Thread by @alliancedao

The DCCPA greatly threatens DeFi innovation.

The proposed bill:

- gives CFTC new powers to regulate spot markets
- forces human intermediation
- forces projects to sacrifice decentralization

It favors centralized incumbents and kills startups.

Alliance opposes the DCCPA. 🧵

The DCCPA is a bill in the US Congress that may become eligible to pass as part of an end-of-year omnibus bill.

The text was introduced by @SenStabenow and @JohnBoozman in the Senate Agriculture Committee (@SenateAg).

Supporters are marketing the bill as a win for the industry because it provides the CFTC with jurisdiction over spot trading in “digital commodities”.

The premise behind this enthusiasm is that the CFTC is a pro-innovation regulator.

The jury is still out on that.

Why is this bill problematic?

First, it gives the CFTC power to regulate spot digital commodity markets whereas it never had the power to regulate spot markets before.

Historically, it only regulates derivatives markets.

Further, the bill does nothing to clearly define what a “digital commodity” is or clarify the distinction between tokens that are commodities and tokens that are not.

And yet the bill identifies bitcoin and ether as commodities. Why? What test applies to them, but not other tokens?

What's more, the CFTC has already acknowledged that bitcoin and ether were commodities without the need for new legislation.

Ultimately, founders who are building tokenized projects will have no greater clarity as to whether their tokens are commodities, securities, or neither.

Definitions aside, this bill kills DeFi.

The bill applies old market concepts to a new frontier, forcing innovative projects to sacrifice decentralization in order to conform with rules and concepts that only make sense to traditional intermediated market practices.

The bill doesn't specifically mention DeFi. Rather, many DeFi projects would likely be classified as “digital commodity platforms” and DEXs would be considered as “trading facilities” because DEXs “facilitate the execution or trading of digital commodity trades between persons”.

The rules that apply to platforms and facilities assume—and in fact, require—human activity at the center of the project, effectively banning decentralization and therefore DeFi.

For example, the bill would require that every DEX have emergency powers that provide for the authority to liquidate or transfer positions as well as to suspend trading in a particular digital commodity “in consultation or cooperation with” the CFTC.

The bill requires that all digital commodity platforms have a chief compliance officer who reports to a senior officer of the platform and bears responsibility for ensuring the platform’s compliance with the act and with CFTC rules.

The bill creates a compliance architecture that precludes the concept of a system of smart contracts operating decentralized infrastructure with little or no reliance on human activity.

The bill enables the CFTC to charge platforms fees to pay for new registration requirements and conduct oversight of trading.

The fee rate is not subject to review by the courts.

Further, the bill flouts the strong principle of economic liberty at the core of the crypto economy, requiring that trading facilities comply with “core principles,” which include providing a “centralized market for executing trades”.

By forcing the above, the bill places tokenized DeFi projects in the impossible position of implementing centralization that has the knock-on effect that the project’s own token now looks much more like a security.

A win for regulatory jurisdiction, but not for innovation.

This is at odds with the CFTC’s prior comments about DeFi.

Its own Commissioners have acknowledged that the regulatory structures of the past (which feature prominently in this bill) are not well-suited to DeFi.

https://twitter.com/CFTCquintenz/status/1429033429237223428?s=20&t=nePoK8d4ASg3ZqrVkmb-jg

Commissioner Berkovitz for example acknowledged that “CFTC regs are made for a different world than DeFi”.

He pointed out that CFTC regulations “are based on an intermediation model”.

Berkovitz acknowledged “a challenge with DeFi … [is] how to fit this new technology within the regulatory structure”.

overcast.fm/+nRGwekS20

And yet this bill imports legal concepts that only make sense to platforms with some form of traditional intermediary.

It seems to deal with the unique aspects of DeFi by eliminating DeFi.

It therefore provides benefits to centralized projects and traditional financial companies that have elaborate, human bureaucracies already in place.

DeFi startups have none of these bureaucracies in place and thus innovation will be heavily stifled by significant upfront compliance and financial costs.

This creates an insurmountable barrier to entry.

Only large, well-funded incumbents will survive.

Centralized exchanges have deep compliance and legal teams ready to conform to the bureaucratic requirements that the bill and subsequent CFTC rule-making will impose.

Some are likely already preparing.

Centralized exchanges also have the advantage of having had a long history of discussing digital asset regulation with regulators and Congress and proposing compliance frameworks that favor such an intermediated approach.

The bill further supports centralized exchanges by providing them with the discretion to certify that their listings are digital commodities, which the CFTC may (but is not required) to review.

While handing exchanges some discretion over listings is positive, the provision’s structure obviously favors centralized exchanges, because decentralized projects are unlikely to have the human infrastructure available to propose listings and manage the process.

The bill’s content, terminology, and structure make it clear little thought was spent understanding the benefits of DeFi (such as identifying specific areas where DeFi can efficiently disintermediate) or providing founders with a roadmap for compliant but decentralized protocols.

Therefore, as written, the bill suffocates DeFi startups and thus innovation and further does not recognize the unique properties of decentralization and disintermediation that DeFi can offer.

Alliance therefore opposes the current bill without significant structural reform, a clear carveout for DeFi, and/or a new bill.

The current bill is now being revised behind closed doors and could be passed as soon as December in an end-of-year omnibus package.

The time to raise awareness and your voice is now!

We call for unity in opposing the bill, including from CEXs and trade groups, all of whom recognize the importance DeFi has had and will have in shaping this industry. @coinbase @FTX_Official @binance @Gemini @krakenfx @coincenter @BlockchainAssn @fund_defi @globaldca1

A short-term win for centralized companies that sacrifices DeFi diminishes the overall value of the sector, reduces activity in the industry, and prevents crypto from delivering its full economic promise.

Individuals should reach out to their senators and representatives to oppose the bill due to its lack of consideration of decentralized technologies and the impact it will have on startups and innovation.

congress.gov/members/find-y…

We call on Congress and advocates for our industry not to rush to pass a bill that serves little more than the interests of traditional businesses and entrenched lobbies.

We welcome Congress to invite DeFi builders to meet and discuss how a comprehensive legislative plan can be drafted to balance the public’s interests in innovation and investor/consumer protection.