Working in DeFi? You should probably start thinking about the new US market structure law coming down the road.
On January 21, the Senate Agriculture Committee released its latest discussion draft of the takeaways “Digital Commodity Intermediaries Act”. And while this isn’t law yet, here are my main takeaways for DeFi:
1. The path for DeFi to operate outside CFTC regulation is very narrow. DeFi is only exempt under the Act if:
A. The system meets the definitions of a “Decentralized Finance Trading Protocol” and
B. It is governed by a “Decentralized Governance System”.
2. It is highly doubtful whether most offshore memberless foundations meet the definition of a Decentralized Governance System.
3. DeFi lending is not covered by the Act. DeFi is generally subject to state lending laws. That means that a developer of a DeFi lending platform may not be protected under the Act for violating state lending laws.
4. DeFi developers, administrators and maintainers will need careful legal guidance. The exemption for developers, administrators and maintainers of DeFi will only apply if they strictly adhere to those roles and do not exercise “control” over their protocol, including by participating in a governance system that fails to be truly “decentralized”. There is no provision in the Act for the CFTC to issue a formal no-action, or pre-ruling decision on whether a DeFi trading protocol meets those requirements, and no sandbox or minimal threshold under which projects can develop and try to reach decentralization before being regulated (although the CFTC may develop its own process and rules for this). DeFi developers should follow expert legal guidance or face serious risks.
5. The DeFi exemption does not apply to the CFTC’s anti-fraud, anti-manipulation or false reporting authorities. DeFi projects may still face fraud and manipulation CFTC enforcement.
These comments reflect the current draft, which will change before becoming law.
Not legal advice.
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