Coinbase CEO Argues for Exclusion of DeFi from CFTC Oversight

Coinbase, a prominent player in the cryptocurrency industry, is currently facing allegations of misconduct in US courts. The legal representatives of the platform have denied any wrongdoing and have even requested the dismissal of the case.

Despite these accusations, Coinbase and its CEO, Brian Armstrong, are generally seen as positive influences by institutional investors and policymakers. As previously reported by CryptoPotato, Armstrong met with House Representatives to discuss upcoming cryptocurrency legislation.

It is important to note that while Coinbase is a centralized platform, it does not claim to be decentralized. This is why Armstrong shared his thoughts on the legal challenges that his decentralized counterparts may encounter.

Concerns About the CFTC’s Actions

According to Armstrong, the CFTC (Commodity Futures Trading Commission) should avoid targeting decentralized finance (DeFi) protocols, as their legal authority to do so is questionable and could potentially harm the industry.

The CFTC should not be creating enforcement actions against decentralized (DeFi) protocols. These are not financial service businesses, and it’s highly unlikely the Commodity Exchange Act even applies to them.

My hope is these DeFi protocols take these cases to court to…

— Brian Armstrong 🛡️ (@brian_armstrong) September 13, 2023

However, the CFTC has a different perspective on the role of DeFi, as emphasized by Ian McGiley, the Director of the CFTC Enforcement Division, following a recent enforcement action against three DeFi protocols.

“Somewhere along the way, DeFi operators got the idea that unlawful transactions become lawful when facilitated by smart contracts. They do not. The DeFi space may be novel, complex, and evolving, but the Division of Enforcement will continue to evolve with it and aggressively pursue those who operate unregistered platforms that allow U.S. persons to trade digital asset derivatives.”

Some members of Coinbase’s community have voiced criticism of Armstrong’s statement.

Unpacking the Meaning of DeFi

Several users were quick to point out the apparent contradiction in Armstrong’s assertion that “DeFi protocols are not financial services.” They argue that this contradicts the “Fi” aspect of DeFi.

““Decentralized (DeFi) protocols. These are not financial service”? Did you not forget one word here? What does “Fi” stand for?”

Others have highlighted that the fact that DeFi protocols can be taken to court indicates that these projects are not truly decentralized.

the fact the the Defi protocols can even “take these cases to court” show just how decentralized they really are

— TylerBTC (@TylertBTC) September 13, 2023

If a project is genuinely decentralized, there would be no individual or company that could be held accountable for alleged financial misconduct, as the mere creation of a protocol itself is not illegal.

In order for the CFTC to stop pursuing DeFi protocols, these platforms would need to demonstrate their true decentralization, with no master keys or backdoors.