The CFTC report reveals Defin’s Achilles’ heel: lack of accountability.

In a recent report, the Commodity Futures Trading Commission (CFTC) highlighted a fundamental issue in the defiance system, pointing out that clear lines of responsibility and accountability are being deliberately ignored by certain industry structures.

The report emphasized the significant risks that DeFi systems pose to consumers, investors, financial stability, market integrity and the fight against illegal finance. A central concern is the lack of a well-defined mechanism to ensure victim recovery, prevent illegal exploitation, and implement critical changes and controls during times of crisis and network stress.

The CFTC believes that DFI developers still have a long way to go to take advantage of the many opportunities the sector has to improve the delivery of financial products and services.

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DeFi risks

The CFTC has emphasized several risks that affect various stakeholders. For investors and consumers, the challenges stem from a lack of technology and DeFi knowledge, leaving them vulnerable to fraud, market manipulation, conflicts of interest, data breaches and privacy breaches.

In addition to the risks associated with algorithmic discrimination, the risks of scaling up and bankruptcy are huge. Market integrity faces risks of exposure to trade laundering, front-running, pump-and-dump schemes, and word-of-mouth exploitation.

DeFi projects and ecosystems struggle with complex collateral risks, including increased reliance on outsourcing, limited control rights in times of stress, software security vulnerabilities, and possible automated failures.

The stability of the financial system faces multiple systemic risks, complex interactions with high economic and technological exposure, concentration risks and inherent procyclicality.

Meanwhile, combating illicit finance and national security may be at risk, resulting in a loss of geopolitical posture and surveillance capabilities. Environmental impact, especially in terms of energy consumption, pollution, noise and other ecological concerns, further adds to the multifaceted challenges faced in the defiance space.

CFTC Advice for Policymakers

According to the CFTC, a primary focus for policymakers is to increase their understanding of DeFi, distinguishing between what is known and what is yet to be explored.

The agency recommended that policymakers use mapping exercises to assess whether the organization of financial products and services with DeFi projects falls within the scope of existing US financial and non-financial laws.

The report recommends that policymakers prioritize the most pressing projects by emphasizing digital identity, Know Your Customer (KYC) and Anti-Money Laundering (AML) frameworks.

In September, the CFTC successfully brought legal action against three decentralized finance protocols — Opyn, ZeroEx and Deridex — for failing to register various derivatives trading offerings. The move caused a huge outcry from the community.

The latest report marks a change in tone from last year's statement, in which the regulatory agency expressed its intention to “vigorously” pursue unregistered DeFi entities that serve US individuals.