The Commodity Futures Trading Commission (CFTC) is taking steps to create a federal regulatory framework specifically for cryptocurrency exchanges. This initiative comes after Congress did not pass a bill that would have defined the market structure for a significant part of the digital asset sector.
On Monday, October 5, the CFTC released an advance notice of proposed rulemaking. This document proposes two interconnected regulatory frameworks that would enable crypto exchanges to register as federally regulated “crypto asset markets.” This development follows the collapse of the Clarity Act, which did not advance in the Senate last month. The Clarity Act aimed to clarify the division of regulatory duties for digital assets among federal agencies after extensive discussions over the past two years.
As this is an ANPRM (Advance Notice of Proposed Rulemaking), the CFTC is inviting public feedback before they formalize any regulations. The public will have a 60-day window to submit comments following the notice’s publication in the Federal Register.
The proposed frameworks include Regulation Crypto Asset Transactions (Regulation CTX) and Regulation Crypto Asset Markets (Regulation CAM), according to reports from Decrypt.
Regulation CTX aims to leverage an existing clause from the Dodd-Frank Act that mandates retail commodity transactions involving leverage, margin, or financing to take place on a CFTC-registered exchange unless the commodity is delivered to the buyer. The agency is contemplating a broad interpretation of this authority, suggesting that even transactions where customers have leverage might come under CFTC scrutiny if the assets aren’t moved to the customer’s wallet.
This interpretation positions “actual delivery” as a crucial distinction between state and federal oversight. According to the CFTC, “actual delivery” might necessitate that customers have control over their private keys. Consequently, decentralized or on-chain methods that enable tokens to be directly transferred to customer wallets would typically meet this requirement.
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On the other hand, Regulation CAM would introduce a new registration category for “crypto asset markets,” based on the existing framework for designated contract markets that govern futures exchanges, as reported.
Transactions on these registered crypto asset markets would typically flow through futures commission brokers who must adhere to anti-money laundering regulations. Only those intermediaries or affiliated banks could extend leverage, although exchanges could register simultaneously as brokers and clearinghouses.
The CFTC is also exploring potential proof-of-reserves requirements and guidelines aimed at preventing exchanges from listing tokens that are prone to market manipulation. The proposed framework does not intend to fully federalize the entire crypto spot market, allowing exchanges that do not provide leverage to continue operating under state money-transmitter licenses.
CFTC Chairman Michael Selig stated in a press release that this new framework is aimed at preventing fraudulent schemes, such as FTX, rather than merely reacting after the fact.
This announcement also signifies a shift from the agency’s past focus on enforcement, marking an end to what has been characterized as “regulation by enforcement” in cases involving Kraken, Ooki DAO, and Uniswap, as reported by Decrypt.
This initiative allows the CFTC to utilize its existing legal authority to address part of the regulatory void that Congress aimed to fill with the Clarity Act.
The agency forwarded this proposed framework to the White House for review in September, shortly after the Senate failed to advance the legislation. In August, Selig had warned that the CFTC would formulate its own regulations if Congress did not take action.
In parallel, the Securities and Exchange Commission is advancing its own regulatory agenda. Last month, it proposed its version of Regulation Crypto Assets and introduced an innovation exemption for tokenized stocks, showing that federal regulators are moving forward with administrative actions even in the absence of the comprehensive legislation the crypto sector sought from Congress.