“Clever” but fragile: the CFTC’s go-it-alone crypto framework has obvious limitations

The U.S. Commodity Futures Trading Commission (CFTC) took steps to regulate crypto exchanges as it released an early-stage rulemaking on October 5. However, the bigger story is what it left out. 

The agency made use of its already existing authority to propose rules affecting leveraged and margin trades, but did not touch the larger spot market on purpose, due to its limited authority in that regard.

Leverage in, spot trading out 

The commission published a document it termed an Advance Notice of Proposed Rulemaking that affects two linked measures: Regulation Crypto Asset Transactions, or CTX, and Regulation Crypto Asset Markets, or CAM. 

CTX makes it clear that the trades the agency has jurisdiction over are retail activity that makes use of leverage, margin, or borrowed funds. CAM, however, exists to stand up a new exchange license that’ll host that retail activity.

That license happens to build on the present DCM, DCO, and FCM categories without ascribing new authority to itself. The license also serves as a simpler replica of the designated contract market registration that the CFTC currently supervises. 

The Commodity Exchange Act covers retail commodity trades done on margin. And the CTX relies heavily on Section 2(c)(2)(D) of the Act.

The new rules do not affect ordinary spot trading in any way. And exchanges exclusively offering ordinary spot trading do not need to register 

Why Selig acted without Congress 

The proposed new rules come after the CLARITY Act stalled in Congress. The bill failed to pass cloture on September 15, by a 49 to 50 vote. It needed 60 votes to advance in the Senate. The CLARITY Act aimed to create separate jurisdictions for the CFTC and the Securities and Exchange Commission (SEC) and create statutory registration categories for spot exchanges, brokers, and dealers.

After the failure of the CLARITY ACT, Mike Selig, Chairman of the CFTC, has chosen to go solo. 

“These rules would codify a pathway for crypto asset exchanges to operate under uniform national oversight by the CFTC pursuant to the same statutory authorities that the prior administration instead utilized to regulate by enforcement,” Selig said. 

He went on to add that prevention of fraudulent schemes was his main goal, rather than prosecution.

Selig also alluded to a safer environment for software developers, saying, “A person should not have to register as an introducing broker simply because that person shipped code.”

The durability challenge

The new rules, while they are clever, are also fragile. One of the drawbacks is the CFTC’s inability to go beyond anti-fraud and anti-manipulation enforcement. This means the commission cannot create a licensing regime for spot exchanges on its own.

Also, whatever rules are made by the agency will only last until a new administration comes into power and reverses them all. For example, the Fifth Circuit had vacated a lot of the Biden administration’s SEC crypto rules for going beyond their statutory authority. 

JPMorgan has tagged the latest approach by the agency as less durable than legislation passed by Congress since the rules can be easily struck down by a future commission.

The CFTC’s effort is part of a four-agency push, alongside the Treasury, the SEC, and the Federal Reserve, converging on a January 18, 2027, effective date. That coordination carries its own risk: the SEC lost Commissioner Hester Peirce on October 2, leaving Chair Paul Atkins and Commissioner Mark Uyeda to finalize its share by unanimous agreement.

The CFTC’s comment window runs 60 days once the notice is published in the Federal Register. Even then, the agency must issue formal proposed rules and final ones before any exchange faces binding requirements.