A bipartisan group of former U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) officials is advocating for a more balanced and consistent regulatory approach to the cryptocurrency industry, particularly concerning derivatives and custody rules. They argue that the current regulatory landscape risks driving significant market activity offshore, while a risk-based framework could encourage onshore trading and mitigate risks.
The core message from these former officials is that regulatory approaches can inadvertently push trading elsewhere, but the underlying demand and associated risks do not disappear. “If we calibrate federal regulation to actual risk instead of maximum burden, that liquidity comes onshore,” stated former CFTC Chairman Chris Giancarlo, as quoted by Crypto In America. He added, “Every year we wait, it gets harder to bring to America.”
This call for regulatory clarity comes as both the SEC and CFTC are actively developing new rules for the approximately $2.5 trillion crypto industry. In June, the agencies sought public input on how to define various crypto products, including swaps and security-based swaps, and to clarify jurisdictional boundaries. The officials’ comment letter emphasizes that similar risks should face similar regulatory treatment and that overlapping rules should be avoided to prevent additional compliance costs.
Derivatives and Offshore Markets
The issue is particularly relevant for crypto derivatives, a market some signatories have argued U.S. regulation has largely driven overseas. Prediction market platform Kalshi estimates that offshore perpetuals trading could exceed $90 trillion by 2025, a significant increase from an estimated $28 trillion in 2023. Earlier this month, former President Donald Trump indicated that CFTC Chairman Michael Selig is working to bring the popular offshore perpetuals platform Hyperliquid into the United States. Kalshi sponsored the comment letter by retaining the law firm Bellementis PLLC for drafting, though the signatories stated they were not compensated and Kalshi had no influence over the letter’s content.
Evolving Custody Rules
Meanwhile, the SEC is also revisiting its approach to crypto custody rules. Last week, the agency sent a planned rewrite of its custody rules for investment advisers and investment companies to the White House Office of Information and Regulatory Affairs (OIRA) for review. This initiative aims to clarify how SEC-regulated investment firms can provide custodial services for digital assets while adhering to federal securities laws. The specific details of this rewrite are not yet public, leaving uncertainties about which firms might qualify as crypto custodians and what requirements they would need to meet.
This marks a notable shift from the SEC’s previous attempt to address crypto custody three years ago. At that time, then-Chairman Gary Gensler proposed a broad “safeguarding” rule that would have extended existing custody requirements beyond traditional funds and securities to encompass virtually all client assets, including crypto. The SEC later scrapped that proposal last year.
Separately, the SEC’s “Reg Crypto” proposal, which outlines new rules for certain crypto asset offerings, is open for public comment until October 20. The bipartisan nature of the officials submitting the comment letter is significant, especially at a time when neither the SEC nor the CFTC has bipartisan representation. The signatories contend that these are not inherently partisan issues, pointing to historical common ground between commissioners of both parties on investor protection and market competitiveness.
The current regulatory environment presents a critical juncture for the U.S. crypto market. The former officials’ input highlights the potential consequences of regulatory complexity and the opportunity to attract substantial offshore market activity by adopting a more harmonized and risk-focused approach.
Why This Matters
The materials describe a narrow update: A bipartisan group of former SEC and CFTC officials has submitted a comment letter advocating for regulatory clarity and consistency in the crypto market, especially for derivatives and custody. Details on which firms could qualify as crypto custodians under the SEC’s revised rules.
Broader Context
Source materials place the factual news in this context: While crypto market structure legislation sits in summer recess limbo, the SEC and CFTC are getting a head start on writing the rules for the $2.5 trillion industry.
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