CFTC Moves To Bring More Crypto Trading Under Federal Oversight. Exchanges Would Get A New Regulatory Path.

The U.S. Commodity Futures Trading Commission is moving to establish a new federal regulatory framework for crypto exchanges offering leveraged trading to retail customers, opening a path for some platforms to operate under nationwide CFTC oversight rather than relying primarily on state money-transmitter licenses.

The CFTC published an advanced notice of proposed rulemaking covering what it calls "crypto asset transactions," or CTXs -- retail commodity transactions involving digital assets that are conducted on a margined, leveraged or financed basis. The agency is seeking public comments before moving to potential formal rules.

Under the framework outlined by CFTC Chairman Michael Selig, exchanges that only want to offer those transactions could seek registration under a new subcategory of designated contract market called a crypto asset market, or CAM. Existing CFTC-registered designated contract markets could also offer CTXs under tailored rules.

The proposal would not require every U.S. spot crypto exchange to register with the CFTC. Selig said ordinary spot exchanges could continue operating primarily under state money-transmission regimes, while exchanges offering leveraged, margined or financed retail crypto transactions would fall under the federal framework.

"Only Congress has the authority to mandate that all crypto asset exchanges register with the Commission," Selig said in remarks Monday at Fordham Law School's Blockchain Regulatory Symposium. He described the system as a federal option for crypto firms, comparable to businesses choosing between certain state and federal regulatory structures.

State money-transmitter rules generally impose requirements such as know-your-customer and anti-money-laundering checks, but Selig said they do not provide the same market-specific protections associated with federal trading regulation, including requirements aimed at orderly trading, market manipulation and conflicts of interest.

Platforms registered as CAMs would be subject to core principles already applied to designated contract markets, including standards covering market surveillance, financial integrity, customer funds, abusive trading practices, conflicts of interest and system safeguards.

The CFTC is also considering crypto-specific requirements. Selig said platforms listing crypto asset transactions could be required to assess factors including token concentration, distribution methods, vesting schedules, lock-up periods, programmed token issuance and buybacks when determining whether an asset could be susceptible to manipulation.

Another part of the framework would establish a proof-of-reserves requirement for exchanges holding customer assets in omnibus accounts. Proof of reserves is generally intended to demonstrate that a platform holds assets corresponding to customer balances rather than relying solely on its own accounting statements.

The proposed framework would also require trades in covered crypto asset transactions to be intermediated by registered futures commission merchants, or FCMs. Those firms would manage customer accounts and funds while remaining subject to federal requirements covering capital, disclosures and segregation of customer property.

Using FCMs would also bring customer-facing activities under applicable Bank Secrecy Act obligations, including anti-money-laundering, customer-identification and suspicious-activity-reporting requirements, according to Selig's remarks.

The agency is not proposing a single maximum leverage ratio across crypto products at this stage. Instead, it is considering how existing CFTC rules should apply to individual leveraged transactions and asking market participants for input as it develops the framework.

The CFTC is also addressing when leveraged crypto transactions can occur outside a registered exchange. The Commodity Exchange Act contains an "actual delivery" exception for certain retail commodity transactions when the asset is delivered within 28 days.

Under the interpretation contemplated by the agency, transferring crypto to a customer's external, non-custodial wallet within that 28-day period would generally qualify as actual delivery, Selig said.

Monday's proposal follows months of broader federal rulemaking around digital assets.

In August, the Securities and Exchange Commission proposed its own Regulation Crypto Assets, creating a tailored securities-offering framework for certain investment contracts involving crypto assets. The SEC proposal includes exemptions for smaller offerings and a conditional safe harbor addressing when a crypto asset would no longer be treated as subject to an investment contract.

The CFTC also expanded its crypto derivatives framework earlier this year. In May, the agency approved a bitcoin perpetual contract submitted by KalshiEX, allowing a CFTC-registered designated contract market to list a perpetual futures contract referencing bitcoin's spot price.

The latest regulatory effort follows Congress' failure to complete legislation that would have created a more comprehensive statutory structure for the digital asset market.

The Digital Asset Market Clarity Act, or CLARITY Act, was designed to give the CFTC jurisdiction over digital commodities and establish clearer boundaries between the CFTC and SEC. An official House report said the legislation would also establish customer protections for entities required to register with either regulator.

Selig said Monday that the legislation would have required centralized crypto exchanges and brokerages to register with the CFTC and created specific core principles for those firms. With the legislation not reaching the president's desk, the agency is instead using authority it says already exists under the Commodity Exchange Act to regulate leveraged retail commodity transactions.