetary penalties of $250,000, $200,000, and $100,000, respectively. Additionally, as charged, they must cease and desist from violating the Commodity Exchange Act (CEA) and CFTC regulations.

Director of Enforcement Ian McGinley emphasized the CFTC’s commitment to pursuing “unregistered platforms” facilitating the trading of digital asset derivatives. McGinley stated:

Somewhere along the way, DeFi operators got the idea that unlawful transactions become lawful when facilitated by smart contracts. They do not.

Opyn, specifically developed and deployed the Opyn Protocol, offering trading of a digital asset derivative token called oSQTH.

ZeroEx, developed the 0x Protocol and front-end application called Matcha, enabling users to trade digital assets with leverage.

Deridex, developed the Deridex Protocol, facilitating trading of “perpetual contracts” as leveraged derivative positions.

The CFTC found that these activities constituted swaps and leveraged or margined retail commodity transactions, which require registration and compliance with CFTC regulations.

The respondents allegedly operated without proper registration as SEFs or FCMs and failed to implement necessary compliance programs.

While DeFi presents unique challenges due to its novelty, complexity, and continuous evolution, the CFTC’s Division of Enforcement remains committed to keeping its ongoing crackdown against the nascent industry, aggressively pursuing those operating alleged unregistered platforms that allow US persons to trade digital asset derivatives.

This latest enforcement action highlights the increasing scrutiny of DeFi operators and the growing need for regulatory clarity in the rapidly evolving digital asset landscape.

As the CFTC continues to navigate this emerging sector, market participants must ensure compliance with existing regulations to avoid potential legal consequences.