With the exception of BitMEX and Arthur Hayes, the U.S. Commodity Futures Trading Commission doesn’t seem to have any other cryptocurrency exchanges, blockchain company executives or DeFi projects on its enforcement radar — at least not in the immediate future.
Last month, the CFTC charged cryptocurrency exchange BitMEX and several senior company executives — including CEO and co-founder Hayes — with operating an unregistered trading platform and violating the know-your-customer and anti-money laundering (KYC/AML) requirements under the Bank Secrecy Act. Despite the criminal charges, Hayes — a Hong Kong resident — has remained out of reach of U.S. authorities because of a suspended extradition treaty.
CFTC chairman Heath Tarbert said during a recent CoinDesk event that the agency “might” be looking at other noncompliant cryptocurrency exchanges and DeFi projects.
When asked if CFTC is investigating other platforms as well, Tarbert reportedly replied: “I’ll say maybe.”
But in reality, the CFTC doesn’t seem like it is looking into any more cryptocurrency exchanges in an official manner at this time.
Freedom of Information Act requests sent by Forkast.News to the CFTC since April reveal that the agency investigated Arthur Hayes and BitMEX’s parent company HDR Global Trading. But the CFTC would not disclose more details or subpoenas under the enforcement-themed exemption 7a because an active investigation was underway. A second FOIA request made by Forkast.News last month for information on the top cryptocurrency exchanges and a number DeFi projects has come back from the CFTC with a “no documents” response.
“The difference between FOIA exemption 7a [which is used to withhold documents due to law enforcement proceedings] and ‘no responsive documents’ reply is the difference between meat and vegetables,” attorney David Reischer, CEO of LegalAdvice.com, told Forkast.News. “The 7a exemption requires a two-step analysis on whether a law enforcement proceeding is pending or prospective, and the release of information about it could reasonably be expected to cause some actual harm. The ‘no responsive documents’ reply means that the agency searched and found no relevant records.”
Braden Perry, a former CFTC enforcement attorney and now a law partner at Kennyhertz Perry, believes that the commission would go after the low hanging fruit of Bank Secrecy Act violations for not having adequate know-your-customer and anti money laundering provisions, which is what allegedly did Hayes and BitMEX in, but would stop short of broad regulatory action because a “hasty attempt to reign in every potential for wrongdoing would likely fail and cause more damage than good to the DeFi environment.”
“The CFTC’s increasingly expanded view of their jurisdiction will likely be challenged, especially against offshore exchanges and participants that have limited ties to the United States,” Perry told Forkast.News. “This is dangerous territory for the CFTC.”
Perry points to the possibility that a campaign against DeFi platforms would be “regulation by enforcement, as opposed to a defined regulatory framework, transparent and clear to all participants.”
“The last thing any industry wants is what the CFTC appears to be doing: regulation by enforcement, in which agencies decide that some practices should have been illegal, and instead of declaring it illegal from now on through rulemaking, go back and prosecute the people who were doing it before,” Perry added “But that regulatory framework cannot catch innovation and many times frustrate those willing to adopt new technology.”
A DeFi-themed regulatory regime for the CFTC is coming
As Forkast.News has previously reported, there is a regulatory framework for cryptocurrency exchanges and DeFi that is making its way through Congress.
The Digital Commodity Exchange Act (DCEA) would seek to “regulate the trading venues which list emerging digital commodities, such as Bitcoin, Ether, their forks, and other similar digital assets, for trading,” to an official public summary of the bill. The end result of the bill would be the creation of a digital commodity exchange, or DCE, to replace the existing regulatory setup of exchanges being regulated as money service providers. The DCEA also delineates legislative responsibilities for token creation and sales, which would categorize the token itself as a commodity under the purview of the CFTC.
While Perry says the proposed bill is a “start” and hits some existing pain points such as custody of funds and market data, there’s not enough clarity in the bill to bring exchanges and projects to the U.S. from their offshore domiciles.
“If the CFTC really wants to reign in offshore market participants, they need to understand their lack of action is pushing these companies offshore,” Perry said. “Without a transparent structure, the DeFi’s are stuck watching their back as opposed to looking to the future.”
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