U.S. financial regulation has long recognized the distinction between building infrastructure on the one hand and providing regulated financial services on the other. An internet service provider runs the cables that let a derivatives broker take orders from its customers, but no one confuses either person for the other. The broker answers to the CFTC for how it handles its customers’ orders and funds. The internet service provider does not; it built a tool that someone else uses to run a regulated financial services business, but it does not run that business itself. 

Today, HPC and Phantom filed a joint comment in response to the CFTC’s request for information to carry that distinction into onchain markets. We support the Commission’s decision to examine whether its rules remain fit-for-purpose as financial technology evolves, and write to recommend that it tailor its rules so that developers can build, registrants can modernize, and regulation falls on the firms actually performing regulated financial activities.

The line between building a tool and running a regulated business runs through American derivatives markets. Software engineers build the matching engine at the core of a regulated futures exchange that pairs every buy order with a sell order. They have done so for decades, and the CFTC has never treated them as running the exchange. The engineers write the code, and the exchange carries the compliance obligations associated with offering a regulated product.

Software developers in the digital asset industry have too often been denied that same clarity. Under prior leadership, the CFTC left developers who contribute to an onchain protocol guessing whether they may be treated as operating an unregistered exchange or clearinghouse, so the cautious move was to build offshore. Many did.

Fortunately, today's CFTC, under Chairman Selig's leadership, is working to change that, and to make room for fintech firms building in the digital asset and derivatives markets.

The Commission's preexisting rules were built for legacy markets. There, customers hand their orders and money to a chain of intermediaries: a broker takes the order, an exchange matches it, and a clearinghouse guarantees and settles it, collecting margin and standing behind the trade. At every step, someone other than the customer controls the funds. 

Onchain markets work differently, and they need rules of their own. They let users hold their own funds and trade directly with one another, under rules written in code. And they let the exchanges and clearinghouses already inside the system run those same functions on onchain infrastructure, settling faster and more transparently, while still meeting their core regulatory obligations. These markets have moved past the rules written for custodial intermediaries running on their own private systems, and the rules should move with them.

We recommend three steps: 

Confirm that publishing onchain protocol software, on its own, does not require registration. For engineers deciding where to build, that alone often decides whether the work happens here at home or offshore.

Give the Commission's own registrants a clear path to run regulated functions using onchain infrastructure. An exchange or clearinghouse could then retire decades-old systems for infrastructure that is transparent by default.

Turn the recent Phantom no-action letter into a rule. Non-custodial wallet providers do not perform the role of financial intermediaries, which the Commission recognized in granting relief to Phantom. A rulemaking would extend that treatment to every firm in the same position, so each one has durable certainty rather than having to ask, one at a time, for relief the Commission has already granted.

We can modernize our financial infrastructure without giving up the protections that intermediaries have historically been tasked to provide. Self-custody and transparent onchain systems let us build those protections into the technology itself, by design rather than by decree, while regulated intermediaries keep responsibility for the things technology cannot solve on its own. This is the path that keeps innovation in the United States and puts the next generation of financial markets within reach of American consumers.

Taken together, these steps bring innovative markets onshore, under CFTC oversight, with customers holding their own money. The CFTC asked which of its rules get in the way. This is our answer, and it is within the Commission's own authority to act on.

Our full comment letter is available here.