Original title: Statement of objection to the settlement with Uniswap Labs
Original author: Summer K. Mersinger
Original translation: Ismay, BlockBeats
Editors note: Last night, it was reported that a16z and USV were summoned by a New York court regarding Uniswap regulation. Prior to this, the CFTC accused Uniswap Labs of providing illegal digital asset derivatives transactions. According to the detailed announcement of the CFTC, Uniswap Labs has actively cooperated with the investigation and only needs to pay a fine of $175,000. However, this penalty decision has aroused some objections. Commissioner Summer K. Mersinger issued a statement of objection to the settlement with Uniswap Labs last night. She stated that the Commissions regulation through law enforcement approach to DeFi protocols not only failed to provide clear regulatory guidance for the DeFi field, but also may inhibit innovation and expel responsible developers from the United States. This is why US institutions such as Coinbase have unanimously called for the formulation of clear regulatory rules.
The following is the original content
Today, the Commodity Futures Trading Commission (“CFTC” or “the Commission”) once again swung its symbolic enforcement “hammer” against another decentralized finance protocol. Given that the Commodity Exchange Act (“CEA”) and CFTC rules were written for traditional centralized market infrastructure providers and intermediaries, I had hoped that the Commission would one day consider rulemaking, or at least provide guidance, clarifying how DeFi protocols could comply with those regulations. Unfortunately, today is not that day.
Regulation through law enforcement
This case has all the hallmarks of regulation through enforcement that we are familiar with: a paltry fine settlement that has little to do with the alleged conduct, general statements about the industry as a whole that have no substantive relevance to the case, and legal theories that have not been tested in court.
Our use of enforcement powers over DeFi protocols, rather than establishing clear rules through notices and comment solicitations, risks driving responsible DeFi developers overseas, where they will start businesses, create jobs, and economic activity, while leaving the United States with only the bad actors and criminals whose sole purpose is to take advantage of American citizens.
Furthermore, if we continue to proceed with an enforcement-first approach, one or more of the DeFi protocols we target may choose litigation rather than settle out of court. Litigation of these cases would not only consume significant government (and private sector) resources, but could also result in a litany of lawsuits with mixed results and conflicting conclusions.
The CFTC is not the only agency struggling with increased enforcement, but I hope we can stop using this often short-sighted strategy. Wielding the enforcement hammer against these DeFi protocols may result in some short-term “wins,” but in the long run, without better solutions, it will only create more problems.
The cost of doing good
Furthermore, I worry that this settlement sets a twisted precedent for future Commission actions—one that punishes efforts to comply with the law.
The allegations in the settlement are supported by the fact that Uniswap created, provided, and maintained a protocol that allowed third parties to trade leveraged tokens. However, Uniswap also took proactive steps to try to prevent the trading of leveraged tokens. In fact, after the Commission reached a settlement in its previous DeFi Cleanup Action, Uniswap blocked trading in the specific tokens involved in the settlement.
However, rather than commend Uniswap for paying attention to our enforcement actions and taking steps to respond to our regulatory approach in the DeFi space, we filed charges against Uniswap covering the period before its platform blocked these specific tokens. For those in the DeFi community working to comply with CEA and CFTC regulations, the only message this settlement sends is the Commission’s estimate of the cost of DeFi’s attempts to do good.
Misaligned priorities
The decision to devote resources to this case similarly raises concerns about the Commission’s enforcement priorities. Uniswap did not act as a liquidity provider, extend credit, actively trade leveraged tokens, or collect transaction fees from related trades. Moreover, there are no allegations of market or customer harm in this matter. For every case we bring against a DeFi protocol that does not have allegations of fraud or complaints of customer losses, we risk diverting resources away from cases where there are genuine innocent victims who have suffered financial losses from genuine fraud.
In recent testimony to Congress regarding the CFTC’s budget, Chairman Benham discussed the need to prioritize agency resources due to the growing amount of fraud targeting the digital asset markets:
“In the digital asset space, we have seen the most activity…With many institutional resources not accounted for in our budgetary allocations and being allocated to an unregulated market, I am concerned that current trends are unsustainable. That is, we will continue to see rampant fraud and manipulation in the digital asset markets, which will harm U.S. customers and may even impact traditional financial markets.”
I share the Chairman’s concern that current trends are unsustainable, and this concern is heightened when we devote enforcement resources to investigating DeFi activity where there is no clear harm or no apparent benefit, especially as we see the protocol proactively taking compliance steps.
We are in the midst of an epidemic of financial fraud. So-called scams alone may cost victims up to $75 billion and are a significant source of funding for transnational criminal organizations. I commend the Commission for warning clients about scams and other online fraud, for bringing its first scam case in December 2023, and especially for recently hosting the first interagency conference to combat scams. But we must do more to combat this fraud—and, crucially, we must use our limited resources wisely.
No room for innovation
The concept of platform liability is complex. While in some cases platforms may be held liable for conduct that occurs through their protocols, the extension of such liability in the absence of exacerbating facts is worrisome.
With this settlement, the Commission appears to be taking the position that any DeFi platform could be held liable for all conduct that occurs on its protocol. The practical effect of this approach would severely discourage the launch of any DeFi protocol in the United States and significantly increase the likelihood that all DeFi innovation and economic activity will move elsewhere. This theory of liability also raises a broader question: Is the Commission fulfilling its duty under the Commodity Exchange Act to promote responsible innovation (rather than inhibiting it), a duty that Congress considers one of the core principles of the CFTCs mission.
Congress was deliberate in placing the word “responsible” before “innovative” in the CFTC’s mission statement because, as we all know, innovation can also be exploited by criminals. For example, in the 1930s, newer and faster cars enabled criminals to flee crime scenes and go on crime sprees across multiple states. To curb the rise in crime during the so-called “Era of Public Enemies,” Congress, the Department of Justice, and the FBI chose to pass new laws, enact regulations, and strengthen enforcement capabilities to target criminals, not the inventions they used to commit crimes.
But imagine if J. Edgar Hoover had held Henry Ford responsible for the crimes of John Dillinger and Bonnie and Clyde because the Ford V 8 was the key vehicle that enabled them to commit their crimes. This outcome is the natural endpoint of the logic that the Commission has adopted in this settlement.
Continuing to bring and resolve these cases against DeFi platforms is not consistent with the CFTC’s goals and vision. This settlement and the Commission’s previous “DeFi Cleanup” settlements raise transparency questions and concerns about the CFTC’s commitment to its stated goals. Our 2022-2026 Strategic Plan recognizes that “innovations like DeFi require broad stakeholder engagement” and specifically points to DeFi as an area that needs to “increase stakeholder engagement and leverage principles-based regulation.”
I quote again from Chairman Benhams latest testimony:
“Today, technology is driving change in financial markets, and the CFTC must keep pace to fulfill its mission and congressional mandate. Our work is centered on customer protection and market resilience, while supporting continued growth and innovation to ensure the agency’s continued success for the next 50 years.”
Enforcement actions like this undermine the credibility of our strategic plan and run counter to our statutory mission to promote responsible innovation and our publicly stated core value of being transparent with market participants about our rules and processes.
A better way forward
Unlike the broad regulatory uncertainty in the crypto market, the CFTC has exclusive regulatory jurisdiction over DeFi protocols involving derivatives transactions. This allows the Commission to issue rules that promote responsible innovation by finding the right path for protocols that want to comply and operate in a regulated environment while achieving other statutory and regulatory goals.
Rulemaking through notice and comment provides the DeFi community, consumer advocates, industry representatives, and the American public an opportunity to engage with the Commission and use their expertise and experience to advise on how to appropriately regulate DeFi while complying with the obligations of the Commodity Exchange Act.
Regulation through enforcement is, at best, a stopgap measure. At some point, the Commission must initiate a rulemaking process around DeFi and consider our role in promoting responsible innovation in the future of U.S. derivatives markets.
For these reasons, I object.
