Sanctions Against Abra Mean that SEC and CFTC Could Be Targeting DeFi Next
Abra, an investment platform that allows users to trade tokenized versions of stocks and bonds, has become the latest crypto company to suffer at the hands of U.S. financial regulators. Earlier this week, the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) launched a joint attack against the company for various violations.
The two regulators filed charges against Abra for illegal off-exchange swaps in digital assets and foreign currency in the U.S., ordering the company to pay out $300,000 in fines split evenly between the SEC and CFTC.
According to the official CFTC filing, Abra was fined for accepting orders for thousands of digital assets and foreign currency based contracts, which allowed customers to gain exposure to price movements of over 75 different assets. However, Section 2(e) of the Commodity Exchange Act (CEA) makes it unlawful for any person to enter into a swap unless the swap is subject to the rules of a board of trade designated as a contract market. In soliciting and accepting orders for these contracts, Abra effectively acted as a futures commission merchant without a proper license.
Abra has since agreed to stop offering tokenized stocks to both U.S. and non-U.S. residents on their platform and will continue operating as a regular cryptocurrency investment platform and wallet.
While this isn’t that big of a blow to Abra itself, as the company most likely won’t have any problems maintaining their current business model, the SEC and CFTC rulings could have a significant impact on DeFi as a whole.
The two regulators, notorious for their tough stance on the crypto industry, could use this ruling as a precedent and target other DeFi protocols that offer swaps and other similar services. Because the ruling states that tokenized stocks should be subject to the same regulations regular stocks are, DeFi protocols such as Compound, Uniswap, and Kyber could all easily find themselves targeted by the SEC and CFTC in the future.
Many influential voices in the crypto industry believe that the huge growth the DeFi space has seen in the past few months has made regulators very interested in the space. Some have even drawn parallels between today’s DeFi market and the 2017 ICO boom.
“They can look at DeFi applications, understand them, and now make convincing arguments that can threaten to consume the time and energy of an entire development team,” said Josh Garcia, a partner at Ketsal, a law firm that specializes in crypto regulation. “I expect nothing but more inquiries, investigations, and regulatory actions going forward.”
The CEO and founder of DeFi protocol Aave told reporters that they’re feeling the heat from regulatory pressure and have already begun to increase their legal resources and preparing for the worst. However, he did note that Abra was hit with fines because it offered a centralized service—suing a decentralized protocol would be much harder, if not completely impossible.
Maya Zehavi, the founding member of the Israeli Blockchain Industry Forum, believes that the deliberate language used in these rulings means that other DeFi products, decentralized or not, could potentially face the same charges as Abra.
She also noted that the fact that the SEC and CFTC managed to rule against Abra despite the fact that the company was registered in the Philippines could spell trouble for the industry.
“The original SEC ruling on Abra plainly states that the SEC has [a] standing regardless of the jurisdiction if the planning and strategy are [done] by Americans or [outside] the U.S.,” she wrote on Twitter.