Staff at the U.S. Commodity Futures Trading Commission said Thursday that software developers can build regulated derivatives trading into self-custodial crypto wallets without registering as brokers, widening a position that had previously been available to only one company.
The CFTC’s Market Participants Division issued Staff Letter 26-25, saying it will not recommend enforcement against a provider of passive software for failing to register as an introducing broker, or against relevant personnel for failing to register as associated persons.
In March, the division gave substantially the same relief to Phantom Technologies, the company behind the Phantom crypto wallet, in Letter 26-09. That earlier letter could be relied on only by Phantom. The division said it later heard from other similarly situated providers of passive software seeking comparable relief.
What the relief covers
Under the letter, a provider may distribute front-end software that allows users to send orders directly to a registered exchange, futures commission merchant, or introducing broker. Covered products include event contracts, perpetual contracts, and other Commission-regulated derivatives.
The provider may take a share of a registrant’s revenue, charge users a per-transaction fee, market specific venues, and embed the software in its own wallet. If the software is embedded in a wallet, the wallet must clearly and conspicuously indicate when a user is trading a regulated product.
The letter describes the arrangement as a custodial model of trading that is consistent with the existing market structure for exchange-traded derivatives. Users hold margin at the venue’s clearinghouse or with a clearing member. The provider does not hold user assets at any point, does not generate express buy or sell signals, and does not exercise discretion over routing.
Users participate as the registrant’s own members or customers and must retain the ability to reach that registrant without using the app.
The conditions
The letter sets out 10 conditions. The seventh condition extends to trading venues themselves: the provider and each registered venue or broker it works with must sign an undertaking that makes them jointly and severally liable for the provider’s violations in the covered activities conducted with that venue, and consent to CFTC jurisdiction for investigations and enforcement actions.
Providers must also file a notice accepting the conditions, give users conflict-of-interest disclosures and, unless the venue already owes users one, a risk disclosure statement, and follow National Futures Association marketing rules as though they were registered.
A provider tied to a state or tribal government must also include a waiver of sovereign immunity, whether limited or otherwise, if such a waiver is needed to make that consent enforceable.
Limited scope and timing
The division said the position is its own and is not binding on the Commission. It will remain in effect only until a CFTC rule or guidance on when software developers must register takes effect.
The relief is not limited to crypto software.
Context around the release
The letter was released the same day the U.S. Securities and Exchange Commission granted a five-year innovation exemption for tokenized stock trading, and two days after the Senate blocked the Clarity Act. The letter does not mention that bill.