Romero

CFTC’s tech committee gathered in DC to talk DeFi — Here’s what was discussed

DeFi was on the agenda at the CFTC’s tech committee meeting, with crypto execs explaining and discussing the space with the regulator.

The United States commodities regulator received a crash course on decentralized finance (DeFi) on March 22. Crypto executives briefed the regulator on key issues affecting the space, including exploits, decentralization and digital identities.

As part of a scheduled first meeting of the CFTC’s Technology Advisory Committee (TAC) in Washington D.C., members from the crypto space gave presentations to the regular intending to cover critical issues currently impacting DeFi.

CFTC commissioner Christy Goldsmith Romero opened the meeting with prepared remarks, saying “understanding how DeFi works” is “important” as “policy decisions related to DeFi” are currently being made by regulators and lawmakers.

The panel began with an explainer on DeFi and blockchain technology by Ari Redbord, head of legal and government affairs at blockchain intelligence firm TRM Labs.

He outlined the claimed benefits of blockchains, namely transparency, immutability and privacy, saying it could allow regulators to balance the “right to privacy with the need for security.”

Redbord and Nikos Andrikogiannopoulos, the founder of analytics firm Metrika, jointly outlined the benefits and issues currently facing decentralization, concluding that the benefits “far outweigh” the challenges, which they believe will “self-resolve.”

“We’ve reached a point in time where we can no longer ignore decentralization,” Andrikogiannopoulos said. “Not only do we have to embrace it, but I think it’s our duty to lead it in the right direction.”

Redbord highlighted the total value that entered DeFi in the last two years, saying it was “stress tested during FTX […] and did not fail. DeFi is absolutely here to stay.”

DeFi’s total value locked is around $49.1 billion, according to DefiLlama, rising from around $15 billion at the beginning of January 2021.

Carole House, executive in residence of venture firm Terranet Ventures, and Jill Gunter, chief strategy officer of blockchain infrastructure company Espresso Systems, then provided an overview of the current solutions for digital identity and noncustodial wallets, using the examples of the Ethereum Name Service and MetaMask wallet.

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Fireblocks founder Michael Shaulov and Trail of Bits founder Dan Guido then presented the exploits and vulnerabilities that have, and continue to, take place in the market.

“All the hacks, they are extraordinarily public, and it’s usually your users and other outside firms that find out about them before you do,” Guido remarked, which he said instills a “need for perfection” in crypto firms.

Throughout 2022, the top 10 exploits in crypto alone saw over $2 billion lost, with DeFi on the receiving end of 113 exploits out of the 167 carried out across the year.

Shaulov then briefly explained the exploits carried out against the Ronin Bridge, BadgerDAO and the recent Euler Finance exploit.

The DeFi portion of the meeting ended with members unanimously voting for creating a Digital Assets and Blockchain Technology Subcommittee.

The subcommittee will focus on the “why of DeFi,” what problems it solves, use cases, vulnerabilities, and proposed legal and policy frameworks.

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CFTC commissioner compares crypto contagion risk to 2008 financial crisis

The commissioner warnes that vulnerabilities seen within the crypto markets are similar to those seen during the global financial crisis and calls for the agency to be given additional authority.

Commodity Futures Trading Commission’s (CFTC) Christy Goldsmith Romero has pointed to the collapse of the Terra ecosystem and its flow-on effects as an example of how contagion risks within crypto markets are similar to those experienced by the traditional financial (TradFi) system during the global financial crisis (GFC) of 2008. 

Romero suggested in a speech given at the International Swaps and Derivatives Association’s (ISDA) Crypto Forum on Oct. 26 that increased links between crypto markets and TradFi increases the risk posed by crypto to overall financial stability, noting:

“The digital asset market remains relatively small and contained from the level of systemic risk that would come with greater scale or interconnections with the traditional financial system. But this may not be the case in the near future, particularly given growing interest by traditional finance.”

One area of TradFi the commissioner would prefer to remain distant from crypto is retirement and pension funds. This opinion has likely been influenced by recent events in the United Kingdom, where pension fund issues required intervention from the Bank of England.

While Romero cautions the United States to not rush regulations, she supports a “same risk, same regulatory outcome” approach as the level of risk posed by the crypto industry increases, suggesting:

“Similar to post-crisis reforms, Congress can address financial stability risks by providing additional authority to the CFTC.”

The GFC came about after banks began to lend recklessly to people without the means to fully pay back their mortgages. These “subprime” mortgages were bundled together and sold as safe investment products before defaults started a ripple effect that spread across the world.

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While the CFTC is often regarded as the more crypto-friendly regulator compared to the U.S. Securities and Exchange Commission (SEC), it appears to be attempting to change that image as part of its bid to gain more regulatory oversight after revealing it instigated 18 enforcement actions on the sector throughout the 2022 fiscal year.

One of the more recent CFTC actions was the fine levied at the Ooki DAO and its members, which was heavily criticized by a CFTC commissioner and members of the crypto community, who referred to it as “blatant regulation by enforcement.”

Before this action, decentralized autonomous organizations (DAOs) were regarded by many advocates as being “above the law,” and have resulted in the formation of legal entities within DAOs as a way to limit liability.