The Desk - SPECIAL EDITION - CFTC's Proposed Regulation CTX and Regulation CAM の全文書き起こし

a person that is not an eligible contract participant or an eligible commercial entity and done so on a leveraged or margined basis or financed by the offer. So in both cases the transaction can be offered even if it's not entered into. so this is a similar statutory authority under which the CFDC regulates retail foreign exchange transactions that are leverage margin or finance. and there's there's a key distinction in jurisdictional hook and the commission's authority here and that is where there's not actual delivery of the commodity. So if there's actual delivery of the commodity then the commission doesn't have this regulatory authority. And one of the the key points of the MPRM that we'll talk about is a preliminary position from the commission that interprets actual delivery in a way where you know a large swath of retail crypto transactions would not have actual delivery. So what the commission says in the release is that if a customer receives titles at crypto assets through a book entry. you know on the the venues books and records, that doesn't constitute actual delivery. So if a customer takes possession of a digital wallet address or account, then actual delivery would occur. And and so if actual delivery occurs then the transaction wouldn't be subject to to this new regime. and one thing that's important is There's existing state licensing regimes and to the extent some of this transaction activity isn't offshore, it's already subject to some regulation. Can you talk about that? The Desk Special Edition: Yeah, so I mean this is also one of the main drivers, the C F T C said, for the A and P RM and ultimately the CFTC is seeking to sort of clean up two things. one is to establish really one federal authority for this. They mentioned the the web or patchwork of state licensing requirements. You have requirements in New York, California, there are others And the CFTC says that those state licensing requirements no longer, I'm quoting them, adequately address risks arriving in financial markets and crypto assets with consumptive uses and functionalities that have moved far beyond just currency, which is also interesting that they're saying that digital asset used for payment has moved far beyond currency. and so they seek to establish that one sort of federal regulatory authority for this. The next piece, with regard to state licensing regimes that they talk about is that they want to protect retail participants from things like manipulation. They want to promote transparency. they have the you know kind of full sweep and breadth of the CFTC and their rules and regulations that come around fair dealing they note that the state licensing regimes don't have any legal mechanism or authority to self regulate or surveil or establish or enforce rules like CFTC registered DCMs do. So that's another piece of this is that the AMPR says that DCMs are responsible for creating rule books and policing these markets. Another thing to think about when

we're talking through this is that the AMPRM refers to crypto assets as any digital representation of value that is recorded on a cryptographically secured distributed ledger, which makes sense. the sort of key in thinking of this and thinking of state licensing regimes is that it excludes payment stable coins issued by permitted payment stable coin issuers under the Genius Act. And it also excludes payment stable coins issued by a foreign payment stable coin issuer. So those remain out of reach of this ANPRM. Stuart, can you sort of walk us through the two parts and then maybe start us off to talk about what the regulation CTX entails and some of the interpretations therein? Stuart: Yeah, so as we mentioned, there's two components to this proposed or envisioned regulatory framework. Regulation CTX, which would apply to crypto transactions, so short CTX short for crypto transactions, and that's a set of preliminary interpretations of the commission's authority under section two C two D of the CEA, and then regulation CAM or crypto asset market. which is a contemplated exchang exchange regulation framework for crypto exchanges. and so you know they ask the AMP solicits comments and they have questions on both of these topics, but let's kind of dive into what they set out. regulation CTX that applies to crypto asset transactions relies on three interpretations that will be critical to the C of D C cementing and statutory authority to include really the broad categories of transactions and markets that I think they're seeking to. the first is offers. So we talked about 2C, 2D applying to offers of transactions even if they're not entered into. So the commission talks about offers on a leverage margin or finance basis and what that means. And they read a covered offer to attach to any transaction in which a retail customer could accept leverage. And so that that would apply to transactions where the customer doesn't accept leverage. And you know they they further go on to say a covered offer could be made in onboarding documents, terms and conditions, margin documentation. And it can apply to all transactions on an exchange in an account or in a product class. So it's really the availability of leverage or margining or financing that would bring transactions and venues into scope rather than a specific transaction utilizing leverage or being financed. Next, they talked talk about you know how third party credit and how financing can come into play, and that a transaction can be considered to be financed if the platform sets or influences terms, markets it, shares revenue from it, operates through the platform that it's accessed or otherwise provides material assistance and financing. And the in the release asks whether on-chain lending Vaults and similar mechanisms are also a covered offer in terms of offering financing. And then critically the CFTC puts forth an interpretation of actual delivery. we've had prior interpretations of actual delivery that have come out and then boo been withdrawn, but this builds on court case CFTC versus Mon X Credit Co. which is a ninth circuit case in 2019. and the CFTC here suggests that possession and control of a crypto asset, which would constitute actual delivery, would require holding private keys, as we mentioned before, would require you know actually having the crypto asset in a digital wallet off the venue. So for assets with governance or staking rights, it may also require unfettered access to those rights, including staking without intermediary fees. and so really this is critical to which transactions will be in scope. and you know fully paid open positions would stay under this regime until actual delivery occurs. So Even if a customer declines leverage, but they hold a book entry position with a trading venue, you know, it would the transaction would remain under the framework until actual delivery occurred. and after you get actual delivery and the transactions quote unquote come out of outside of this 2C2D framework, the CFTC still has broad anti-fraud and anti-manipulation authority. For cash commodity markets, even if they wouldn't fall under this regime. and on-chain settlement gets favorable treatment here. So the the CFTC's preliminary view is that most on-chain trading protocols deliver The Desk Special Edition: Thank you. Stuart: assets directly to a purchaser's wallet and satisfy actual delivery. in some cases, even where a lien remains outstanding. So really what we're talking about here, Barrett, is trading venues where a customer you know maintains an account, a wallet at the the provider and you know that that provider is custodying custodying the crypto assets for the customer. And so do you want to talk about crypto asset markets? So we're talking about trading menus, we're talking about exchanges. What what is the C C F T C looking at for crypto asset markets that are exchanges? The Desk Special Edition: Yep, so crypto asset markets or regulation CAM. So these the CFTC is contemplating a new subcategory of DCMs with their own core principles. They'll still be subject to the larger DCM core principles, but there would be a subset of core principles specifically tailored to crypto asset transactions. And when I think about how to analyze these new this new subcategory of DCM. think of it in sort of like the key components, registration, intermediation, clearing, leverage, margin, custody, things like that. And so I'm just gonna kind of tick down through that. So the registration, this crypto asset market would list only crypto asset transactions governed by these CAM core principles. and the twenty-three statutory DCM core principles. And then when we think about intermediation, there would be FCM intermediation of all crypto asset transactions under a modified FCM crypto transaction regime. And it does discuss the possibility of a limited purpose FCM category. So Maybe we have another subcategory of FCM on the way. for

clearing DCO clearing under a modified DCO crypto asset transaction regime. for integration. So a CAM may dual register as both an FCM and a DCO or an affiliate with either one. Which is consistent with the conflicts and affiliations proposal that the CFTC put out in August. The next one is key, so leverage providers. they provide leverage. So Further, a sponsored bank has to represent in writing that it'll follow the FCM's leverage rules, and these arrangements have to be listed in the CAM rulebook. And further that any leverage that is extended is extended bilaterally and on individualized terms. Next and sort of how I think about it is is margin. And so either the current DCO set model or a prescriptive regime possibly delegated to the NFA, similar to how retail Forex is done, maybe coming. And then for listing, manipulation factors like free flow, governance control, open source code, network security, and crypto asset Disclosures are expressly non issuer style disclosures are coming. next up and how I think about it is are the exemptions. There is a de minimis exemption from CAM registration and NFTs are flagged as open questions when considering exemptions. The release also discusses a topic that's likely to surface and we talked about state licensing up at the top, but preemption is likely to be a large piece of this. And it argues that treating 2C2D transactions as if they're futures, Congress preempted state law over trading facilities that offer them. and I fully expect to see this litigated in the future as the CFTC moves into this space. we're seeing it now with prediction markets, and I fully expect to see it with crypto asset transactions. And litigation is a good place to sort of segue into Stuart, how viable, sustainable, durable do you think the CFTC's approach proposing this regulation is? Stuart: Well, I think it depends for it. And just just to go back to what you were saying, regulating these transactions as as if they were futures, I mean that that's the goal. So futures markets in the US have been some of the most resilient and sustainable markets, and you know, that protect customers, maintain, you know, integrity and transparent trading, and that's that's what the CFTC would like to bring to these markets. So how sustainable is this more viable is this regulatory framework? You know, in in one sense it's more durable than action through you know commission interpretation, CFTC staff guidance or no action letters. but I think it can potentially be weaker than express statutory authority given to the commission through through legislation. So the benefits here is there will be rule makings and it'll be the the CFTC's interpretation of their authority. but after Loper Bright Enterprises versus Raimondo an express delegation of authority to the agency is where it stands strongest you know where it stands strongest. another I think benefit is that it has you know opt-in features. So unlike features which you know can only be traded on a DCM or a foreign board of trade, CAM registration would be voluntary. and it would bring significant customer protections with FCM intermediation and DCO clearing, significant benefits to you know detecting fraud and manipulation, having these venues self-regulate. and it it'll be difficult to argue that the commission's gone too far. The Desk Special Edition: it'll be interesting to see if there's a bifurcation of markets here with crypto asset transactions. If you have some that are under this new subsection of DCMs and maybe they have more liquidity because banks are providing them and and consumers appreciate the enhanced protections, or if the sort of I'm gonna say unregistered, but the unregistered crypto asset transaction scheme takes off in it if if that market bifurcates. Stuart: Yeah, that's an interesting point because a lot of the largest crypto companies already have DCMs. and so the question is does this proposal bring some venues onshore that that don't have US presence and or does it does it bring venues into play that don't already have a DCM? and as I mentioned, another benefit is that you know these would be final regulations ultimately, and would supplant staff guidance, FAQs, interpretations, so more durable than than stopgap approaches that I think the the commission has used and Also the Commission has been criticized for regulation by enforcement in this area. So putting out regulations would alleviate those kind of concerns and criticism. then the other thing is if participants opt in and use this framework, then it creates constituency that's voluntarily seeking to to come under it and and gain the certainty and benefits and protection of you know being regulated by the CS CFTC and subject to the Commodity Exchange Act. the case kind of against the Commission's authority here is there's there's no express statutory framework. I think it's been acknowledged the Commission needed and wanted broader statutory authority. That that's what the Clarity Act was for. and so there's out of the gate, I think there's an acknowledgement that it's not perfect use of statutory authority. the Loper Bright case I mentioned cuts both ways though. so you have interpretations of offer, you have interpretations of actual delivery, and you have precedent and Here that's really only applicable in the Ninth Circuit. So there's some key statutory interpretations that could be contested. Barrett, you mentioned preemption, that's likely to be a significant issue here, as we've seen with event contracts. and so here you preempt state regulations and state licensing. in the in the same manner that we've seen it play out in the courts with event contracts. and so that could be a a weakness. and also you have you know the the political context. So a a proposed rule proposed rules here could come in twenty twenty seven. You know they they have to get feedback on the A and PRM draft rules and you know we have an election in twenty twenty

eight so it's y the the frameworks also relying on the joint crypto asset taxonomy and SEC's proposed regulation crypto assets. and so, trying to harmonize with the the SEC but also dependent on what they do and how they move forward. so do you wanna talk a little bit more about the Clarity Act? I know Some people have said it may not be totally out of the the the picture, but it seems like it is. The Desk Special Edition: may not be totally out of the picture as is I think correct because ultimately there will be some form of regulation around crypto asset transactions, some sort of statute around crypto asset transactions. And I think when people are reading through this A and P R they should think about two worlds and how they're making their comments. One is the world where this regulation is in place and functioning and governing your crypto asset transactions and then your the next world is whenever we get clarity or whatever the next version of it that makes its way into into wall. I think that's key as you're reading through this and and making comments. Stuart, what kind of comments do you think we'll see here? Do you think people will again poke at some of these interpretations or do you think this will sort of stand as it is? Stuart: I I think comments are likely to surface some of the tensions with how these businesses are operating currently and how they might operate under a proposed regime. So I think you will probably get they will probably get some comments on this covered offer interpretation and the financing interpretation. So, how do retail transactions that are leveraged margin in finance, how does that turn into an entire venue and business? and what do they actually offer currently? there's I think you'll get some comments on this interpretation about whether a lien precludes actual delivery. So there's there's places in the release where The commission says actual delivery can occur when there's a lien on the asset. And then there's questions about you know, is that the case? So if if there's a lien, are you actually taking you know clear title to the asset? and people may have different business models for mandatory FCM intermediation and DCO clearing. you may see people talk about the way they operate today and how that might not work. and then lastly what I think will come in is what are the c what would be the costs of this regulatory framework and what are the benefits. So that's key information that agencies need to draft regulations. I assume that market participants and others will fleck out, you know how this imp would impact their existing businesses, what are the costs, what and you know, what are the benefits as well? so what what are the next steps here, Barrett? what's what's gonna happen from here? The Desk Special Edition: So we have we have a ways to go, but the way things are going, I would expect this to move quickly. on timing, this ANPRM has to be followed by an actual proposed rule and then a final rule. folks commentating on this this week don't expect binding final rules before sort of late next year. there are four steps we think people could start doing. now in anticipation of this. And this is probably also just good housekeeping if you're offering crypto asset transactions. So the first would be to map every leverage, margin, lending, and financing touch point, including those run by any of your affiliates or your partners. Next, test custody and staking flows against the private key and unfettered access standards. Next, decide whether to comment directly to a trade association or both. I'm certain many trade associations will be commenting on this. And finally, calendar the deadline. So once this is published in the Federal Register, there'll be 60 days for comment. Stuart, any final closing words while we end the first special edition? Stuart: mean I think I think you summed it up from you know the market participant and business side it's really do you have leverage of margin or financing? Would would you fall under this covered offer or definition? and you know how how would your business, either currently or in the future, fall under this regime? and I think there will be a first mover advantage here as as there are with I would say many new regulatory regimes. in the CFTC is always cognizant of that, but I can see participants really wanting to take advantage of this and be the first to get registered as a crypto asset market. That's a ways down the line, but I think we'll probably see some of that as well. Barrett: Thank you, Stuart. That wraps our conversation today on the CFTC's advanced notice of proposed rulemaking regarding section 2C2D of the Commodity Exchange Act, and specifically regulation crypto asset transactions and regulation crypto asset markets. We hope everyone has a great weekend and roll tide.