In a significant move aimed at bridging the gap between legacy financial regulations and the rapidly evolving world of decentralized finance, Phantom Technologies and the Hyperliquid Policy Center (HPC) have submitted a joint comment to the Commodity Futures Trading Commission (CFTC). The filing urges the federal agency to overhaul its existing regulatory framework to better accommodate onchain market infrastructure, arguing that current rules are rooted in an outdated, custodial model of finance that does not reflect the technological realities of blockchain-based trading.
The submission serves as a formal response to the CFTC’s recent Request for Information (RFI) concerning the impact of financial technology on the regulated derivatives markets. Specifically, the commission sought input on potential barriers that prevent fintech innovators from partnering with traditional financial intermediaries and infrastructure providers. Phantom and HPC contend that the primary barrier is a regulatory architecture designed for a world where intermediaries—such as brokers and clearinghouses—must hold and manage customer assets, a requirement that is fundamentally at odds with the non-custodial nature of decentralized protocols.
The Shift from Custodial to Non-Custodial Market Structures
At the heart of the joint comment is the distinction between traditional "custodial" market structures and modern "onchain" or "non-custodial" systems. Under the current regulatory regime, the CFTC’s rules assume that an intermediary, such as a Futures Commission Merchant (FCM), acts as a gatekeeper. These intermediaries are responsible for receiving customer orders, holding margin deposits, and ensuring the integrity of the trade lifecycle.
However, Phantom and HPC highlight that onchain markets operate on a different premise. Through the use of smart contracts and decentralized ledgers, users are able to trade directly with one another while retaining full control of their private keys and digital assets. In this model, the "infrastructure" is the software itself, rather than a centralized corporation that takes possession of client funds.
The groups argue that applying custodial-era rules to non-custodial software creates unnecessary friction and legal uncertainty. They suggest that the CFTC should adopt a "technology-neutral" approach that recognizes the security and transparency benefits of self-custody. By allowing users to maintain control of their assets, onchain protocols can theoretically reduce the "counterparty risk" that traditional regulations were originally designed to mitigate.
Clarifying the Role of Software Developers and Protocol Contributors
One of the most critical requests made by Phantom and HPC is for the CFTC to provide clear guidance on the registration requirements for software developers. The groups have asked the commission to confirm that the act of developing, maintaining, or contributing to onchain protocol software does not, by itself, trigger a requirement to register as a regulated entity.
The filing argues that registration should be reserved for firms that perform active financial functions, such as handling customer orders, managing funds, or entering into transactions as a counterparty. In contrast, developers who provide the underlying code—essentially the "digital plumbing" of the market—should not be treated as financial intermediaries.
This distinction is vital for the growth of the decentralized finance (DeFi) ecosystem. If software developers are held liable for the trades conducted via the code they write, it could stifle innovation and drive talent away from the United States. Phantom and HPC emphasize that a software protocol standing alone is a tool, not a business enterprise, and should be regulated accordingly.
A Path for Regulated Entities to Utilize Onchain Infrastructure
Beyond protecting developers, the joint comment outlines a vision for how existing regulated entities can integrate blockchain technology into their operations. The groups have requested that the CFTC establish a clear path for registered exchanges, clearing organizations, and intermediaries to use onchain infrastructure for their mandated functions.
Specifically, the filing suggests the following:
- Designated Contract Markets (DCMs): These regulated exchanges should be permitted to utilize onchain protocols for trade matching and execution. This would allow for 24/7 trading and near-instantaneous execution without the need for traditional centralized matching engines.
- Derivatives Clearing Organizations (DCOs): The groups argue that DCOs should be allowed to use smart contracts for margining, settlement, and default management. Onchain settlement could potentially eliminate the "settlement lag" that currently exists in traditional markets, thereby reducing systemic risk.
By allowing DCMs and DCOs to adopt these technologies, the CFTC could foster a more resilient and efficient financial system. The transparency of a public ledger would allow regulators to monitor market activity in real-time, providing a level of oversight that is difficult to achieve in the siloed databases of traditional finance.
Codifying the Phantom No-Action Letter
A key component of the filing is the call for the CFTC to transform its recent "no-action letter" regarding Phantom into a formal, industry-wide rule. Earlier this year, the CFTC’s staff issued a letter granting relief to Phantom, acknowledging that as a non-custodial wallet provider, its role is limited to providing technical access to regulated markets. The letter clarified that Phantom was not required to register as an intermediary because it does not execute trades or hold user funds.
While the no-action letter provided temporary relief for Phantom, it does not carry the weight of a formal regulation and can be revoked at any time. Furthermore, it applies specifically to Phantom’s unique circumstances. Phantom and HPC argue that a formal rulemaking process is necessary to provide "broader certainty" to the entire industry. Such a rule would protect other wallet providers and front-end interface developers, ensuring they can offer access to onchain markets without the threat of enforcement actions for failing to register as brokers.
Background and the Evolving Regulatory Landscape
The push for updated rules comes at a time of heightened tension between the digital asset industry and U.S. regulators. For several years, the CFTC and the Securities and Exchange Commission (SEC) have engaged in what many industry participants describe as "regulation by enforcement." This approach involves bringing lawsuits against firms rather than providing clear, proactive guidelines.
The CFTC, led by Chairman Rostin Behnam, has generally been viewed as more receptive to the potential of blockchain technology than its counterparts at the SEC. However, the agency has also been aggressive in asserting its jurisdiction over decentralized platforms, as seen in the 2023 enforcement action against Ooki DAO. That case established a precedent that DAOs (Decentralized Autonomous Organizations) could be held liable as "unincorporated associations" for operating illegal trading platforms.
The joint filing by Phantom and HPC represents a strategic attempt by the industry to move the conversation toward "regulation by rulemaking." By engaging with the CFTC’s RFI process, the groups are attempting to build a collaborative framework that satisfies the agency’s mandate for market integrity while allowing for the unique architecture of decentralized systems.
Chronology of Recent Regulatory Engagement
The submission is the latest in a series of efforts by crypto-native firms to influence U.S. policy:
- Late 2023: The CFTC’s Global Markets Advisory Committee (GMAC) began discussions on digital asset markets, focusing on the need for clearer definitions of "non-custodial" services.
- Early 2024: Phantom receives a no-action letter from CFTC staff, marking a rare moment of regulatory clarity for wallet providers.
- Mid-2024: The CFTC issues a formal Request for Information (RFI) on "Operational Resilience" and the role of third-party service providers in the financial sector.
- Late 2024: Phantom and the Hyperliquid Policy Center file their joint comment, seeking to turn the RFI into a catalyst for comprehensive rule changes.
Profiles of the Filing Parties
Phantom Technologies is best known as the developer of Phantom, one of the most popular non-custodial wallets in the digital asset space. Originally built for the Solana blockchain, it has since expanded to support Ethereum, Bitcoin, and Polygon. Phantom’s primary function is to allow users to manage their private keys and interact with decentralized applications (dApps). The company has consistently maintained that it is a software provider, not a financial intermediary, as it never takes possession of user funds.
The Hyperliquid Policy Center (HPC) is an advocacy group closely associated with Hyperliquid, a decentralized perpetual exchange that has seen massive growth in trading volume over the past year. Hyperliquid operates as a high-performance Layer 1 blockchain optimized for derivatives trading. While the platform is currently not available to users in the United States due to regulatory constraints, the HPC’s mission is to create a legal and regulated path for Americans to access these onchain markets.
Currently, Phantom integrates the Hyperliquid interface, allowing its global user base to trade derivatives directly from their wallets. However, this functionality is geo-blocked for U.S. IP addresses. The joint filing underscores the desire of both organizations to bring these services to the U.S. market under a formal regulatory umbrella.
Analysis of Implications and Market Impact
If the CFTC were to adopt the recommendations put forth by Phantom and HPC, it could signal a paradigm shift in how digital assets are regulated in the United States.
First, it would provide a "safe harbor" for developers. By decoupling the act of writing code from the act of financial intermediation, the U.S. could retain its position as a hub for blockchain innovation. Currently, many DeFi developers operate in a "legal gray area," fearing that their contributions to open-source software could lead to criminal or civil penalties.
Second, it could lead to the "onshoring" of crypto liquidity. Currently, the vast majority of decentralized derivatives trading occurs on platforms that exclude U.S. participants. By providing a clear path for DCMs and DCOs to use onchain infrastructure, the CFTC could allow U.S.-regulated exchanges to compete with offshore platforms, bringing volume back to domestic markets where it can be monitored for fraud and manipulation.
Third, the move would validate the non-custodial model. For years, the gold standard of financial regulation has been "third-party custody." Acknowledging that "self-custody" can be equally or more secure would be a landmark admission by a major federal regulator. This could pave the way for other agencies, such as the SEC or the Treasury Department, to reconsider their own stances on digital wallets.
However, challenges remain. The CFTC must balance the desire for innovation with its core mission of protecting retail investors and preventing systemic risk. Critics of DeFi argue that without centralized intermediaries, there is no one to perform "Know Your Customer" (KYC) or "Anti-Money Laundering" (AML) checks, making the platforms susceptible to illicit finance. Phantom and HPC’s filing suggests that these concerns can be addressed at the "interface" level or through decentralized identity solutions, but the commission has yet to signal its agreement on these points.
Conclusion and Future Outlook
The joint comment from Phantom Technologies and the Hyperliquid Policy Center represents a sophisticated attempt to modernize the American derivatives market for the 21st century. By advocating for a clear distinction between software development and financial services, and by calling for the integration of onchain tools into regulated infrastructure, the groups are laying the groundwork for a more transparent and efficient financial future.
The CFTC will now review the comments submitted in response to its RFI. While the agency is under no obligation to initiate a formal rulemaking process immediately, the pressure to do so is mounting. As onchain markets continue to grow in volume and complexity, the gap between existing law and technological reality will only become more pronounced. For the U.S. to remain a leader in global finance, a regulatory evolution—rather than just enforcement—may be the only viable path forward.
