The central theses
- The CFTC today filed a lawsuit against Digitex and its founder, alleging that it failed to register for the proper license to operate its commercial operations.
- While Digitex markets itself as a decentralized project, it falls short of today’s DeFi standards.
- Last week, the CFTC took the unprecedented step of suing Ooki DAO.
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Crypto and commodity derivatives trading exchange Digitex is being sued by the CFTC for illegally offering its services. The regulator also made the unprecedented decision last week to sue a DeFi protocol and its DAO.
Questionably decentralized
The Commodity Futures Trading Commission (CFTC) filed a complaint today against cryptocurrency futures trading exchange Digitex and its founder Adam Todd.
The US regulator alleges that Digitex failed to register for the necessary license to operate its business or to comply with the requirements of the Bank Secrecy Act. Todd is also accused of manipulating the price action of Digitex’s native token, DGTX.
Digitex was launched in 2018 marketed itself as a decentralized platform for trading cryptocurrencies, commodities, and other types of assets. One of the promised value propositions was the zero-fee model; The costs should be recovered by minting the DGTX token and forcing trades. The practice was believed to decentralize the exchange by essentially spreading its liquidity among token holders, rather than holding them on the exchange’s main servers. Despite hitting an all-time high of $0.16 in October 2018, the DGTX token has since flattened and is now trade for about $0.000018.
However, Digitex’s architecture is much more centralized than newer on-chain derivatives exchanges such as e.g dYdX or GMX. Digitex offers escrow services for its futures contracts and does not use automated market making technologies (AMM) or liquidity pools. In fact, the exchange’s website is up to date at the time of writing inaccessible. While this could theoretically be a “front-end” issue, it seems possible that the exchange was simply downgraded to the back-end — which would be impossible if it were open-source, permissionless code on the blockchain.
Today’s complaint comes just a week after the CFTC filed a lawsuit against Ooki DAO, also for allegedly operating an illegal derivatives trading exchange. The two cases are different because the Ooki protocol is a true smart contract platform and is thus decentralized. However, the CFTC made the unprecedented decision to hold BZRX (Ooki’s native coin) token stakers 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 chatbox.
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 has raised deep concerns in space. Blockchain Association attorney Jake Chervinsky specified that the move “might be the most egregious example of regulation through enforcement in the history of crypto.” And while the CFTC complaint against Digitex shouldn’t be seen in the same light (since the exchange can’t claim the same level of decentralization), it could be a sign of further enforcement action.
Disclaimer: At the time of writing, the author of this article owned BTC, ETH, and several other cryptocurrencies.
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