In August, the Commodity Futures Trading Commission (CFTC) launched the Crypto Sprint to provide regulatory clarity and foster innovation in digital asset markets. Seeking to implement the recommendations in the President’s Working Group on Digital Asset Markets report, this effort aims to clarify the applicability of CFTC registration requirements to decentralized finance (DeFi).
To support this goal, we recently submitted a response to the CFTC which proposes three concrete, actionable measures within the agency’s current authority that would protect developers creating DeFi derivatives products and services in the United States, and further the Trump Administration’s goal of making the United States the “crypto capital of the world.”
What’s the problem?
Blockchain technology has the potential to revolutionize financial markets, including derivatives markets. Specifically, blockchain networks and smart contract protocols, together with the apps (frontend websites and applications) people use to access them, offer significant advantages over traditional derivatives markets. Those advantages include:
- peer-to-peer transactions without intermediaries,
- lower transaction costs,
- user control of assets through self-custody,
- auditable and verifiable records on public blockchains,
- operations in accordance with transparent rules rather than by opaque discretion, and
- virtually instantaneous settlement.
Yet, to date, the development of DeFi derivatives products has occurred largely offshore because it is not clear when the Commodity Exchange Act (CEA) requires exchange or intermediary registration — or indeed, whether the CEA assumes the presence of such registered third parties. As a result, it is altogether impossible for DeFi products and services to comply.
Making matters worse, the CFTC under the previous administration brought a series of imprecise enforcement actions that adopted expansive and novel interpretations of their own authority, particularly by failing to distinguish between protocol functionality, app functionality, and the products for which they may be used, and providing inconsistent and contradictory guidance as to what types of conduct give rise to which registration obligations.
This uncertainty has a real cost. U.S. developers are shifting activity overseas because it is unclear how the CEA and existing CFTC rules apply to decentralized, non-custodial systems. As a result, while the market for tokenized and onchain derivatives has expanded substantially, this growth has primarily occurred outside of the United States, to the detriment of U.S. users, traders, and developers.
Without a clear framework, domestic users lose access to onchain alternatives, and it becomes more difficult for regulators to oversee digital asset businesses. The CFTC has a unique opportunity to provide clarity, guidance, and a regulatory path that will reverse this unfortunate state of affairs, provide adequate protections to developers, and allow DeFi innovation to flourish in U.S. financial markets.
What’s the solution?
In line with the agency’s statutory mandate to promote innovation, we propose three measures that the CFTC can undertake to help bring DeFi derivatives products back to the United States — while also preserving the safety and integrity of U.S. financial markets:
1. The CFTC should make a clear and emphatic statement that neither blockchain networks and smart contract protocols nor their developers are subject to the CEA’s registration requirements. This statement should acknowledge the limits of the CFTC’s authority to regulate software, particularly where that software is not operationally controlled by any person, including where such systems are:
- Autonomous, executing and enforcing transactions and other activities without human intermediation and without any person having unilateral authority to alter functionality.
- Permissionless, not restricting access or empowering any person to restrict access.
- Credibly neutral, not granting anyone private permissions, hard-coded privileges, or similar rights over others that would enable them to discriminate.
- Non-custodial, enabling participants to maintain total independent control of digital assets owned by them.
Importantly, any such requirements established by the CFTC should take into account both the potential benefits of blockchain technology and the risks that may arise from the elimination of operational control. The CFTC should consider and recognize the ways in which the nature of blockchain technology and the manner in which blockchain networks and smart contract protocols function may be consistent with the statutory objectives of the CEA in novel ways.
2. The CFTC should provide no-action relief and/or interpretive guidance confirming when apps are not engaged in activity that requires registering with the CFTC. For example, apps are not engaged in conduct triggering CFTC registration where they do not take custody or control of user assets, do not exercise discretion with respect to user-initiated transactions, do not solicit or provide investment recommendations, do not provide tailored derivatives trading advice, and do not act as a counterparty to any transaction initiated by the user.
This relief and/or guidance should also address potential off-exchange trading, indicating what users apps may enable to access protocols, registered exchanges or intermediaries, or exempt exchanges or intermediaries. In addition, the CFTC should clarify what steps taken by an app to exclude U.S. person access are sufficient to remain outside of the CFTC’s territorial jurisdiction.
3. The CFTC should engage in formal rulemaking and/or adopt exemptive relief to provide a safe harbor or innovation exemption setting out the circumstances and way in which apps, where they fall outside of the above proposal, can still comply with the CEA and CFTC rules via a tailored registration pathway.
Why now?
The market for DeFi derivatives has continued to grow rapidly — just last month, the trading volume of perpetual futures products alone exceeded $1 trillion. Without regulatory clarity much of this activity will continue to occur offshore. This problem is also unlikely to be addressed in crypto market structure legislation, which focuses on digital assets that are not derivatives, like network tokens, and spot markets for such assets.
Clear rules would give the CFTC better visibility into onchain activity and ensure that, in line with its mandate, innovation happens in the United States rather than offshore. With builders seeking workable compliance pathways and the technology maturing quickly, this is the right moment to create a framework that protects users while strengthening America’s competitiveness in the future of financial markets.
Read our full proposal.
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