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CFTC Advisory Committee Progresses Recommendations Emphasizing Need for Attention to DeFi

The Technology Advisory Committee (TAC) of the Commodity Futures Trading Commission (CFTC) made a significant step on Monday, unanimously agreeing to submit a pivotal report.

This report showcases the collaboration between governmental bodies and industries to comprehend and nurture the responsible and compliant evolution of decentralized finance (DeFi).

Christy Goldsmith Romero, the sponsor of the committee and a CFTC Commissioner, emphasized the report’s purpose. She highlighted the necessity of studying emerging issues concerning digital assets to forestall unintended harmful consequences.

Romero stressed the report’s role in informing ongoing policy discussions in Congress, state legislatures, and regulatory bodies like the CFTC. The report aims to establish a foundational understanding of DeFi, recognizing that its benefits and risks hinge significantly on the design and features of individual systems.

Romero expressed, “From the time that I arrived at the CFTC, I have played a steady drumbeat that we need to study emerging issues related to digital assets or we could risk harmful unintended consequences.  This report is the result of the hard work of the TAC Digital Assets and Blockchain subcommittee to study DeFi.  It is intended to help inform ongoing policy debates in the U.S. Congress, state legislatures, and regulators including the CFTC.”

Acknowledging the spectrum on which most DeFi systems operate, falling neither fully centralized nor decentralized, Romero highlighted the report’s potential to kickstart dialogues between policymakers and industry stakeholders. She underscored the persistent risks associated with DeFi, encompassing illicit finance, cyber hacks, and theft.

The report’s core traces back to April, when the Department of Treasury flagged illicit finance risks in DeFi, urging federal regulators to engage with the industry further. Today’s report signifies the commencement of such engagement, delving into the intricate landscape of DeFi benefits and risks, particularly concerning accountability and responsibility holes within these systems.

Highlighting the lack of clear responsibility lines as a primary concern, the report outlines potential risks to consumers, investors, financial stability, market integrity, and illicit finance. It stresses the urgent need for collaboration between government and industry to comprehensively understand and mitigate DeFi risks.

Outlined within the report also are detailed recommendations aimed at mitigating risks and combatting illicit finance within DeFi, which include resource assessment, regulatory mapping, risk identification and prioritization, policy responses, and enhanced engagement with both domestic and international regulatory bodies.

Specifically addressing the ongoing exploits of DeFi in circumventing anti-money laundering (AML) and counter-financing of terrorism (CFT) protections, the report advocates for a holistic approach; it recommends policymakers evaluate options for regulating and mandating identity information discoverability and verification across the layers of the DeFi ecosystem, emphasizing the need for due process and various identity information types.

In essence, the report from the CFTC’s Technology Advisory Committee serves as a comprehensive call to action, urging collaborative efforts between regulators and industry stakeholders to understand, regulate, and mitigate the risks associated with the rapidly evolving landscape of decentralized finance.

Download report here.

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