Phantom Technologies, the developer behind the widely used non-custodial Phantom wallet, and the Hyperliquid Policy Center (HPC) have formally submitted a joint comment to the Commodity Futures Trading Commission (CFTC), advocating for a comprehensive update to the agency’s regulatory framework regarding onchain market infrastructure. The filing comes as a direct response to the CFTC’s Request for Information (RFI) concerning the evolution of financial technology and the potential barriers that existing regulations pose to the integration of decentralized systems within the traditional financial ecosystem.
The core of the submission centers on the argument that current federal regulations are built upon an antiquated, custodial-centric market model that does not account for the technical realities of blockchain technology. By urging the CFTC to recognize the distinction between software development and financial intermediation, Phantom and HPC aim to pave a legal pathway for American users to access decentralized derivatives markets while maintaining the protections afforded by federal oversight.
The Push for Regulatory Modernization: Onchain vs. Custodial Models
The joint comment highlights a fundamental friction between the Commodity Exchange Act (CEA) and the operational logic of decentralized finance (DeFi). Under the current regulatory regime, the CFTC’s rules generally assume a market structure where intermediaries—such as Futures Commission Merchants (FCMs)—hold customer funds, execute orders, and maintain records. In this traditional "custodial" environment, the intermediary acts as a gatekeeper and a point of systemic risk, which necessitates rigorous registration and capital requirements.
However, Phantom and HPC argue that onchain markets operate on a fundamentally different premise. In a decentralized environment, users typically trade directly through smart contracts and retain exclusive control over their private keys and assets. Because the "intermediary" is often a piece of immutable code rather than a human-led firm handling commingled funds, the groups argue that applying traditional custodial rules to non-custodial software providers is both impractical and counterproductive to the CFTC’s mission of protecting market integrity.
The filing emphasizes that onchain infrastructure can actually enhance transparency and reduce systemic risk. By utilizing public ledgers, regulators can gain real-time visibility into market positions and collateralization levels, a feat that is often difficult in the fragmented world of traditional finance.
Defining the Boundaries of Registration
One of the most significant requests made in the joint filing is for the CFTC to provide clear "bright-line" rules regarding what activities trigger a requirement to register as a market participant. Phantom and HPC have asked the Commission to confirm that the act of developing, maintaining, or contributing to open-source onchain protocol software does not, in and of itself, constitute a regulated activity.
The groups propose that registration requirements should be strictly limited to entities that perform traditional financial functions, such as:
- Directly handling or possessing customer funds.
- Executing trades on behalf of third parties.
- Acting as a counterparty to customer transactions.
By separating the "software layer" from the "service layer," the filing seeks to protect developers from the legal liabilities typically reserved for financial institutions. This distinction is vital for the growth of the DeFi ecosystem in the United States, as the threat of being classified as an unregistered exchange or broker has driven many innovative projects to block American IP addresses or relocate to more permissive jurisdictions.
From No-Action Relief to Formal Rulemaking
A central pillar of the Phantom and HPC submission involves the future of "no-action" letters. In the past, the CFTC has issued specific relief to Phantom, acknowledging its status as a non-custodial wallet provider that merely provides a technical interface to regulated markets without performing the functions of a broker or exchange.
While this letter provided a temporary "safe harbor" for Phantom, the joint filing calls on the CFTC to codify this relief into a formal, industry-wide rule. The groups argue that case-by-case no-action relief is insufficient for long-term industry growth because it is discretionary and can be rescinded at any time. A formal rulemaking process under the Administrative Procedure Act (APA) would provide the broader crypto industry with the legal certainty needed to invest in infrastructure and offer services to U.S. retail and institutional clients.
"A formal rule would ensure that all wallet and front-end providers who adhere to non-custodial standards are treated equally, rather than relying on individual letters of intent," the filing suggests. This move would effectively standardize the "Phantom Model" of non-custodial access as a legitimate gateway to regulated derivatives markets.
Integration of Onchain Protocols into Regulated Entities
Beyond protecting software developers, the joint comment outlines a vision for how existing regulated entities—such as Designated Contract Markets (DCMs) and Derivatives Clearing Organizations (DCOs)—could utilize onchain infrastructure to improve their operations.
Phantom and HPC suggested that the CFTC should create a clear path for:
- Designated Contract Markets (DCMs): To utilize onchain protocols for the matching and execution of trades, potentially allowing for 24/7 market operations and automated order books.
- Derivatives Clearing Organizations (DCOs): To employ smart contracts for real-time margining, settlement, and default management.
Currently, clearing and settlement in traditional markets often involve a multi-day process (T+1 or T+2). Onchain infrastructure allows for "atomic settlement," where the transfer of the asset and the payment occur simultaneously. The filing argues that allowing DCOs to adopt these technologies would significantly reduce counterparty risk and lower the capital requirements currently needed to cover settlement delays.
Background Context: The Evolving Stance of the CFTC
The filing by Phantom and HPC comes at a pivotal moment for the CFTC. Under the leadership of Chairman Rostin Behnam, the agency has frequently asserted its jurisdiction over "digital assets that are commodities," such as Bitcoin and Ethereum. However, the agency has also faced pressure from both the industry and Congress to provide more granular guidance on how DeFi fits into the existing legal framework.
The CFTC’s RFI, to which Phantom and HPC responded, is part of a broader effort by the Commission’s "LabCFTC" and its technology advisory committees to understand the risks and benefits of decentralized ledgers. This dialogue is occurring against the backdrop of several high-profile enforcement actions against decentralized platforms, creating an environment of "regulation by enforcement" that many industry participants find stifling.
Timeline of Key Events
To understand the significance of this filing, it is necessary to view it through the lens of recent regulatory and corporate milestones:
- 2021-2022: The CFTC begins increasing its oversight of crypto derivatives, leading to significant fines against platforms like BitMEX and Polymarket.
- Early 2023: Phantom Technologies receives a "no-action" letter from the CFTC, providing temporary relief for its non-custodial wallet operations.
- Late 2023: Hyperliquid emerges as a leading decentralized perpetual exchange, gaining significant volume but remaining unavailable to U.S. users due to regulatory uncertainty.
- Early 2024: The CFTC issues an RFI seeking public comment on the impact of fintech on regulated intermediaries.
- Present: Phantom and HPC file their joint comment, seeking to transform temporary relief into permanent policy.
Supporting Data: The Growth of the Onchain Derivatives Market
The push for regulation is driven by the sheer scale of the market in question. According to data from DeFi Llama, the total value locked (TVL) in decentralized derivatives protocols has seen a steady increase, often exceeding billions of dollars in daily trading volume globally.
Hyperliquid, one of the parties in the filing, has consistently ranked as one of the top decentralized exchanges (DEXs) by volume. However, because of the lack of a clear regulatory path in the U.S., a significant portion of the global liquidity for these products remains offshore. Phantom and HPC argue that by modernizing CFTC rules, the U.S. could capture this economic activity while ensuring that American consumers are protected by the same standards of fairness and transparency that apply to the Chicago Mercantile Exchange (CME).
Statements and Inferred Reactions
While the CFTC has not yet issued a formal response to the joint comment, industry advocates have praised the move. Organizations like the Coin Center and the Blockchain Association have long argued that software developers should not be treated as financial institutions.
Conversely, traditional financial intermediaries may view the proposal with caution. Existing FCMs and clearinghouses have invested billions in infrastructure designed to comply with custodial rules. A shift toward onchain, direct-access markets could disrupt their business models. However, the Phantom/HPC filing addresses this by suggesting that these traditional players should be the ones allowed to use the onchain tools, rather than being replaced by them.
Analysis of Implications: A Potential Paradigm Shift
If the CFTC adopts the recommendations laid out by Phantom and HPC, it would represent a paradigm shift in American financial regulation. It would signal a move away from "entity-based regulation" (regulating the firm) toward "activity-based regulation" (regulating the function).
For the crypto industry, the implications would be profound:
- Innovation Safety: Developers could write and publish code for decentralized protocols without the immediate fear of being charged with operating an illegal exchange.
- U.S. Access: Platforms like Hyperliquid could potentially find a legal way to offer their services to U.S. residents, provided they partner with the right front-end interfaces or register specific components of their service.
- Efficiency Gains: Traditional exchanges could lower costs by migrating their "back-office" functions (settlement and clearing) to public or private blockchains.
The filing concludes by reiterating that Phantom and the Hyperliquid Policy Center are committed to working with the Commission to ensure that the U.S. remains a leader in financial innovation. By bridging the gap between the code-driven world of DeFi and the rule-driven world of the CFTC, the groups hope to foster a market that is both decentralized and dependable.
