During the US Commodity Futures Trading Commission (CFTC) virtual meeting today, people gained attentions about DeFi sector in that one participant said to colleagues that the emerging tech is "a game changer."
But it boasts a variety of questions on how to regulate the new financial species. The CFTC Technology Advisory Committee heard a presentation including the ins- and outs- of DeFi today which is the group of applications based on blockchain that offer financial services, covering loans, asset trading and interest on customer deposits. However, different from banks, DeFi protocols utilize smart contracts to perform user orders and cut down overhead costs.
A high-level overview of the current DeFi landscape had been made from the Virtual Currencies Subcommittee, which also implied that CFTC regulators may be seeking the most effective means to apply liability without impeding innovation in the space. However, the meeting disclosed that it is hard to find solutions to stopping the use of DeFi for illicit activities.
To determine the liability is the current biggest challenge. Gary DeWaal - Special Counsel at Katten Muchin Rosenman LLP and a member of the Virtual Currencies Subcommittee pointed out that the potential for direct liability was down to developers of DeFi protocols.
"There are a lot of folks in the blockchain ecosystem who have spent a fair amount of resources trying to get it right from the beginning, making sure proactively they did what they needed to do to comply with applicable rules and law," DeWaal said. "What's challenging here is that it's effectively non-legal entities doing whatever the incorrect activity is, so it will be mostly secondary actors who are potentially liable, which raises an issue of fundamental fairness."
Aaron Wright - a subcommittee member who is a clinical professor of law at Cardozo Law School and co-founder of the OpenLaw digital contract platform - stated that a safe harbor agreement would enable DeFi protocols to abide by relevant US regulations without red taps.
"A safe harbor could potentially create a regulatory incentive to build and support compliance," he said. "It could excuse either direct liability against software developers or other DeFi participants, if the protocol has a lawful purpose and entails no fraud, excluded addresses to encourage compliance, and limits margin trading."
In conclusion, the subcommittee recommended that a wait-and-see approach should be adopted to better know where risk of illicit activity would show in the broader DeFi ecosystem.