Amid the intensifying regulatory scrutiny of the crypto industry, regulators have turned their attention toward decentralized finance (DeFi) protocols, accusing several of them of operating without viable licenses. Following this, Coinbase CEO, Brain Armstrong has taken a stand encouraging the projects to take proper legal action against regulators 

Coinbase CEO Champions Legal Resistance

On Wednesday, September 13, Brian Armstrong Co-Founder and Chief Executive Officer (CEO) of Coinbase, one of the world’s largest cryptocurrency exchanges took to X (formerly Twitter) and declared his adamant disapproval of the recent regulatory constraints imposed on DeFi protocols. 

Armstrong has appealed to the projects to legally challenge regulatory actions of the United States Commodities and Futures Trading Commission (CFTC).

The Coinbase CEO argued that the CFTC should be prioritizing developing and enabling proper regulatory frameworks for the cryptocurrency industry and DeFi ecosystem instead of taking an aggressive approach by sanctioning and closing down DeFi projects and imposing regulations unilaterally. 

“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 establish precedent,” Armstrong stated.

He added that the CTFC’s action against DeFi projects is deteriorating the ecosystem’s growth and pushing “an important industry offshore.”

Many people in the crypto community have voiced support for Armstrong’s stance on the regulatory crackdown of the DeFi industry. Some community members have stated that some projects are unable to take proper legal action against the CTFC because they lack adequate funding. Others believe that legally challenging the regulators would help ensure the DeFi industry’s long-term viability and credibility. 

DeFi Protocols Under Regulatory Scrutiny

On Tuesday, September 7, the CTFC issued orders and financially sanctioned three prominent DeFi protocols, Opyn, ZeroEx, and Deridex. 

The regulatory commission released the statement on an X post, charging these protocols for failing to register as a swap execution facility (SEF) or designated contract market (DCM). The commission also charged the protocols for not incorporating a customer identification program required of Futures Commission Merchants (FCMs) as part of a Bank Secrecy Act compliance program. 

In a press release, the regulatory commission stated that it had ordered an official cease and desist order and issued a $250,000 fine to Opyn, $200,000 to ZeroEx, and a $100,000 penalty to Deridex. 

Presently, all three crypto firms have agreed to settle the charges; however, it has not been confirmed if they will shut down their operations permanently. 

Despite the steady growth of the DeFi ecosystem, many projects have been prone to failures and crashes. Some have experienced significant losses from security breaches, causing users to lose a substantial amount of digital assets while others have performed rug pulls and made away with customers’ considerable assets. 

This is why the need for clearer regulatory guidance and rules are needed in the crypto and DeFi space to ensure the safety and security of individuals in the digital ecosystem.