Overview
- The CFTC has issued an advance notice detailing Regulation CTX and Regulation CAM, which would enable crypto exchanges to register as federally regulated "crypto asset markets."
- According to the agency's initial interpretation, providing leverage could subject even fully paid trades to CFTC regulation unless customers take actual delivery of their cryptocurrency.
- There is a 60-day period for public commentary. Exchanges that do not offer leverage can continue operating under state licenses.
The CFTC is looking to establish a federal framework for crypto exchanges, with leverage playing a crucial role.
This initiative follows the collapse of the Clarity Act, which aimed to set the regulatory standards for cryptocurrency activities in the U.S. The CFTC published an advance notice of proposed rulemaking on Monday, marking the beginning of a public feedback process prior to formal rule creation.
Myriad: Who wins the midterm elections? Click to make your prediction.The proposal consists of two interconnected regulations: Regulation Crypto Asset Transactions (Regulation CTX) and Regulation Crypto Asset Markets (Regulation CAM). The public will have a 60-day window to provide feedback once the notice is published in the Federal Register.
This plan is grounded in a 2010 provision of the Dodd-Frank Act, which mandates that retail commodity trades involving leverage, margin, or financing be executed on exchanges registered with the CFTC, similar to futures trading.
Under Regulation CTX, the CFTC interprets this rule broadly. Merely offering leverage, even in standard terms of service or onboarding materials, could bring fully paid trades under CFTC oversight, provided that the acquired crypto remains on the exchange’s internal ledger instead of being transferred to the customer's wallet.
Trades can avoid federal oversight only through "actual delivery," which the CFTC contends may necessitate customers retaining their private keys. On-chain trading protocols that generally transfer tokens directly to users' wallets would typically meet this requirement, according to the agency.
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The CFTC is considering requirements for proof of reserves and criteria for listing tokens that are susceptible to manipulation. Exchanges that do not offer leverage may continue to operate under state money transmitter licenses.
CFTC Chairman Michael Selig emphasized that these regulations are intended to "prevent, rather than just prosecute, fraudulent schemes like FTX."
The notice also distances itself from the agency's previous methods, labeling its enforcement actions against Kraken, Ooki DAO, and Uniswap as "regulation by enforcement."
The CFTC submitted this framework to the White House for evaluation in September, shortly after the Clarity Act was rejected in the Senate. Selig had indicated in August that the agency would establish its own crypto regulations if Congress failed to act. The CFTC has also presented the White House with new rules for prediction markets.
Meanwhile, the SEC is pursuing its own regulatory path, having proposed Regulation Crypto Assets in August and recently unveiling an innovation exemption for tokenized stocks.