CFTC, SEC deliver on regulatory promise with exemptions despite stalled CLARITY Act

The CFTC’s Market Participants Division has extended no-action relief to providers of passive crypto-trading software, sparing them from registering as brokers, two days after the Senate blocked the CLARITY Act.

The relief is set out in CFTC Staff Letter 26-25, signed by division director DJ Hennes. Division staff said they will not recommend enforcement against eligible software providers that fail to register as introducing brokers, nor against their personnel for not registering as associated persons of an introducing broker.

The same treatment was given to a single company, Phantom Technologies, in March. However, that position bound only Phantom.

Other developers that wanted the same cover had to file their own respective requests. What the latest CFTC Staff Letter 26-25 does is lift that limit, offering the relief on substantially the same terms to any passive software provider that meets the conditions. 

Where the line falls between software and broker

The relief only reaches software that passively connects users to regulated markets. A provider can build and hand out interfaces that let users check market data, review products, and send orders straight to registered venues. It can also bundle that into a self-custodial wallet.

The cover disappears when brokerage enters into the picture. Under the conditions, a provider cannot decide how an order is routed or executed. They cannot throw off express buy or sell signals and cannot take custody of user funds. 

Money backing a derivatives position has to sit with the clearing structure and not the software maker. Users must be able to reach a designated contract market, futures commission merchant, or introducing broker without passing through the software at all.

Eligible providers can advertise their software and their ties to registered firms. They can also promote specific derivatives contracts and steer users toward particular venues. They can collect fees from registered counterparties and charge users per transaction. 

Ten conditions and a caveat

The CFTC staff letter detailed ten covered activities and their limits. Among them, a provider and its principal are not subject to statutory disqualification. 

Providers have to disclose conflicts and fees, and they must keep evidence that users acknowledged risk disclosures. Also, they must sign written agreements with each registered partner covering joint and several liability. 

Providers also have to notify the CFTC of any insolvency and file a notice accepting the agency’s jurisdiction.

However, there is a caveat, and that is the position comes from the Market Participant Division. It wrote that it does “not necessarily represent the position or view of the Commission or of any other office or division of the Commission.” So it is not binding on the CFTC.

In the letter, it was stated that the division has the discretion to modify, suspend, or end the cover. It also added that it would lapse if the CFTC ever adopts formal guidance on how broker registration applies to software developers. 

CFTC Chair Michael Selig said in May, at Consensus Miami, that he wanted to codify the Phantom position into rules “very soon,” calling the sequence a “crawl, walk, run.”To date, that rulemaking has not arrived.

A workaround while CLARITY sits stalled

The Division’s Staff letter is coming roughly two days after the US Senate rejected cloture on the Digital Asset Market CLARITY Act by a vote of 49 to 50, eleven short of the 60 needed.

Four Republicans were among the no votes, and no Democrat voted in favor. 

In response to that vote, Selig said that the outcome of the vote was unfortunate. He shared on X, “Americans deserve regulatory clarity, legal certainty, and consumer protections in crypto asset markets.”

He said the CFTC was locked in to help President Trump deliver his promise of “a future-proof crypto asset regulatory market structure,” writing, “One way or the other, and we will help him get the job done using our existing statutory authorities.” 

The SEC moved on the same day as it released a long-awaited innovation exemption. Uniswap founder Hayden Adams pointed on X to an accompanying comment letter from SEC Commissioner Hester Peirce, quoting her line that “Truly decentralized systems that are driven by autonomous software… do not need an exemption.”

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