Last week, we saw a good deal of healthy debate over the most recent language of the Digital Commodity Consumer Protection Act (DCCPA). The controversy centered around the implications of the bill’s applicability to both CeFi and DeFi.
In essence, the bill seeks to regulate for CeFi and DeFi “digital commodity” spot markets and creates a uniform regulatory framework to do so. Unfortunately, the “principles” of that regulatory framework as defined in the bill are designed for centralized financial intermediaries and are unworkable.
For example, the bill’s definition of a “trading facility” would capture DeFi protocols, requiring registration and compliance with requirements such as running a “central limit order book.” The bill’s definition of a “dealer” would capture individual participants in DeFi protocols, like liquidity providers, mandate their registration with the CFTC, and require them to, among other unworkable requirements, set up a Bank Secrecy Act program.
The DeFi community also debated whether centralized, for-profit front end operators should be required to register as a “broker” and whether they would be required to do so under the bill.
In the event that the language does cover front-end operators, which it does, critics pointed out that front-end operators would not be able to meet practically any of the standards laid out in the core principles of the draft. More fundamentally, critics argued that applying those principles to front-end operators wouldn’t be logical (as they don’t present the same risks as traditional brokers) and would eliminate the permissionless of the primary means through which people access protocols.
What does this mean?
The DCCPA should exclusively focus on CeFi, and we’re making the case. The bill is unquestionably designed to regulate centralized intermediaries in the cryptocurrency sector—businesses that provide services in ways that are substantially similar to traditional financial intermediaries that governments have decades of experience regulating. DeFi protocols function in a fundamentally different way and therefore present fundamentally different opportunities and risks to consumers.
Not only does it not make sense to attempt to regulate them in the same way, but also it’s inappropriate to legislate on DeFi at all before studying DeFi’s functionalities, opportunities, and risks. Congress has held zero hearings on DeFi; the Federal government and regulatory agencies have completed zero studies on DeFi. The European Union agrees and is taking several years to study these issues before legislating.
In addition, the bill would do much to accomplish the drafters’ primary objectives without including anything on DeFi. Consumer activity in CeFi dwarfs consumer activity in DeFi. According to Dune, 5-ish million ethereum wallets have interacted with DeFi protocols to date (meaning far less than 5 million people have used DeFi protocols given many people use multiple wallets), while, for example, Coinbase alone has 100 million customers. Congress can accomplish 95%+ of its consumer objectives while avoiding the downside risk of undermining DeFi development and use in the United States.
Haun Ventures’ Petition for DAO Rulemaking
On Monday, Haun Ventures petitioned the Commodity Futures Trading Commission (CFTC) to initiate a rulemaking process and work with the public to define DAO participants’ scope of liability and limit it to those who “actively engage in or facilitate illegal activity.”
Haun Ventures’ petition argued that promulgating the rule would provide clarity on potential liability to DAO participants and address the “legal and pragmatic issues” in the CFTC’s recent Ooki DAO action.
As a reminder, the CFTC served Ooki DAO, alleging it violated the Commodity Exchange Act & Regulations (CEA) by “illegally offering leveraged and margined retail commodity transactions in digital assets” without a Futures Commission Merchant registration or a Bank Secrecy Act (BSA) program.
In this case, the CFTC argues that any token-holder who had voted “at any point and on any matter” was “jointly and severally liable for any future unlawful actions by the DAO,” as expressed in the complaint. However, the petition cited Commissioner Mersinger’s dissent arguing that the CEA does not hold members of a for-profit association personally liable for its unlawful actions.
Regarding the adverse consequences of the CFTC’s complaint, the petition argued that the agency’s approach will disincentivize participation in DAO governance, which in turn will lead to “more illegal governance proposals passing,” protocol attacks from the lack of patching vulnerabilities, and risk the United States’ national security as developers move abroad and build the next generation of the internet without U.S. involvement.
What does this mean?
The petition is on point for several reasons, most importantly that regulation by enforcement ultimately is a disservice to the public. We agree that the CFTC should develop policy via a public process as opposed to litigation, and we need regulatory clarity to enable great innovation and mitigate its negative externalities.
a16z Filed Amicus Brief in CFTC v. Ooki DAO
On Tuesday, a16z filed an amicus brief in CFTC v. Ooki DAO that argued against regulating protocols.
a16z argued in their brief that in order to serve an “unincorporated association,” California law requires the plaintiff to establish mutual consent to a common lawful purpose, which the CFTC did not do in this case. Therefore, the brief argued, the CFTC does not have grounds to serve Ooki DAO.
The brief added that while the CFTC did not explicitly define the lawful purpose, the allegation against Ooki DAO focused on the Ooki Protocol’s “unlawful transactions,” thus implying that this was its purpose. However, the brief argued, the lawful purpose of Ooki DAO was instead the administration of the Ooki Protocol, as DAOs serve many purposes “unrelated to derivatives or leveraged commodity transactions.”
The brief recommended that the CFTC’s complaint should articulate the DAOs lawful purpose and “wrongdoing by individuals that is distinct from the simple act of voting on any DAO governance proposal at any point in time.”
What does this mean?
As explained by Miles Jennings on Twitter, the purpose of the approach is to enable the CFTC to hold bad actors accountable without interfering in good-faith innovation by removing the protocol from the complaint and explicitly serving individuals who participated in illegal activity.
A note on the litigation: subsequent to a16z’s filing, the CFTC requested and the court granted an extension to 11/14 for the agency’s response to amici. Our response will now be due 11/21.