New US Market Structure Law Coming Down the Road — Implications for DeFi
By Akiva Miller, Owner & Principal.
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 “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 definition of a “Decentralized Finance Trading Protocol” and (b) it is governed by a “Decentralized Governance System.”
2. Most offshore memberless foundations probably don’t qualify as a Decentralized Governance System. It is doubtful whether the typical thin-foundation structure meets the Act’s definition.
3. DeFi lending is not covered by the Act. DeFi lending is generally subject to state lending laws. 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 will only apply if they adhere to those roles and do not exercise “control” over their protocol, including by participating in a governance system that fails to be “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.