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BitMEX Case Might Prompt a Closer Regulatory Look into DeFi

BitMEX Decentralized Exchange

DeFi

Regulation

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Sead Fadilpašić

Journalist

Sead Fadilpašić

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Sead specializes in writing factual and informative articles to help the public navigate the ever-changing world of crypto. He has extensive experience in the blockchain industry, where he has served...

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Last updated:

June 25, 2023

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The latest crackdown on the world’s first crypto derivatives exchange, BitMEX, might turn the regulatory eye towards the decentralized finance (DeFi) space, said financial services platform BitOoda.

“In our view, we will not be surprised if/when regulators take a closer look at DeFi platforms and participants, as they recognize the potential for these networks to be used for nefarious activity that violates the BSA (Bank Secrecy Act, aka Travel rule) or other rules, even if the network incorporates KYC [know your customer],” the company said in their latest regulatory analysis.

A question that regulators will “grapple with” is when exactly they should take enforcement action against “a DeFi effort” – this could be:

“during initial development when there are identifiable actors to target (e.g., owners/developers),
when there is fundraising/investment activity that may be inconsistent with securities laws,
or after a network has launched and is sufficiently decentralized, when there may be no regulatory targets other than the platform/technology itself.”

BitOoda found both the reasons for and against DeFi being subject to regulatory oversight.

What the company suggested is that DeFi might serve as “the ready answer” to regulators’ money laundering concerns, because of the features the space is the most proud of, so to say: open protocols, transparent blockchain-based activity, and transactions governed and executed by smart contracts instead of specific individuals or entities. So, “with a truly decentralized, peer-to-peer, community-managed platform, DeFi networks represent open markets that can and should operate without regulatory oversight,” BitOoda said.

However, they continued, all that is DeFi, its networks, protocols, infrastructure, governance structures, etc., are created by developers. “Those individuals, as well as the platform itself (i.e., the front end) are therefore subject to regulatory scrutiny.”

What’s more, there already exists a precedent per which the US Securities and Exchange Commission (SEC) “does not (or did not, at that time) believe decentralized platforms that conduct peer-to-peer transactions are exempt from regulation.” This was established in 2018 in the case against Zachary Coburn, the founder of EtherDelta, charged with operating an unregistered national securities exchange.

The least regulatory attention will likely be drawn by those platforms and protocols that continue to rely on self-custody, said BitOoda.

Still, the platform found that, even though “decentralized platforms could dispel many regulatory concerns that exist today regarding market risk, manipulation, and unfair trade practices, we expect regulators to make a concerted effort in the coming months to better understand DeFi, with an eye toward identifying potential risks to investors or use of the technology by bad actors.”

As reported, already in July 2019, the US Commodity Futures Trading Commission was investigating whether BitMEX broke rules by allowing Americans to trade on the platform, which isn’t registered with the agency. And just last week, three owners of BitMEX and five related companies have been charged by the regulator with operating an unregistered trading platform and violating multiple regulations. BitMEX said they intend to “defend the allegations vigorously,” adding that they have “always sought to comply with applicable US laws, as those laws were understood at the time and based on available guidance.”

However, several industry insiders argued that this case has shown that decentralization is the way to move forward for those offering crypto-related services.

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