The rapid evolution of decentralized finance has prompted a significant call for regulatory clarity from two prominent players in the digital asset space. Phantom Technologies, the developer behind the widely used Phantom wallet, and the Hyperliquid Policy Center (HPC) have formally submitted a joint comment to the Commodity Futures Trading Commission (CFTC). This filing serves as a direct response to the Commission’s request for information regarding the impact of current regulations on financial technology innovation. The central thesis of the submission argues that the existing regulatory framework, largely drafted in an era of centralized intermediaries, is ill-equipped to handle the nuances of onchain market infrastructure, where users maintain self-custody of their assets and interact directly with smart contracts.
The joint comment highlights a fundamental friction between legacy financial laws and the technological reality of blockchain-based markets. Under the current regime, the CFTC’s rules are predicated on a custodial market structure. In this traditional model, intermediaries such as brokers, clearinghouses, and exchanges act as the primary gatekeepers, handling customer orders, managing funds, and ensuring settlement. Phantom and HPC contend that this "intermediary-heavy" assumption does not apply to onchain protocols, where the software itself facilitates these functions without a central entity ever taking possession of user assets. By asking the CFTC to bridge this gap, the two organizations are seeking a regulatory pathway that recognizes the unique security and transparency benefits of non-custodial technology.
The Push for Technological Neutrality in Regulation
At the heart of the filing is the request for the CFTC to adopt a stance of technological neutrality. Phantom and HPC emphasize that the mere act of developing or contributing to open-source, onchain protocol software should not, by itself, serve as a trigger for registration with the Commission. This is a critical distinction for the decentralized finance (DeFi) sector, where developers often create tools that are subsequently used by the public in a permissionless manner. The groups argue that registration requirements should be reserved for entities that perform specific financial functions—such as handling customer funds, executing trades as a counterparty, or managing order books—rather than the creators of the underlying code.
This request addresses a long-standing fear within the developer community regarding "regulation by enforcement." By providing a clear safe harbor for software development, the CFTC would encourage domestic innovation while focusing its oversight on the actual points of centralized risk. The filing suggests that as long as a firm does not exercise control over user assets or intermediate the transaction in a traditional sense, it should not be categorized as a regulated financial institution. This would effectively separate the "infrastructure layer" from the "service layer," a distinction that proponents argue is necessary for the internet-native financial system to thrive.
Modernizing Infrastructure for Regulated Entities
Beyond protecting developers, the joint comment outlines a vision for how existing regulated entities can leverage blockchain technology. Phantom and HPC have urged the CFTC to provide a clear regulatory path for designated contract markets (DCMs) and derivatives clearing organizations (DCOs) to integrate onchain infrastructure into their operations. Currently, these institutions are bound by rigid rules that often mandate the use of legacy databases and centralized settlement processes.
The groups propose that DCMs should be permitted to use onchain protocols for the matching and execution of trades. Furthermore, they argue that DCOs should be allowed to utilize decentralized ledgers for essential clearing functions, including margining, settlement, and default management. By moving these processes onto a blockchain, the financial system could theoretically benefit from 24/7 operation, reduced counterparty risk, and real-time transparency. Such a move would allow the United States to maintain its competitive edge in financial services by adopting more efficient, transparent, and resilient technologies within a supervised framework.
Codifying the Phantom No-Action Letter
A pivotal aspect of the filing involves the recent "no-action letter" issued by the CFTC to Phantom. This letter provided a temporary assurance that the agency would not recommend enforcement action against Phantom for its role as a non-custodial wallet provider. The letter acknowledged that Phantom’s primary function is to provide a technical interface or "front end" that allows users to access regulated markets, without the wallet provider ever taking control of the users’ private keys or funds.
While the no-action letter was a significant milestone, it is inherently limited in scope and duration. Phantom and HPC are now calling on the CFTC to transform the principles laid out in that letter into a formal, permanent rule. A formal rulemaking process would provide the entire industry with the legal certainty needed to invest in and scale non-custodial solutions. It would signal to the market that the "wallet" model—where the user remains the sole owner of their assets—is a legally recognized and protected method of accessing financial markets. This would be a departure from the "not your keys, not your coins" vulnerability that has plagued centralized crypto platforms in the past.
Background and the Current Regulatory Climate
The submission comes at a time of heightened scrutiny for the crypto industry in the United States. Following the collapse of major centralized entities like FTX and Celsius in 2022, regulators have been under immense pressure to tighten oversight. However, the industry has countered that many of the failures occurred precisely because of the risks inherent in centralized, custodial models—risks that DeFi and onchain infrastructure are designed to mitigate.
The CFTC has historically been viewed as a more "innovation-friendly" regulator compared to the Securities and Exchange Commission (SEC), though it has recently stepped up its enforcement actions against decentralized platforms like Ooki DAO and Uniswap Labs. The Request for Information (RFI) to which Phantom and HPC responded represents an attempt by the CFTC to understand how it can fulfill its mandate of market integrity and consumer protection without stifling the development of "FinTech" and "onchain" solutions.
Supporting Data: The Rise of Onchain Derivatives
The push for updated regulations is supported by the explosive growth of the decentralized derivatives market. According to industry data, the volume of perpetual swaps and futures traded onchain has reached hundreds of billions of dollars annually. Hyperliquid, one of the organizations behind the filing, has emerged as a significant player in this space. As a Layer 1 blockchain optimized for high-performance trading, Hyperliquid facilitates a decentralized order book that allows for transparent, verifiable execution.
The growth of protocols like Hyperliquid, dYdX, and GMX demonstrates a clear market demand for onchain derivatives. However, due to the current lack of a clear regulatory framework in the U.S., many of these platforms are forced to geofence American users. Phantom’s interface, for instance, integrates Hyperliquid functionality but remains unavailable to residents of the United States. The joint filing expresses a desire to change this, stating that the groups are working to create a regulated path for Americans to access these markets under the watchful eye of the CFTC.
Implications for Market Stability and Consumer Protection
The analysis provided in the comment suggests that onchain infrastructure could actually enhance the CFTC’s ability to protect consumers. In a traditional custodial system, the regulator must rely on periodic audits and reporting from intermediaries to ensure that customer funds are not being commingled or misused. In an onchain system, the movement of funds is recorded on a public ledger in real-time. Smart contracts can be programmed to enforce margin requirements and collateralization automatically, reducing the risk of the "cascading liquidations" that can destabilize markets.
Furthermore, the non-custodial nature of these platforms eliminates the risk of "exchange hacks" or internal fraud leading to the loss of user assets. If a wallet provider or a front-end interface goes offline, the user still retains their private keys and can interact with the underlying smart contract through other means. By recognizing these technological safeguards, the CFTC could shift its focus from "policing the intermediary" to "verifying the code," a more efficient approach for the digital age.
Industry Reactions and the Road Ahead
The filing has been met with cautious optimism from the broader crypto advocacy community. Groups such as the Blockchain Association and the Crypto Council for Innovation have long argued for a distinction between software developers and financial service providers. The joint effort by Phantom and Hyperliquid is seen as a strategic move to provide the CFTC with a concrete roadmap for how this distinction can be codified into law.
Critics, however, raise concerns about the potential for "regulatory arbitrage." Some argue that without strict oversight, decentralized platforms could be used for illicit activities or market manipulation. Phantom and HPC address this by asserting that they support oversight; they simply want that oversight to be tailored to the technology. They advocate for a system where "gateways" or "on-ramps" handle Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements, while the core trading infrastructure remains decentralized and permissionless.
The CFTC’s response to this filing and others like it will be a defining moment for the future of finance in the United States. If the Commission chooses to adopt the recommendations, it could pave the way for a new era of "Regulated DeFi," where the efficiency of blockchain technology is paired with the stability of federal oversight. If the agency maintains its current trajectory of applying legacy rules to new technology, the industry warns that the U.S. risks losing its position as a global leader in financial innovation to jurisdictions with more progressive frameworks, such as the European Union under MiCA or the United Kingdom.
As the comment period closes and the CFTC begins its review, the industry remains focused on the potential for a formal rulemaking process. For Phantom and Hyperliquid, the goal is clear: to ensure that the next generation of financial markets is built on a foundation of transparency, self-custody, and clear, common-sense regulation.
