Crypto: The CFTC report on regulatory concerns regarding DeFi

The CFTC has just published a detailed report titled “Decentralized Finance” (DeFi). This was done through its subcommittee specialized in crypto and blockchain technology. Let’s take a closer look at the main concerns raised and recommendations made.

A Lack of Accountability and Compliance 

One of the central concerns raised in the report is the frequent absence of clear lines of accountability and compliance obligations within DeFi systems. 

This intrinsic ambiguity in the decentralized operation of DeFi poses major risks to consumers and crypto investors. But also to financial stability in general, market integrity, as well as combating money laundering and the funding of illegal or condemnable activities.

In light of this, the report calls for rapid and close collaboration between governmental authorities, with the support of financial regulators and DeFi industry players. The goal being to improve a common understanding of the issues and to define appropriate responses to address these worrisome gaps.

The Urgency to Introduce AML/CFT Protections

The CFTC recommends actions for several vulnerabilities, including: 

• Repeated hackings targeting DeFi protocols since their emergence
• The proven vulnerability of the crypto ecosystem to money laundering
• Funding of illicit activities due to the absence of solid anti-money laundering (AML) mechanisms
• The lack of mechanisms against terrorist financing (CFT)

The objective is to detect current gaps in regulatory compliance in terms of identifying participants and financial flows, and to remedy them.

Towards a Dialogue Between Regulators and DeFi Actors 

In general, the CFTC report highlights the urgency for financial regulators to engage in an open and constructive dialogue with developers, crypto investors, and users in the decentralized finance sector.

The aim must be to jointly better understand the intrinsic functioning of DeFi, its use cases, and its weaknesses. But also to discuss possible solutions to meet the growing challenges in terms of cybersecurity and fraud. Not to mention consumer protection and the integrity of crypto transactions.

This highly anticipated report from the CFTC marks a significant step toward a deep understanding of the specific challenges posed by the emergence of decentralized finance. It paves the way for constructive regulatory dialogue with the crypto sector. Despite the rapid growth of DeFi, Ethereum still largely dominates this ecosystem by capturing more than 50% of the total value locked.