CFTC action shows why crypto developers should get ready to leave the US

Considerable anxiety exists in the Web3 world related to regulation and the legal status of cryptocurrency projects. That is particularly evident in the US, where the Commodity Futures Trading Commission (CFTC) caused concern in September with an announcement that it was fining a decentralized autonomous organization, Ooki DAO, and its investors $250,000. The fine was particularly ominous, considering that DAOs are supposed to be “regulatory-proof.”

The CFTC said in its statement on the case that Ooki DAO’s bZeroX protocol offered illegal off-exchange trading of digital assets. The agency took issue with the fact that its founders, Tom Bean and Kyle Kistner, tried to use the existing bZeroX protocol in the DAO to put it beyond the reach of regulators.

“By transferring control to a DAO, bZeroX’s founders told bZeroX community members that their operations would be enforcement-proof,” the CFTC said. “However, the BZx founders were wrong. DAOs are not immune from enforcement and cannot break the law with impunity.”

The fine is not that surprising. The CFTC and other regulators are not going to follow a veil of decentralization. But there is something in the ruling that is extremely troubling to Web3 advocates and developers. The agency’s complaint indicated that voters within a given DAO could be distinctly responsible.

In other words, it is no longer just entrepreneurs who will be targeted, as participating users may also be held liable. This will surely have a chilling effect on turning people away from DAOs and Web3 in general. After all, the whole point is to avoid this kind of targeting and to create new ecosystems where all parties can vote in peace on issues that concern them.

Related: Biden’s cryptocurrency framework is a step in the right direction

And it is not an isolated case. The Securities and Exchange Commission is battling with the CFTC for authority over the Web3 world. Crypto-libertarians will dispute whether centralized governments should even have a say in an ecosystem that they have only attacked and never helped.

The Stabenow-Boozman bill, a proposal in the US Senate, would potentially give the CFTC direct oversight of tokens that qualify as digital goods. This means that exchanges and online Web3 providers will potentially register with the CFTC, further consolidating decentralized finance (DeFi) into a centralized network that it was designed to escape.

Monitoring wallets, targeting smart contracts and more

The SEC has traditionally tried to regulate cryptocurrency as much as possible. The agency plays a useful role as it is able to pursue cases of outright fraud and Ponzi schemes, which are prevalent in the Web3. But there is a stark difference between going after cases of fraud and regulating or governing the industry with regulations that are not applicable.

There are too many question marks associated with crypto regulation. An example relates to microtransactions and airdrops. Such transactions take place on many different exchanges over many years, with different price fluctuations. This is impossible to report on from a tax perspective, especially when many platforms are no longer in operation. Coupled with rewards for stakes and even derivative tokens floating stakes, it becomes almost impossible to account for.

The Biden administration is even targeting proof-of-work (PoW) blockchains with new “comprehensive guidelines” released in September. At the same time, many administration officials seem to be pushing for a digital dollar.

Another highly controversial, draconian crypto regulation that lawmakers have proposed includes forcing recipients to verify the personal information of senders when transactions exceed $10,000. They also seek to regulate smart contracts as future contracts. And criminal charges are being brought against those who develop mixers or privacy coins.

Although no one has actually said it, what we seem to be witnessing is a war on crypto cloaked in democratic language. The very pillars on which distributed ledgers are built crumble if these measures are enforced.

More conflict to follow?

The conflict between traditional regulators and modern finance seems to be reaching a melting point. The regulatory framework is not adapting to meet the needs and strengths of modern DeFi. As such, there is now a gap between new Web3 protocols and existing legislation. It is almost impossible to deal with the existing legal system as it is not flexible enough to account for DeFi.

Ooki DAO is really a bad sign for US crypto developers. And it certainly won’t be the last. A number of bills and procedures are in place. Paradoxically, such actions are likely to simply encourage developers to create programs that are even more resistant to existing laws. The impossibility of complying with existing legislation may leave them with little other choice.

Related: Biden’s anemic crypto framework offered nothing new

In a way, it leaves US crypto developers in the dark about what they should be developing. From another angle, perhaps the way forward is quite clear. All protocols moving forward may need to be fully decentralized.

This was the premise of the very first cryptocurrency, Bitcoin (BTC). Without a central point of failure, there is no one to target. Developers will have to work on building ecosystems that are completely separate with no ties to the old economic system.

Blockchains free of identity and Know Your Customer requirements are the only viable option if developers want to continue operating on US shores. It’s something they need to acknowledge sooner rather than later.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.