The word DeFi is an abbreviation of decentralized finance. It has fewer intermediaries than traditional finance and is conducted over the blockchain. This means it is not reliant on a single source, enhancing the speed of transactions and reducing complexities.
Dan Berkovitz, who is the commissioner of CTFC, which stands for Commodity Futures Trading Commission, has been in opposition to DeFi for derivatives. During a keynote speech on June 28, he stated that they are a “bad idea” and cannot possibly be legal under the CEA. CEA stands for Commodity Exchange Act, and it provides regulation for commodity futures.
The commissioner pointed out the lack of security in the Decentralized Finance space as compared to the traditional finance system of the United States, which he describes as being the most efficient and effective markets for investing and managing risks. He also included that a major reason that the US financial system has been successful is due to the vigorous legal protections given to investors who trust the U.S markets with their finances, which is mainly done through intermediaries. According to Berkovitz, the DeFi system is the direct opposite of all this.
Berkovitz believes that numerous issues are not properly addressed by the DeFi system. One of them is that because there does not exist an arbitrator that will watch out for fraud, avert money laundering, protect the deposited assets, make sure the other party delivers, or assist customers when something goes wrong. He further added that such a system resembles a “Hobbesian” type of market, in which each individual is only concerned with themselves. The term Hobbesian comes from an English philosopher named Thomas Hobbes, who viewed human beings in a continuous condition of selfish competition with each other. The only solution for this was to create a society based on a complete monarchy.
Many advocators of DeFi may agree with Berkovitz; however, some of his remarks may not sit well in the traditional financing world. Hester Pierce, a commissioner at SEC, was reported to have said that Hester Pierce was afraid the U.S regulator would attempt to regulate the cryptocurrency markets. She believes it is not beneficial for innovation since a regulator’s initial response is to turn it into a type of market they already control.