Regulatory Clarity Sought for Decentralized Tech as Watchdog Builds on Landmark Exemption Ruling
In a significant development, the Commodity Futures Trading Commission (CFTC) is poised to transition its provisional guidance for Phantom Technologies into a formal, industry-wide framework. This move, announced by CFTC Chair Mike Selig at Consensus Miami, marks a deliberate shift towards providing durable protections for non-custodial software developers. Selig emphasized his preference for rulemaking, stating that the agency will work to codify the existing guidance and establish it as a formal rule in the near future.
By doing so, the CFTC aims to provide clarity and certainty for software developers, enabling them to create and offer their products in the US market with confidence. Currently, the no-action letter issued to Phantom Technologies in March is limited in scope, applying only to the specific company and requiring other developers to submit their own requests for relief. In contrast, formal rulemaking would extend automatic protection to all non-custodial software providers that meet the specified conditions, making it more challenging for future commissions to revoke.
The eight conditions that define the no-action limit are narrow in scope, requiring that Phantom Technologies does not handle customer funds or digital assets, act as a counterparty, guarantee execution, solicit or accept orders for futures or swaps, or receive transaction-based compensation. Instead, the company is limited to providing user interfaces and software tools, and may only facilitate connections with registered entities such as futures commission merchants and introducing brokers.
The Securities and Exchange Commission (SEC) has adopted a parallel stance, issuing a statement that a person providing infrastructure or technology for securities transactions would not be considered a broker solely based on that activity. This convergence reflects a broader effort by the agencies to harmonize their approaches, as outlined in their March 11 Memorandum of Understanding.
The alignment of the CFTC and SEC positions is crucial for non-custodial wallet developers, which often operate at the intersection of derivatives, securities, and prediction markets. A lack of consistency across agencies would create legal uncertainty, undermining the purpose of the no-action letter.
In a separate development, Selig noted that the CFTC's authority over prediction markets is being challenged by state regulators, with the agency having sued several states over attempts to restrict event contracts. The CFTC expects these matters to be appealed to the Supreme Court, and Selig reiterated the agency's commitment to defending its jurisdiction.
The two regulatory tracks outlined by Selig - codified rulemaking for non-custodial software protections and federal preemption litigation over prediction markets - are intended to provide certainty and clarity for market participants. Both efforts rest on the argument that the CFTC has the authority to define crypto market structure rules in the US. The next step in the process would be the issuance of a Notice of Proposed Rulemaking, followed by a public comment period, although Selig has not provided a specific timeline beyond indicating that it would happen "very soon".