This article was compiled and organized by BlockWeeks
CFTC Throws Out a 108-Page Regulation Draft
On Monday, CFTC (U.S. Commodity Futures Trading Commission) Commissioner Michael Selig appeared at a seminar at Fordham Law, first quoting Reagan's famous line—"The nine most terrifying words in the English language: I'm from the government, and I'm here to help"—and then announced Regulation CTX, which is exactly how the CFTC plans to "help."
Reg CTX and its companion Reg CAM together constitute a 108-page advance notice of proposed rulemaking (ANPR). The 2010 Dodd-Frank Act stipulated that retail commodity transactions with leverage, margin, or financing must be conducted on registered exchanges. For the past decade, the CFTC has enforced against the crypto industry on this basis, yet never explained how to achieve compliance. Now, the industry has finally received a guide.
This ANPR is a very good starting point for the industry. The questions it raises are specific and professional, meaning the industry can finally engage in a real discussion about margin rules and custody, rather than arriving with opinions and leaving with a Wells notice.
Structural Differences Between Traditional Futures Markets and Crypto Exchanges
Traditional futures markets are artificially split into different parts. The exchange (Designated Contract Market, DCM) matches trades, enforces rules, and monitors the market; the broker (Futures Commission Merchant, FCM) holds customer funds on behalf of clients, segregated from its own funds at approved depositories, and is subject to net capital requirements, regulated by the National Futures Association; the clearinghouse (Derivatives Clearing Organization, DCO) steps into the middle of every trade, guaranteeing both sides, and must hold sufficient resources to withstand the default of its largest member. A single company can own multiple of these entities—CME Group owns both an exchange and a clearinghouse—but each is a separate registered entity with its own rulebook.
Crypto exchanges were never built this way. Partly because of crypto's own "hold equals own" characteristic, and partly because of the lack of regulatory guidance. They put listing, matching, settlement, and custody all in the same place, and the coins in users' hands are merely a line on their internal ledger.
Reg CAM does not force crypto exchanges to split these functions into different entities. It allows crypto asset markets to register as their own FCM, their own DCO, or both—i.e., a "fully integrated CAM" (this structure is exactly what Coinbase requested in its comment letter last year).
Yes, an exchange that acts as your broker, your lender, and your clearinghouse is pretty much what FTX looked like. The CFTC's response is: FTX already ran this experiment, and CFTC regulation did indeed protect the minority of FTX customers within its jurisdiction.
Selig pointed out: "Although FTX had a U.S. subsidiary holding a state-level money transmission license, customer funds went missing. However, customer property held by FTX's CFTC-registered subsidiary remained segregated and safe" (the ANPR also notes that the remaining approximately 130 FTX-affiliated entities have all gone bankrupt).
The integrated structure is intended for existing U.S. crypto exchanges like Coinbase. The rest of the document is aimed at all other participants, and that's where the truly interesting content lies.
Watching a futures regulator, after 300 case law footnotes, arrive at the conclusion "not your keys, not your coins" is both strange and wonderful.
Delivery: Private Keys as Ownership
If a transaction achieves "actual delivery" within 28 days, it can escape exchange requirements. Reg CTX finally outlines what this means for crypto. True delivery "may require holding a voucher (e.g., a private key)," which we expect means: coins held on an exchange's internal ledger don't count, while coins in a wallet where you control the private key may count. The CFTC "preliminarily believes" that on-chain trading protocols typically deliver assets "directly to the buyer's digital wallet." Once delivery is complete, footnote 279 states that the agency "no longer has jurisdiction" and can only enforce against fraud and manipulation. Watching a futures regulator, after 300 case law footnotes, arrive at "not your keys, not your coins" in an ANPR (and even retweeting the slogan) is both strange and wonderful.
Selig said: "For those who prefer to operate as the cypherpunks originally envisioned... we aim to provide the necessary clarity for on-chain finance to flourish."
We are not lawyers, but to us, this means a Uniswap-style swap into your own wallet requires no CAM, no DCM, and no FCM. It is encouraging to see two market regulators converging here: when the SEC released its innovation exemption last month, outgoing Commissioner Hester Peirce said that peer-to-peer smart contract trading doesn't need an exemption at all. And last week, the SEC proposed custody rules allowing state trust companies to hold crypto assets for investment advisers and funds, and even allowing advisers to hold private keys themselves when no qualified custodian can be found. Both regulators appear to have made "your keys, your coins" federal policy (sorry, Noah Doe).
Vaults: The Trade Itself Can Escape, But the Entry Point May Not
The trade itself may escape CFTC jurisdiction, but the interface used to execute the trade may not. Reg CTX defines a leverage "offer" extremely broadly: it can exist in a platform's user agreement and be bundled with "all available trades on the exchange." Question IV.B.iii in the ANPR asks: does providing access to on-chain "vaults" through "the same exchange interface retail customers use to purchase crypto assets" constitute offering leverage? This is an open question with a lot of money behind it. Coinbase allows customers to borrow USDC against their crypto assets through Morpho, and to lend USDC to Morpho vaults.
(The middle portion of the original text involves LLM coding capabilities, as well as improvements to fuzzing and formal verification techniques, which may have implications in the future.)
Proof of Reserves
The proposed rules describe proof of reserves as third-party auditors attesting that reserves are "sufficient to cover all of its liabilities to customers," and ask about versions using "innovative applications of blockchain technology." We believe this should be written into the rules, and that the blockchain version is a superior solution to traditional audits. Reserves are placed on-chain for anyone to see; liabilities can be committed to a Merkle tree, thereby proving not only reserves but also solvency.
Regulated On-chain Exchanges
This is the main event. Section V.B of the ANPR asks whether the Commission should "confirm that a CAM (or DCM) may use a blockchain system as its matching and execution layer." Putting this together with the testing-related questions, in our view, you can almost see a compliant version of Hyperliquid—serving U.S. users, with an FCM-gated, KYC-required front end, and an on-chain order book behind it. The price of entry is likely transparency. Regulators cannot formally verify signed binaries, and Hyperliquid's node software is still distributed in this way. We believe the compliant version may need open-source code.
A "Consolation Prize"
Although this ANPR is refreshing, in my view, it is more like a "consolation prize." Congress had the opportunity to write market structure into law through the CLARITY Act, but it fell short in the Senate. What we got is not even a proposed rule, but an advance notice from a commission with only one commissioner—and anything a regulator writes can be erased by the next administration.
Nevertheless, such a thoughtful piece of work will make it harder for the next administration to pretend that market structure issues are simple, or that crypto exchanges are blatant rule-breakers. With luck, it can pull this debate from cable news back into boring conference rooms with bad coffee. The comment period closes in 60 days.
