CFTC Moves to Put Leveraged Retail Crypto Trading Under Federal Rules

The CFTC proposed an optional federal registration path for crypto exchanges that offer retail customers margined, leveraged, or financed trading. The proposal is an advanced notice of proposed rulemaking ("ANPRM") for Regulation Crypto Asset Transactions ("Regulation CTX") and Regulation Crypto Asset Markets ("Regulation CAM").

The agency would act under its existing authority over retail commodity transactions in CEA Section 2. Exchanges that offer only spot trading are subject to CFTC anti-fraud and anti-manipulation authority but are otherwise regulated under state money transmission laws. Retail transactions offered on a leveraged, margined, or financed basis must take place on a designated contract market ("DCM"). Exchanges that also offer perpetuals and other derivatives fall under full CFTC jurisdiction. The ANPRM addresses the middle category and calls these transactions crypto asset transactions ("CTXs").

DCMs could list CTXs under tailored rules. Firms that offer only CTXs could register as a DCM or as a new crypto asset market ("CAM") subject to the core principles in CEA Section 5. When listing CTXs, exchanges may have to consider manipulation risk, token distribution, lock-ups, vesting schedules, programmatic issuances, and buybacks. Regulation CAM also contemplates a "proof of reserves" requirement for exchanges that hold customer property in omnibus accounts.

Futures commission merchants would have to intermediate CTXs. That would bring the transactions under risk disclosure requirements (Rule 1.55), capital and segregation rules, and Bank Secrecy Act duties under Rule 42.2. The CFTC asked how these requirements should apply to crypto.

CFTC Chair Michael Selig called the framework a "federal option," since only Congress can require all crypto exchanges to register with the CFTC, and said the agency is acting after Congress failed to pass the Clarity Act. He said the prior administration regulated crypto "by enforcement." He added that the CFTC is exploring a policy for developers who publish software but don't take orders, control execution, or hold customer assets. He also said the CFTC proposes to codify an interpretation that delivering a crypto asset to a user's non-custodial wallet within 28 days generally meets the CEA's "actual delivery" exception.

Comments on the ANPRM are due 60 days after Federal Register publication.