Take that away
After the BitMEX enforcement action, are there other non-compliant exchanges on the CFTC’s radar? “Maybe,” said Chairman Heath Tarbert.
In an appearance on Wednesday, the regulator largely asked its colleagues at the SEC whether ether in a proof-of-stake version of Ethereum would be a security or a commodity.
Similarly, he stumbled upon DeFi.
“Let me just say how impressed I am with Ethereum, period, period.”
No, this is not a Silicon Valley investor. That was Heath Tarbert, Chairman of the Commodity Futures Trading Commission (CFTC), who gave a sophisticated understanding of blockchains during a live interview at CoinDesk’s invest: ethereum Economy virtual conference on Wednesday.
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Speaking to CoinDesk’s Chief Content Officer Michael J. Casey, Tarbert discussed how Ethereum and Decentralized Finance (DeFi) fit into U.S. securities and commodity laws, as well as the agency’s recent enforcement actions and the potential benefits and risks of migration of financial activities in distributed networks.
The “fireside chat” picked up where a similar conversation left off last year: How Ethereum and its expected move to a consensus mechanism for demonstrating use could fit into US resource laws.
“I’m not ready to necessarily say that” staking governance would definitely put Ethereum 2.0, the upcoming reboot of the world’s second largest blockchain, into a security classification, “he said. “It’s still as decentralized as a typical company or even a cryptocurrency that really is a company,” isn’t.
Ether (the blockchain’s native cryptocurrency) is currently considered a commodity, similar to Bitcoin, the only other cryptocurrency with a regulated derivatives market in the United States. However, it is unclear whether a proof-of-stake network is treated similarly under US law or under US law if it were more similar to a security.
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“The more decentralized it gets over time and the more effectively it operates itself, the more likely it is that it will fall into the commodities category rather than the securities [group]”Said Tarbert.
This problem depends on what the US Securities and Exchange Commission (SEC) says, Tarbert said.
“We usually rely on the SEC’s views [what is] So when the SEC says, “This is not a security,” we are generally confident that at that point we can step in and say it is a commodity, “he said.
Tarbert has been an outspoken proponent of the cryptocurrency space since arriving at the CFTC in mid-2019. During his tenure, the first Ethereum-based derivative contracts were entered into the US, confirming a view he expressed last year. More recently, he said that “a large part” of the financial system could exist in a blockchain format.
With that in mind, on Wednesday he addressed the burgeoning field of decentralized finance (DeFi), in which a dizzying array of complex products has posed new challenges for regulators. On the one hand, he saw reason for optimism.
“The whole idea of DeFi is really, number one, it’s obviously revolutionary, and I think at the end of the day this could lead to massive disintermediation of the financial system and traditional actors,” said Tarbert. “And ultimately, [it] could possibly even reduce systemic risk to some extent, as the financial system does not focus on these large global systemically important institutions. “
Tarbert doesn’t think this shift will happen immediately, saying that it could be “decades” away. However, the potential for this type of disintermediation means that the parties involved should ask questions about the resilience of the network.
“When we think about it [if] Much of our global financial system ends up on Ethereum, then we have real concerns about the theory … what if Ethereum collapses? “He asked.
Tarbert gave no straightforward answer as to how assets are involved in or spent by them DeFi projects could fit into securities or commodities laws and depend on what the digital contracts do and how tokens are distributed.
When asked about Uniswap’s air-thrown UNI governance token, Tarbert said it had “some characteristics” of a security, but also “significant differences”, not least the fact that the assets were distributed free of charge.
“If people didn’t have to pay for it … it’s hard to see at what point there would be an economic loss,” he said. However, the CFTC chairman reiterated that this should be considered by the SEC.
If regulators don’t take legal action against potential violations of the Securities Act, private individuals can continue to bring their own lawsuits. At that point, a court would have to decide, said Tarbert.
So-called fair token distributions like Yearn.Finance’s, where tokens are not reserved for the project’s founding team, are also a difficult task.
“The problem with the fair start that keeps founders from doing so,” he said. However, there are still market manipulation concerns that regulators may need to assess.
Making Ethereum greener would be an added benefit of moving to proof-of-stake, Tarbert said during the chat, noting that proof-of-work, the consensus mechanism currently used by the blockchain (and developed by Bitcoin) ), Requires energy. intensive machines.
“Of course there are problems with mining, so number one [is] Environmental problems, ”he said. “I think we’ve been helping each other out in reducing our carbon footprint in general as a bigger issue, and moving to proof-of-stake makes that clear.”
He compared the current transaction costs on Ethereum’s congested network to the cost of flights across the country compared to buying a car in the 1930s.
“At some point we have to move in terms of scope and efficiency to solve environmental problems, but also cost problems,” he said. “I see the evidence of the commitment as potentially helpful.”
The CFTC recently brought an enforcement action against BitMEX, one of the world’s largest crypto derivatives exchanges. In the charges filed earlier this month, BitMEX is alleged to have allowed US citizens to conduct transactions on its platform without registering as a trader for futures commissions or obtaining other licenses.
BitMEX has also failed to comply with bank secrecy law when conducting know-your-customer and anti-money laundering procedures, as claimed by the CFTC along with prosecutors from the U.S. Attorney’s Office for the southern borough of New York.
“I want the US to be a leader in digital assets,” said Tarbert, explaining why the agency was chasing BitMEX. “We want to create an environment where digital asset sharing innovators can grow up here in the US, come to places like the CFTC and get a license and benefit from our regulatory system. What we don’t want to see are offshore exchanges that are effectively breaking US law. “
The agency has an “obligation” to seek out non-compliant exchanges, he said. When asked if the agency is also considering other platforms, he replied, “I might say.”