Phantom, Hyperliquid ask CFTC to modernize rules for onchain derivatives

A Call for Clarity on Onchain Derivatives

Phantom and Hyperliquid, two prominent players in the crypto space, have recently submitted a letter to the US Commodity Futures Trading Commission (CFTC) urging the agency to clarify its regulations on onchain derivatives. The companies argue that existing CFTC regulations were designed for traditional financial intermediaries, such as banks and brokerages, and do not account for the unique characteristics of blockchain-based derivatives.

According to the letter, Phantom and Hyperliquid are seeking clarity on several key issues. Firstly, they are asking the CFTC to confirm that blockchain protocol developers do not have to register solely for creating onchain software. This is a crucial point, as many blockchain developers are not involved in the custody or execution of trades, but rather focus on creating the underlying protocols that enable onchain transactions.

The companies are also asking the CFTC to provide guidance on the use of blockchain infrastructure by regulated derivatives firms. They argue that these firms should be allowed to use onchain infrastructure for functions such as trade execution, clearing, settlement, margining, and recordkeeping, provided they continue to comply with existing regulations.

Furthermore, Phantom and Hyperliquid are seeking clarification on the treatment of non-custodial wallet providers. They argue that these providers should not be treated as introducing brokers, as they do not handle customer funds or execute trades.

The stakes are high, as the CFTC's decision on how to regulate onchain derivatives could have significant implications for the development of decentralized finance (DeFi) and the broader crypto industry. If the CFTC adopts a more permissive approach, it could pave the way for greater innovation and adoption of onchain derivatives. On the other hand, if the agency adopts a more restrictive approach, it could stifle the growth of DeFi and limit the potential of onchain derivatives.

The Regulatory Debate Intensifies

The letter from Phantom and Hyperliquid comes as the regulatory debate over onchain derivatives intensifies. In recent months, traditional exchanges such as Intercontinental Exchange (ICE) and CME Group have pressed US regulators to scrutinize Hyperliquid's expansion into commodity-linked perpetual futures. They argue that the decentralized platform's energy derivatives pose market integrity and manipulation risks.

However, Hyperliquid and other proponents of onchain derivatives argue that the traditional exchanges are simply trying to stifle competition. They point out that onchain derivatives offer greater transparency, security, and efficiency than traditional derivatives, and that they are better suited to the needs of modern markets.

The Road Ahead

The CFTC's decision on how to regulate onchain derivatives will have far-reaching implications for the crypto industry. If the agency adopts a more permissive approach, it could pave the way for greater innovation and adoption of onchain derivatives. On the other hand, if the agency adopts a more restrictive approach, it could stifle the growth of DeFi and limit the potential of onchain derivatives.

In the meantime, Phantom and Hyperliquid will continue to push for clarity on the CFTC's regulations. They argue that the agency's decision will have a significant impact on the development of onchain derivatives and the broader crypto industry.