CFTC Commissioner Speaks Out for Uniswap, Questions ‘Enforcement-Like Regulation’

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Today, the Commodity Futures Trading Commission (“CFTC” or “the Commission”) once again took its symbolic enforcement “gavel” to another decentralized finance protocol. Given that the Commodity Exchange Act (“CEA”) and CFTC rules were written for traditional centralized market infrastructure providers and intermediaries, I had hoped that the Commission would at some point consider regulation, or at least provide guidance, clarifying how DeFi protocols can comply with those regulations. Unfortunately, today is not that day.

This case displays all the hallmarks of enforcement regulation that we are familiar with: a paltry fine settlement that bears little relation to the alleged conduct, general statements about the sector as a whole that are not substantively relevant to the case, and legal theories that have not been tested by the court.

If we use enforcement powers for DeFi protocols instead of setting clear rules through notices and requests for comment, we risk driving responsible DeFi developers abroad to start businesses, create jobs, and expand economic activity, while the United States is left alone with bad actors and criminals who only want to exploit American citizens.

Furthermore, if we continue with an enforcement-first approach, one or more of the DeFi protocols we target may choose to litigate rather than settle out of court. Litigating these cases would not only consume significant government (and private sector) resources, but could also result in a litany of lawsuits with mixed results and conflicting conclusions.

The CFTC isn’t the only agency struggling with stricter enforcement, but I hope we can stop this often short-sighted strategy. Wielding the enforcement hammer against these DeFi protocols may lead to some short-term “wins,” but in the long run, without better solutions, it will only create more problems.

Moreover, I am concerned that this arrangement sets a distorted precedent for future Commission actions, one that punishes attempts to comply with the law.

The allegations in the settlement are supported by the fact that Uniswap created, provided, and maintained a protocol that allowed third parties to trade leveraged tokens. However, Uniswap also took proactive steps to prevent trading in leveraged tokens. After the Commission settled its previous “DeFi Cleanup Action,” Uniswap blocked trading in the specific tokens involved in the settlement.

Rather than commending Uniswap for paying attention to our enforcement actions and taking steps to respond to our regulatory approach in the DeFi space, we filed charges against Uniswap for the period before the platform blocked these specific tokens. For those in the DeFi community working to comply with CEA and CFTC regulations, the only message this settlement sends is the Commission’s assessment of the cost of DeFi’s efforts to do right.

The decision to devote resources to this case also raises concerns about the Commission’s enforcement priorities. Uniswap did not act as a liquidity provider, did not extend credit, did not actively trade leveraged tokens, and did not collect transaction fees from related transactions. Furthermore, there is no market or customer harm in this case. For every case we bring against a DeFi protocol where there are no allegations of fraud or complaints of customer losses, we risk diverting resources from cases where there are innocent victims who suffered financial loss due to genuine fraud.

In recent testimony before Congress on the CFTC budget, Chairman Benham discussed the need to prioritize the agency’s resources due to the increasing amount of fraud targeting the digital asset markets:

“The digital asset space is where we have seen the most activity… With many institutional resources not accounted for in our budgetary allocations and being allocated to an unregulated market, I am concerned that current trends are unsustainable. That is, we will continue to see widespread fraud and manipulation in digital asset markets, which will be detrimental to U.S. customers and could even impact traditional financial markets.”

I share the Chairman’s concern that current trends are unsustainable. This concern is exacerbated when we deploy enforcement resources to investigate DeFi activity where there is no clear harm or benefit, especially as we see the protocol proactively taking compliance measures.

We are in the midst of an epidemic of financial fraud. So-called scams alone can cost victims up to $75 billion and are a major source of funding for transnational criminal organizations. I commend the Commission for warning clients about scams and other online fraud, for bringing its first scam case in December 2023, and especially for recently hosting the first interagency conference to combat scams. But we must do more to combat this fraud and, crucially, we must use our limited resources wisely.

The concept of platform liability is complex. While platforms can in some cases be held liable for conduct that occurs through their protocols, the extension of such liability in the absence of aggravating facts is concerning.

With this settlement, the Commission appears to be taking the position that any DeFi platform can be held liable for any conduct that occurs on its protocol. The practical effect of this approach would seriously discourage the launch of a DeFi protocol in the United States and significantly increase the likelihood that all DeFi innovation and economic activity will move elsewhere. This theory of liability also raises a broader question: is the Commission fulfilling its duty under the Commodity Exchange Act to promote (rather than impede) “responsible innovation,” a duty that Congress considers to be a core tenet of the CFTC’s mission?

Congress intentionally placed the word “responsible” before “innovative” in the CFTC’s mission statement because, as we all know, innovation can be exploited by criminals. In the 1930s, for example, newer, faster cars allowed criminals to flee crime scenes and go on multi-state crime sprees. To curb the rise in crime during the so-called “public enemy era,” Congress, the Justice Department, and the FBI chose to pass new laws, create regulations, and strengthen law enforcement capabilities to target criminals, not the inventions they used to commit crimes.

But imagine if J. Edgar Hoover had held Henry Ford responsible for the crimes of John Dillinger and Bonnie and Clyde because the Ford V8 was the primary instrument that enabled them to commit their crimes. This outcome is the natural end point of the logic the Commission has adopted in this settlement.

Pursuing and resolving these cases against DeFi platforms is inconsistent with the CFTC’s goals and vision. This settlement and the Commission’s previous “DeFi Cleanup” settlements raise questions of transparency and concerns about the CFTC’s commitment to its stated goals. Our 2022-2026 Strategic Plan recognizes that “innovations like DeFi require broad stakeholder engagement” and specifically points to DeFi as an area that must “increase stakeholder engagement and leverage principles-based regulation.”

I quote again from Chairman Benham’s final testimony:

“Today, technology is transforming financial markets, and the CFTC must keep pace to fulfill its mission and congressional mandate. Our work focuses on customer protection and market resilience, while supporting continued growth and innovation to ensure the agency’s continued success for the next 50 years.”

Enforcement actions like these undermine the credibility of our strategic plan and are at odds with our statutory mission to promote responsible innovation and our publicly stated core value of being transparent to market participants about our rules and processes.

In contrast to the broad regulatory uncertainty in the crypto market, the CFTC has exclusive regulatory jurisdiction over DeFi protocols with respect to derivatives transactions. This allows the Commission to promulgate rules that promote responsible innovation by finding the right path for protocols that seek to comply with and operate in a regulated environment, while achieving other legal and regulatory goals.

Rulemaking through notice and comment provides an opportunity for the DeFi community, consumer organizations, industry representatives, and the U.S. public to engage with the Commission and use their expertise and experience to provide advice on how to properly regulate DeFi while meeting Commodity Exchange Act obligations.

Regulation through enforcement is, at best, a stopgap measure. At some point, the Commission must initiate a regulatory process around DeFi and consider our role in promoting responsible innovation in the future of U.S. derivatives markets.

For these reasons I object.

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