CFTC Sounds Alarm on DeFi: Lack of Accountability Poses Serious Risks

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  • U.S. CFTC issues a warning on Decentralized Finance (DeFi) for its lack of clear lines of responsibility and accountability.
  • Commissioner Romero calls for regulatory actions on AML and digital identity in DeFi.
  • The report advocates for strengthened cooperation between regulatory bodies and DeFi builders.

The US Commodity Futures Trading Commission (CFTC) has issued a stark warning about Decentralized Finance (DeFi), highlighting the urgent need for clear lines of responsibility and accountability. In a report titled “Decentralized Finance,”  Commissioner Christy Goldsmith Romero emphasized that DeFi remains at the center of illicit finance risks, cyber hacks, and theft.

The report’s central concern lies in the spectrum nature of DeFi. One of the key findings of the report shows that “most DeFi systems are not completely decentralized or centralized, but instead fit on a multi-level spectrum of (de)centralization.”

Unlike traditional financial systems or fully decentralized protocols, most DeFi platforms fall somewhere in between, creating a murky zone of responsibility when things go wrong. This lack of accountability, the CFTC warns, could leave victims with nowhere to turn in the face of illicit activities, cyberattacks, or even system errors.

“From the time that I arrived at the CFTC, I have played a steady drumbeat that we need to study emerging issues related to digital assets,” stated Commissioner Romero. “This report is the result of the hard work… It is intended to help inform ongoing policy debates in the U.S. Congress, state legislatures, and regulators, including the CFTC.”

The report urges policymakers to take specific actions on Anti-Money Laundering (AML) and digital identity risks within the DeFi space. Recommendations include regulating centralized identity information, determining required identity information levels at different layers of the DeFi stack, and evaluating compliance gaps. Crucially, the report advocates for strengthened cooperation between regulatory bodies and DeFi builders.

In October 2023, the European Securities and Markets Authority (ESMA) expressed similar concerns about the risks associated with DeFi. The report highlights issues such as market and liquidity risks, scams, illicit activities, and the lack of regulatory protection.

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