- A CFTC subcommittee wrote that DeFi brought substantial risks to the US financial system
- The watchdog finds the lack of clear lines of accountability and responsibility a central concern
The US Commodity Futures Trading Commission (CFTC), which is responsible for monitoring US derivatives markets, published a report on reducing the risks linked to DeFi. The report includes recommendations for policymakers and industry stakeholders.
Risks to national security
A CFTC subcommittee wrote that DeFi presented “promising opportunities,” but added that it brought substantial and complex risks to the US financial system, national security, and consumers.
In the report, the watchdog wrote that the lack of clear lines of accountability and responsibility was a central concern related to DeFi systems. It outlined several ways to reduce DeFi risks, which include enhancing technical capacities, identifying vulnerabilities, analyzing existing regulations, and assessing potential policy responses to address risks.
Responsibility lies with policymakers
According to the report, it should be up to policymakers to define the best form and goals of regulatory intervention. In this process, they should consider where the intervention will have the fewest consequences and the lowest costs to balance costs and benefits.
Assessing resources, gathering and mapping data
The CFTC proposed to enhance understanding of DeFi by continuously collecting and monitoring data, mapping existing DeFi to establish interconnections and threat vectors, sharing information and building regulatory partnerships.
Policymakers should use the above mapping exercise to ensure DeFi products and services fall within the scope of US financial regulations, evaluate compliance, and identify regulatory gaps. They should decide if it’s necessary to expand frameworks to address risks as well as partner with self-regulating organizations.
Risk identification, evaluation, prioritization
The report suggests identifying risks posed by conflict of interest and asymmetric information, liquidity and maturity mismatches, operational, technical and security vulnerabilities, wash trading, front running and other types of market manipulation, over-leverage, algorithmic discrimination, oracle exploitation, hardwired algorithmic failures, vulnerabilities in consensus protocols, or reliance on key service providers.
Policymakers should assess the specter of potential policy responses to address risks, including third-party auditing, disclosure, entry restrictions, regulatory reporting, regulatory supervision, conduct regulation, governance regulation, product regulation, limiting activities, balance sheet regulation, and structural regulation.
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