Interpretation of the New CFTC Rules: Regulatory Scope Includes Crypto Activities Involving Leverage, Margin, or Financing, Lacks Jurisdiction Over Spot Markets

October 6 — The U.S. Commodity Futures Trading Commission (CFTC) on Monday proposed two new rules, aiming to establish a U.S. cryptocurrency regulatory framework based on its authority over leveraged and margin trading, in order to fill the regulatory uncertainty left by Congress's failure to complete crypto legislation.

Agency officials said the CFTC is advancing two regulatory paths intended to form a "comprehensive regulatory framework": one directly addresses trading, namely the "Regulation for Crypto Asset Transactions" (Regulation CTX); the other regulates the companies that host these activities, namely the "Regulation for Crypto Asset Markets" (Regulation CAM). The latter would create a new category of platforms called "crypto asset markets" (CAMs).

Under the proposed rules, crypto activities involving leverage, margin, or financing would fall under CFTC oversight. This means that if traders use borrowed funds to amplify positions, they would be subject to the agency's regulation.

CFTC Chairman Mike Selig said in prepared remarks for Fordham Law School's annual blockchain regulation symposium: "These rules will codify a path that allows crypto asset trading platforms to operate under the CFTC's unified national supervision, based on the same statutory authority that the previous administration used to regulate through enforcement."

However, this effort may still leave major gaps. The CFTC lacks comprehensive regulatory authority over the spot market — the spot market refers to direct trading of cryptocurrencies, where assets change hands in their original form at current market prices, without leverage or margin. This includes the direct buying and selling of the largest crypto tokens such as Bitcoin and Ethereum. But there is one important exception: the CFTC can still combat fraud and manipulation in these markets.

The agency's new initiative cannot reach or replace state money transmission regulations as the governing rules for direct trading. But CFTC officials said companies wishing to offer more complex products would provide them through tailored, CFTC-regulated platforms. Officials said that before hearing more industry feedback during the 60-day public comment period, they are not yet certain how large the remaining spot market would be, but suggested that consumers may prefer to conduct business within a federally regulated space.