DeFi Identity Should Be Focus of U.S. Policymakers, CFTC Says

Policymakers should identify the projects of greatest concern and prioritize progress on digital identity, a report from one of the regulator's committees said.

AccessTimeIconJan 9, 2024 at 9:43 a.m. UTC
Updated Mar 8, 2024 at 7:31 p.m. UTC
  • The CFTC wants policymakers to look at ways of identifying the individuals involved in decentralized finance.
  • Some regulators are concerned that the inherent anonymity of the ecosystem opens the door to money laundering, terrorism financing and fraud.

The Commodity Futures Trading Commission (CFTC), the U.S. agency that regulates futures, swaps and options, wants policymakers to look at ways of identifying the individuals involved in decentralized finance (DeFi), a report published Monday said.

Policymakers need to identify and prioritize projects of greatest concern and focus on digital identity, know your customer (KYC) and anti-money laundering (AML) regimes as well as calibration of privacy in DeFi, according to the report.

Regulators are scrabbling to tackle participants' perception that DeFi is immune to regulatory scrutiny, particularly because of the widespread use of pseudonyms to hide users' identity and the decentralized nature of the industry that makes it hard to assign responsibility to anyone in particular.

"The pseudonymity and disintermediation provided in most DeFi systems presents serious concerns for policymakers focused on ensuring AML and countering financing of terrorism (AML/CFT) regimes are effective and provide appropriate protections and victim recourse for consumers," the report said.

Last June, the CFTC, which is vying with the Securities and Exchange Commission to be the main regulator of the crypto industry, won a lawsuit alleging that decentralized autonomous organization (DAO) Ooki DAO offered unregistered commodities. By September, the CFTC had sued three companies building some of the most respectable DeFi protocols for offering illegal derivatives trading. The companies settled the charges.

"A central concern related to DeFi systems is the lack of, and some industry designs to avoid, clear lines of responsibility and accountability," Christy Goldsmith Romero, one of the five CFTC Commissioners, said in a statement accompanying the report. Goldsmith Romero is the sponsor of the CFTC's Technology Advisory Committee, whose subcommittee produced the report.

DeFi has "no clear route to ensuring victim recourse, defense against illicit exploitation, or the ability to insert necessary changes and controls during periods of crisis and network stress," she said.

The Financial Crimes Enforcement Network (FinCEN) is also looking at ways of identifying individuals active in decentralized finance, and last week introduced a beneficial ownership reporting system that requires many companies operating in the U.S. to say who directly or indirectly owns or controls them.

“In just one week, we’ve received over 100,000 filings,” Yellen said at a separate event on Monday.

Edited by Sheldon Reback.


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Amitoj Singh

Amitoj Singh is a CoinDesk reporter.