New CFTC Lawsuit May Signal Wider Trend in Regulation

Crypto and commodities derivatives trading exchange Digitex is being sued by the CFTC for offering its services illegally. The regulatory agency also made the unprecedented decision of suing a DeFi protocol and its DAO last week.

Questionably Decentralized

The Commodity Futures Trading Commission (CFTC) filed a complaint today against cryptocurrency futures trading exchange Digitex and its founder Adam Todd.

The U.S. regulator claims Digitex failed to register for the necessary license to run its operations or comply with Bank Secrecy Act requirements. Todd is also accused of manipulating the price action of Digitex’s native token, DGTX. 

Launched in 2018, Digitex marketed itself as a decentralized platform for trading cryptocurrencies, commodities, and other kinds of assets. One of its promised value propositions was its zero-fee model; costs were supposed to be covered by minting the DGTX token and forcing trades through it. The practice was believed to decentralize the exchange by essentially spreading its liquidity among token holders instead of keeping it on the exchange’s main servers. Though it reached an all-time high of $0.16 in October 2018, the DGTX token has since flatlined and is now trading for about $0.000018.

However, Digitex’s architecture is much more centralized than more recent on-chain derivatives exchanges such as dYdX or GMX. Digitex provides escrow services for its futures contracts and does not use automated market-making (AMM) technologies or liquidity pools. In fact, at the time of writing, the exchange’s website is currently inaccessible. While this could theoretically be a “front-end” issue, it seems possible the exchange was simply brought down on the back-end—which would be impossible if it were permissionless, open-source code on the blockchain.

Today’s complaint comes only a week after the CFTC filed a lawsuit against Ooki DAO, also for allegedly running an illegal derivatives trading exchange. The two cases differ because the Ooki protocol is a true smart contract platform and is thus decentralized. However, the CFTC made the unprecedented decision to hold stakers of BZRX tokens (Ooki’s native coin) liable along with the protocol’s founders. It also issued subpoenas to all DAO members by submitting the documents through the protocol’s online help chat box.

Compared to the Securities and Exchange Commission (SEC), the CFTC has historically been viewed as less hostile to the crypto industry. However, the agency’s lawsuit against Ooki DAO raised deep concerns in the space. Blockchain Association lawyer Jake Chervinsky stated that the move “may be the most egregious example of regulation by enforcement in the history of crypto.” And while the CFTC complaint against Digitex shouldn’t be seen in the same light (since the exchange cannot claim the same level of decentralization), it may be a sign of further enforcement actions. 

Disclaimer: At the time of writing, the author of this piece owned BTC, ETH, and several other cryptocurrencies.