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DCCPA Threatens DeFi’s Unique Features of Composability and Permissionlessness.

Cato Institute | Jennifer J. Schulp and Jack Solowey | Oct 26, 2022

DeFi and DCCPA - DCCPA Threatens DeFi’s Unique Features of Composability and Permissionlessness.As the crypto policy world debates the future of stablecoins and the legal culpability of decentralized autonomous organization (DAO) governance voters, don’t sleep on the Digital Commodities Consumer Protection Act (DCCPA).

  • While the DCCPA helpfully codifies bitcoin and ether as digital commodities under the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC), it leaves a great deal of the line drawing between crypto securities and crypto commodities uncertain. In addition, in requiring all platforms for buying, selling, and trading crypto tokens to register with the CFTC and comply with other mandates, the DCCPA poses serious challenges to decentralized finance (DeFi).
    • To defend creative dynamism in DeFi, any registration of decentralized crypto token exchanges (DEX) ought to be strictly voluntary.

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  • DeFi has revolutionary potential because it is permissionless and composable, allowing for projects to be more creatively adapted and recombined.
    • The lending scenario described above is permissionless; instead of requiring a traditional credit score – or an “in” with the right institution to get the loan – the borrower only needs the right collateral.
    • DeFi is composable – because the underlying smart contracts are written with open‐​source code and standards, functions can be built atop one another like interoperable Lego blocks.
  • The DCCPA threatens DeFi’s unique features. Although the law does not once use the word “decentralized,” its broad definition of “digital commodity trading facility” (i.e., that which facilitates the execution of digital commodity sales or trading of digital commodities between persons) very likely brings DEXs within its scope. DEXs would therefore be subject to a slew of compliance mandates, beginning with the requirement to register with the CFTC.
    • The problem with these mandates is that many of them are aimed at what current CFTC Commissioner Kristin N. Johnson aptly referred to in a 2021 law review article as “intermediary risks” – the potential for financial middlemen to mishandle assets and information in their possession. Regulations to address intermediary risks don’t make sense for software designed to achieve disintermediation.
    • For example, under the DCCPA, covered platforms would be required to “hold customer property (including digital commodities) in a manner that minimizes the risk of loss.” This is relevant to a centralized, custodial exchange but not to a DEX where users self‐​custody their tokens.

See:  [Brookings Webcast, Nov 15]: Digital Asset Regulation: The State Perspective

  • What should be clarified: Any law that would impose sweeping obligations on DeFi should at the very least know what it is regulating.
    • Any exchange regulation must ask what separates a decentralized exchange from a centralized exchange and how their risk profiles differ.
    • The law also should differentiate between project teams that interpose themselves and their discretion between users and a DEX protocol and developers that simply let the software, not human agency, be the service.

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NCFA Jan 2018 resize - DCCPA Threatens DeFi’s Unique Features of Composability and Permissionlessness.The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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