CFTC Proposes Federal Regulatory Framework for Leveraged Retail Crypto Trading

Earlier this week, the Commodity Futures Trading Commission (the “CFTC” or the “Commission”) issued an advance notice of proposed rulemaking (the “ANPRM”) describing its intent to build a federal regulatory framework for retail crypto asset transactions involving margin, leverage or financing, and to create a new category of CFTC-regulated trading venue, the Crypto Asset Market (“CAM”). The initiative is titled Regulation Crypto Asset Transactions (“Regulation CTX”) and Regulation Crypto Asset Markets (“Regulation CAM”). 

The CFTC does not assert new jurisdiction in the ANPRM; rather, the agency is proposing to formalize in a rulemaking a legal theory the CFTC has pursued through enforcement for years. Section 2(c)(2)(D) of the Commodity Exchange Act (the “CEA”), added in 2010, has long required “retail commodity transactions” involving margin, leverage or financing to trade on designated contract markets (“DCMs”) unless an exception applies. The Commission began enforcing that requirement against both centralized exchanges and decentralized crypto protocols in 2021 and 2022 for offering this kind of “off-exchange” trading (i.e., without DCM registration). 

The Commission never built the registration categories, listing standards or intermediary structure a crypto exchange would need to operate on-exchange, so enforcement was the only tool it had. Chairman Selig has acknowledged that although Congress has long required exchanges offering this kind of trading to register with the CFTC, the agency “never used this authority to issue purpose-fit rules for these transactions or platforms, only to enforce.” The ANPRM is the Commission’s first attempt to close that gap.