A crypto market structure bill failed to reach 60 votes in Congress. In response, the Commodity Futures Trading Commission intends to write its own federal rules for crypto markets, relying on powers it already holds.
The derivatives regulator put out an Advanced Notice of Proposed Rulemaking (ANPRM) on Sunday. The notice seeks public comment on two regulatory regimes the agency plans to roll out: Regulation Crypto Asset Transactions (Regulation CTX) and Regulation Crypto Asset Markets (Regulation CAM).
It’s important not to jump ahead, though. None of these rules has been enacted yet.
A comment period, not a finished rulebook
The ANPRM marks the very beginning of the regulatory process. The CFTC has not yet enacted any CTX or CAM rules. For now, the agency is gathering feedback from the industry, and that feedback could end up shaping formal proposed regulations later on.
The comment window runs for 60 days once the notice appears in the Federal Register. Anyone with a stake in the outcome should pay attention to that period.
The agency frames the initiative as an effort to create crypto-specific regulations under the authority it currently has through the Commodity Exchange Act. CFTC Chairman Michael Selig, however, cast it in far grander terms.
“Today’s action is a critical step in the CFTC’s ongoing efforts to ensure America remains the crypto capital of the world,” Selig said.
That’s an ambitious claim for what amounts, procedurally, to a call for feedback.
Leveraged trading in the crosshairs
What concerns the CFTC most right now is retail trading that involves margin, leverage or other forms of financing. Ordinary spot trading of cryptocurrency is not the main focus at this stage.
The reasoning behind that focus becomes easier to see when you look at how Selig splits up the market.
Selig’s three-tier framework
Selig laid out a market divided into three tiers. The first tier includes conventional spot exchanges. These would largely remain under the existing system of state money transmitter regimes, although the CFTC would keep its power to pursue fraud and market manipulation.
The second tier consists of exchanges that allow retail customers to trade cryptocurrency using margin, leverage or financing. The regulator refers to these transactions as CTXs, and this is the segment the new rules would cover.
The third tier is made up of exchanges facilitating futures, perpetuals and derivatives. Those already fall under the CFTC’s designated contract market framework.
In practice, if you purchase coins outright on a spot exchange, the structure as outlined leaves things largely as they are. If you trade with borrowed funds on a retail platform, however, you’re in the slice of the market where the CFTC is drafting new rules.
Why the CFTC is acting now
The step arrives only weeks after the Senate failed to pass the Clarity Act, the latest congressional effort at a comprehensive digital asset regime. The bill fell short of the 60-vote threshold needed to advance, with four Republicans siding with Democrats to block it.
Had it passed, that legislation would have handed the CFTC a broader statutory role over crypto markets. With it defeated, the agency is operating within the bounds of existing law.
Operators of platforms offering leveraged crypto trading to retail customers should submit comments during the 60-day window. That is the point in the process when the CTX rules can still be influenced.