CFTC Chair Rostin Behnam has asserted that decentralized finance (DeFi) crypto exchanges can be regulated under U.S. law, even if they operate autonomously, according to the latest report.
In a conversation for Bloomberg’s Odd Lots podcast, Behnam clarified that regulations from either the Commodity Futures Trading Commission (CFTC) or the Securities and Exchange Commission (SEC) would apply to DeFi exchanges, despite their reliance on “self-effectuating” protocols driven by code.
Behnam emphasized that the key factor in determining regulation is the offering and exposure of products to U.S. customers, as well as the individuals or groups responsible for establishing and operating the platforms. He stated that the belief in the immunity of decentralized platforms to regulation is misguided.
Limited CFTC Regulation In Cash Crypto Markets
The CFTC Chair also highlighted an area of limited regulation for the CFTC: markets where tokens function solely as cash substitutes. As the CFTC does not regulate cash markets, Behnam explained that their authority is confined to investigating fraud or manipulation within these markets.
Behnam referenced the CFTC’s recent lawsuit against Binance, a centralized exchange, for allegedly conducting business in the U.S. without proper registration as a commodities exchange.
He mentioned the surprising content of internal messages cited in the CFTC’s complaint, in which Binance executives seemingly acknowledge their involvement in wrongdoing.
Regarding the legal analysis of digital assets, Behnam stressed the importance of precedent, specifically referring to the Howey Test, which determines whether a contract involves a security.
He acknowledged the unique characteristics of crypto assets and the need for distinct policy ideas to regulate them effectively.
One area of uncertainty Behnam identified pertains to tokens initially launched as securities but later traded on decentralized exchanges purely as cash substitutes.
The transition from security to commodity due to decentralization poses an open question that demands further consideration and policy development.
Nevertheless, Behnam’s remarks underscore the CFTC’s commitment to regulate DeFi exchanges and ensure compliance with U.S. law. While acknowledging the distinctive aspects of crypto assets, he emphasized the application of existing legal frameworks and the ongoing need for refined regulations in this rapidly evolving sector.
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