U.S. Policymakers Urged to Focus on DeFi Identity by CFTC

• CFTC Calls for Enhanced Identification Measures in Decentralized Finance
• The CFTC's Stance on Decentralized Finance
• The Challenge of Regulating DeFi
• Past Regulatory Actions by the CFTC
• Views Expressed by CFTC Commissioners
• Efforts by the Financial Crimes Enforcement Network

CFTC Calls for Enhanced Identification Measures in Decentralized Finance

The Commodity Futures Trading Commission (CFTC) is urging policy makers to consider ways of identifying individuals engaging in the decentralized finance (DeFi) sector. This move comes amidst concerns that the anonymity inherent to the DeFi ecosystem could facilitate activities like money laundering, terrorism financing, and fraud.

The CFTC's Stance on Decentralized Finance

The CFTC, being the U.S. agency responsible for regulating futures, swaps and options, has voiced its intentions to scrutinize the DeFi industry more stringently. A report published on Monday reiterated this stance, emphasizing the need for policy makers to identify potentially risky projects and to concentrate on areas such as digital identity, know your customer (KYC) procedures, anti-money laundering (AML) regimes, and privacy calibration within DeFi.

The Challenge of Regulating DeFi

Regulators face the challenging task of dispelling the perception that the DeFi space is beyond regulatory purview. This is largely due to the widespread use of pseudonyms to conceal users' identities, coupled with the decentralized structure of the industry that blurs lines of responsibility. The report expressed clear concern over the ability of policy makers to ensure effective AML and countering financing of terrorism (AML/CFT) regimes, as well as the provision of adequate protection and victim recourse in the DeFi environment.

Past Regulatory Actions by the CFTC

In June of the previous year, the CFTC emerged victorious from a lawsuit alleging that the decentralized autonomous organization (DAO) Ooki$0.0023 0.77% DAO offered unregistered commodities. By September, the CFTC had initiated legal action against three firms creating some of the most renowned DeFi protocols for illegal derivatives trading. The companies settled the charges.

Views Expressed by CFTC Commissioners

Christy Goldsmith Romero, a Commissioner with the CFTC, stated that the absence of clear lines of responsibility and accountability in DeFi systems is a major concern. Romero, who sponsors the CFTC's Technology Advisory Committee that produced the report, highlighted the lack of clear mechanisms to ensure victim recourse, defense against illicit exploitation, or the incorporation of necessary changes and controls during crisis and network stress scenarios.

Efforts by the Financial Crimes Enforcement Network

The Financial Crimes Enforcement Network (FinCEN) joins the CFTC in exploring methods of identifying individuals involved in DeFi. Last week, FinCEN introduced a beneficial ownership reporting system that mandates many companies operating in the U.S. to disclose who directly or indirectly owns or controls them. Yellen revealed that within a week of introducing the system, over 100,000 filings were received.

Edited by Jonathan Stoker