U.S. CFTC joins SEC in proposing crypto regulations, though spot-market gap lingers

The Commodity Futures Trading Commission is proposing a pair of rules on Monday to establish U.S. cryptocurrency oversight under its powers to regulate leveraged and margin-dependent trades, trying to fill in regulatory uncertainties left by the inability of Congress to finish the job of passing a crypto law.

The U.S. derivatives agency is pursuing two regulatory pathways it intends as a "comprehensive regulatory framework," according to agency officials — one that directly handles transactions and another that governs the firms hosting the activity. The latter will establish a new category of platforms known as crypto asset markets (CAMs).

Crypto activity associated with leverage, margin or financing would fall into the CFTC's regulatory world under the rules. So, if traders want to use borrowed funds to amplify their positions, that would fall into this oversight.

"Today, the CFTC is doing its part to deliver clear rules of the road for crypto asset markets with its advanced notice of proposed rulemaking on Regulation Crypto Asset Transactions (Regulation CTX) and Regulation Crypto Asset Markets (Regulation CAM)," CFTC Chairman Mike Selig said in remarks prepared for delivery at Fordham Law's annual Blockchain Regulatory Symposium. "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."

But the effort may continue to leave a significant gap because of the regulator's missing authority to oversee spot markets — the direct trading of crypto in which the assets change hands in their original form at current market prices, without leverage or margin considerations. That would include the unvarnished buying and selling of the largest swath of crypto tokens, such as bitcoin and Ethereum's ether , with one major exception: The CFTC can still police fraud and manipulation in those markets.

The agency's new efforts otherwise can't touch or replace the states' money-transmission regulations as the governing rules of direct trading, though CFTC officials said that firms that want to offer more complex products would do so through tailored, CFTC-regulated platforms. The officials said they're not yet sure what the scale of the remaining spot market will be until they hear more from the industry in the 60-day public comment period these proposals are opening up, though they suggested that consumers may prefer to do business in the federally regulated space.