The CFTC Is Bringing Crypto Into Wall Street. Let DeFi Stay Wild.

On October 5th, the Commodity Futures Trading Commission (CFTC) announced plans to establish a federal regulatory framework for crypto exchanges offering leveraged and margined trading. With the CLARITY Act failing to pass, the agency is moving ahead under its own rule rather than waiting for Congress.

The plans are published as the Advance Notice of Proposed Rulemaking (ANPRM), which outlines two frameworks, Regulation Crypto Asset Transactions (CTX) and Regulation Crypto Asset Markets (CAM). It’s important to note that these are not final rules; instead, the agency is seeking public comment before making an official draft.

Below, I outline the new proposals and how the CFTC should move forward with them. Therefore, this article provides public comment that the CFTC might find useful. Moreover, this news also reflects a line of thought I’ve consistently raised: regulators are doing whatever they can to update the financial system with crypto infrastructure without attempting to replace it. And I believe this should be the point of crypto. Crypto’s greatest feat is how it changes financial coordination; the crypto assets that back said financial coordination are not necessary - if anything, their speculative nature can be destructive. The destructive aspect can be left for those who welcome the risk.

CTX and CAM

CTX establishes rules for retail crypto transactions involving either leverage or financing. For example, a customer borrowing funds from an exchange to purchase Bitcoin could fall under the framework, even if the transaction involves actual cryptocurrency rather than a futures contract.

However, the Commodity Exchange Act exempts certain leveraged transactions from futures-style regulation if the buyer receives actual delivery within 28 days of purchase. However, there is a debate over what constitutes actual delivery of crypto. For example, if a customer borrows $4,000 to purchase $5,000 in Bitcoin, does having the $5,000 in Bitcoin credited to their exchange account count as delivery, or must they receive it in their own wallet with full control of the private keys? I assume the crypto community will chant loudly and proudly, “not your keys, not your crypto.” However, this generally makes it impossible for exchanges to enforce liquidations; thus, I don't see a clear pathway for users to own their assets while owing on collateral. It’s possible for third-party applications or firms to mediate this process between key holders and liquidators,s, but this opens the door to more attack vectors and more regulatory red tape. Thus, I propose applying the 28-day rule only to exchange accounts - at least for the foreseeable future.

CAM, on the other hand, would create a new federal registration pathway for crypto exchanges offering leveraged trading to retail customers. The main question is whether these exchanges should be allowed to handle trading, custody, and lending themselves, or be required to separate these functions among different firms, as traditional futures markets generally do. For example, rather than allowing an exchange to hold customer funds and manage leveraged positions itself, those responsibilities would fall to a regulated intermediary known as a futures commission merchant (FCM).

CAM would move crypto trading toward this model, partly to prevent another FTX meltdown. However, it could also complicate trading and increase costs and fees. I imagine many traders would migrate to DeFi alternatives (e. g., Hyperliquid), while institutions would welcome the added compliance. Quite frankly, that may be the ideal outcome. Leveraged trading is already dangerous for inexperienced retail traders, and centralized exchanges have done little to protect them from themselves. Let regulated exchanges serve those who want institutional safeguards, and let the Wild West remain in DeFi for those willing to accept the risks.

Federal Regulation Without Congress

In his October 5 remarks at Fordham Law, CFTC Chairman Michael S. Selig cited FTX's collapse as a reason to change existing regulations, noting that they lack strong guardrails to prevent the misuse of customer funds or conflicts of interest.

However, the CFTC's authority is limited as it can only regulate certain leveraged crypto transactions, not ordinary spot trading. For example, an exchange offering leveraged Bitcoin purchases could fall under the proposed rules, while one offering only fully paid purchases generally would not. This leaves a significant gap, as spot exchanges can still misuse customer funds without ever offering leveraged trading. Expanding federal oversight to the broader spot market would still require Congress (e.g., the Clarity Act).

Selig acknowledged these limits but argued that the CFTC and SEC already have enough authority to act. This follows the SEC's recent Innovation Exemption and crypto custody proposals, with both agencies moving ahead under existing laws rather than waiting for Congress. Nonetheless, we won’t see what a true crypto regulatory landscape can look like until Congress DOES act. For now, we can only plan and offer our proposals.

Moreover - alas, the direction is becoming clear. Crypto is not replacing financial regulation. Regulators are adapting the existing system to accommodate it. If you have your own comments for the CFTC, let us know, and we will collect all opinions to send off.