CFTC begins preparing crypto market rules in case Congress doesn’t pass Clarity Act

CFTC (Commodity Futures Trading Commission) has started preparing a federal crypto market structure that it can pursue under existing law if Congress fails to pass CLARITY.

CFTC Chairman Michael S. Selig announced the work Thursday, saying his staff are now looking at rules that could bring both registered companies and currently unregistered crypto exchanges under a purpose-built CFTC framework.

He is also working with SEC Chairman Paul Atkins through Project Crypto on an asset classification system. But the CFTC is not planning to leave the market in limbo if CLARITY dies on Capitol Hill.

CFTC prepares its own crypto rules while Congress decides CLARITY’s fate

Selig noted that the CFTC already has authority to designate a new type of designated contract market (DCM) centered on crypto.

The current registered CFTC entities could be able to join, but unregistered cryptocurrency exchanges could apply for such designation. This framework would be applicable for margined and leveraged cryptocurrency trades with regulation specifically designed for these products.

“To achieve this, I’ve directed the CFTC staff to begin exploring rules to codify a CFTC market structure for crypto assets using the agency’s existing authorities. This could enable current registrants as well as non-registrant crypto exchanges to be designated by the CFTC as a type of DCM known as a crypto asset market and offer crypto asset trading on a leveraged or margined basis subject to purpose-fit rules under the CFTC’s regulatory oversight.”

Furthermore, Selig wants his employees to talk with protocol developers on how their products can be sold in the United States without these developers having to wonder where the boundary of legality is.

“I’ve also directed staff to engage with developers of onchain finance protocols to establish ways in which developers can offer their protocols in a legal and compliant manner in the United States. Future-proofing developer protections once and for all.”

Selig said CLARITY will still be given time for a congressional vote. If lawmakers cannot agree, however, he plans to tell staff to begin the CFTC rulemaking process.

“We’re going to give CLARITY its breathing room for a vote, but if the Democrats cannot support a bipartisan work product, which reflects compromises from both sides of the aisle, and ultimately send a fair version of the bill to the President’s desk, then rest assured, I will direct CFTC staff to move swiftly to propose these new rules for the industry.”

The chairman tied that approach to the CFTC’s history. Congress created the agency in 1974 after derivatives markets had moved well beyond the agricultural contracts covered by older federal laws. Currency contracts, petroleum allocations and Ginnie Mae certificates were among the newer instruments emerging at the time.

The roots went back much further. Merchants formed the Chicago Board of Trade in 1848 above a flour store. By 1859, traders had developed arrangements that allowed contracts to settle based on changes in commodity prices instead of always requiring physical delivery. Futures were born, and politicians quickly started calling the activity gambling.

Congress eventually created one federal framework instead of dividing derivatives regulation according to whatever commodity sat underneath a contract. The CFTC received “exclusive jurisdiction” over commodity derivatives and a legal mandate to “promote responsible innovation.”

The definition of a commodity was intentionally wide. It could cover physical goods, services, rights, interests, events, and other underlying subjects used in derivatives. Federally regulated DCMs then became the main venues for these contracts, while also acting as self-regulatory organizations responsible for enforcing market rules.

Selig expands the CFTC roadmap into AI compute and prediction markets

The CFTC is also preparing for financial markets built around AI compute and expanding its rulebook for prediction markets.

“We’ve crossed the Rubicon and are standing at a new frontier of finance. It’s not a question of whether innovations like blockchain, artificial intelligence, and prediction markets will transform our markets. It’s a question of where this innovation will take place and who will write the rules.”

For AI, the agency is treating computing capacity as an increasingly important economic resource. Advanced GPU clusters are expensive and scarce, while demand keeps rising. Selig said spot, forward, and derivative markets could develop around compute to provide pricing and hedging tools.

The CFTC issued a request for comment on compute markets earlier this week and is working with the Department of Commerce. The administration’s AI plan also calls for better access to large-scale compute for startups and researchers.

“Access to advanced GPU clusters and compute capacity increasingly determines who can compete, who can innovate, and ultimately, who can lead. As demand for compute grows, so too does the need for markets capable of efficiently allocating scarce resources and managing risk.”

Proposals have been made by the agency regarding modifications in CFTC Rule 40.11. It is not possible for the event contracts to fail to meet core principles or to be easily manipulated. War and terrorism, assassination, gaming, and criminal acts are given additional consideration, as per federal law, and the contracts may be prohibited by the CFTC.

The problem is that terms including “gaming” and “involve” are not defined in the statute, while the law also lacks a fixed test for determining the public interest.