Existing Rules Don't “Describe Leveraged Tokens”: CFTC's Pham after Uniswap Settlement

The US Commodity Futures Trading Commission charged decentralized exchange (DEX) developer Uniswap Labs with offering illegal leveraged and margined commodities transactions. The two parties simultaneously settled the charges with a payment of $175,000.

Meanwhile, CFTC's Commissioner, Caroline Pham, dissented from the order, pointing out that the existing rules do not specify characteristics of “leveraged tokens.” She also expressed concern over the regulator's “ever-expanding jurisdictional overreach.”

Leveraged Tokens Are Illegal on Unregistered Platforms

According to Wednesday's announcement, the regulatory action also includes a cease-and-desist order to prevent Uniswap from further violating the Commodity Exchange Act.

The regulator highlighted that Uniswap developed a protocol and interface allowing “Non-Eligible Contract Participants” and institutional users in the United States and abroad to trade digital assets through the Ethereum blockchain. The protocol allowed users to create and trade with hundreds of liquidity pools, consisting of matched pairs of digital assets valued against each other. It also included a limited number of leveraged tokens, which provided leveraged exposure to digital assets like Bitcoin and Ethereum.

The CFTC finds these leveraged tokens to be leveraged or margined commodity transactions that did not result in actual delivery within 28 days. Thus, they can only be offered to “Non-Eligible Contract Participants” on a board of trade designated or registered by the CFTC as a contract market. However, Uniswap is not a CFTC-registered contract market.

“Today's action demonstrates once again that the Division of Enforcement will vigorously enforce the CEA as digital asset platforms and DeFi ecosystems evolve,” said the CFTC's Director of Enforcement, Ian McGinley. “DeFi operators must be vigilant to ensure that transactions comply with the law.”

Two Dissenting Voices

However, two CFTC Commissioners, Caroline Pham and Summer Mersinger, dissented against the regulator's order concerning the decentralized exchange protocol. Notably, both are aligned with the Republican political party. There are five CFTC Commissioners, including the Chair, of whom a majority of three align with the Democratic Party.

“There is no evidence in the administrative record that describes the specific terms and/or characteristics of the 'Leveraged Tokens' as characterized in the settlement order,” Commissioner Pham wrote in her dissent. “I am concerned that the Commission's ever-expanding jurisdictional overreach continues to perpetuate a lack of regulatory clarity, not only regarding digital assets, but more significantly, for our cash commodity markets.”

Earlier, Commissioner Pham also criticized the enforcement department of the CFTC for its misconduct in the My Forex Funds case. Her comments even grabbed the attention of Republican Senator Charles Grassley from Iowa, who sent a set of questions to the CFTC's Chair to clarify the misconduct and the steps taken to address such issues.

“Given that the CEA and CFTC rules were written for traditional, centralized market infrastructure providers and intermediaries,” noted Commissioner Mersinger, “it was my hope that one day soon the Commission would consider rulemaking, or at the very least guidance, making clear how DeFi protocols could comply with them.”