The Hyperliquid Policy Center and Phantom are urging the Commodity Futures Trading Commission (CFTC) to stop applying traditional brokerage and exchange regulations to decentralized onchain protocols.
The Hyperliquid Policy Center and Phantom wallet are urging the CFTC to stop applying outdated brokerage rules to decentralized onchain protocols that operate via automated code.
As the United States federal government ramps up its scrutiny of the digital asset industry, two major players in the non-custodial space have officially responded to a formal inquiry. This week, the Hyperliquid Policy Center and the popular Phantom wallet team urged the CFTC to recognize that decentralized software does not function like a Wall Street bank.
For US investors, this debate is critical because it determines whether popular DeFi (Decentralized Finance) apps can legally serve Americans. If the government forces software to act like a bank, many services might block USA IP addresses entirely to avoid legal liability.
The Push for Code-Specific Regulation
The core of the argument is that onchain protocols (software programs that run directly on a blockchain) are neutral tools. Unlike a traditional broker, these protocols do not hold user funds in a private account or trade against their customers.
Hyperliquid and Phantom argue that the CFTC’s current framework—designed for the 1970s—is a poor fit for 21st-century code. They claim that because these protocols are transparent and immutable (unchangeable), they actually solve many of the risks that traditional regulations were designed to prevent.
The industry leaders emphasize that transparency is built into the blockchain itself. Anyone with an internet connection can verify the rules of a protocol, making some traditional reporting requirements redundant.
Why Traditional Brokerage Rules Do Not Fit
Traditional regulations often require a central entity to perform "Know Your Customer" (KYC) checks and hold insurance. However, a decentralized protocol often has no CEO, no physical office, and no human intervention in individual trades.
Phantom and Hyperliquid argue that treating these automated systems as central intermediaries is like trying to regulate a calculator for the math problems it solves. They suggest the CFTC should focus on the developers or the users, rather than trying to fit the software itself into a "broker" box.
- Smart Contracts: These are self-executing contracts with the terms directly written into code.
- Non-Custodial Wallets: Apps like Phantom let users hold their own private keys rather than trusting a third party.
- Onchain Liquidity: Using automated pools of capital instead of a traditional order book managed by humans.
The Risks of Regulation by Enforcement
The US crypto industry has long complained about "regulation by enforcement." This happens when agencies sue companies before providing clear rules on how to comply. By responding to the CFTC's Request for Information, these firms are trying to get ahead of the curve.
If the CFTC continues to view DeFi through a legacy lens, it could drive innovation away from the United States. Many developers are already moving to crypto-friendly jurisdictions like Dubai or Switzerland to avoid the legal gray areas in America.
"Regulating software protocols as intermediaries is not only technically impossible but undermines the very transparency and security that decentralized technology provides to the public."
- Step 1: Regulators gather information via formal requests.
- Step 2: Industry leaders provide technical feedback on how DeFi actually works.
- Step 3: The agency decides whether to issue new rules or continue with enforcement.
What This Means for USA Investors
For the average American crypto user, this regulatory tug-of-war has immediate consequences for how you interact with the market. Currently, the SEC Crypto Assets guidelines and CFTC mandates create a complex web of rules for US-based exchanges like Coinbase and Kraken.
If the CFTC adopts a stricter stance on decentralized protocols, you might find more DeFi apps "geo-fencing" or blocking US users. Furthermore, the IRS (Internal Revenue Service) requires you to report all crypto trades; if local platforms are banned, tracking those taxes on offshore or decentralized sites becomes significantly more difficult for the taxpayer.
Historically, US regulators have viewed most tokens as either commodities or securities. A win for Phantom and Hyperliquid would solidify the idea that the software facilitating these trades shouldn't be taxed or regulated like a New York Stock Exchange broker.
Looking Ahead: The Future of US DeFi
The outcome of this dialogue will determine if the United States remains a hub for blockchain development. As of now, the CFTC is still in the information-gathering phase, but the pressure from the private sector is mounting.
Investors should watch for formal rule proposals coming in late 2024. These will likely clarify whether decentralized exchanges will be required to register as "Swap Execution Facilities"—a move that would fundamentally change how Americans use the blockchain.
Always remember to keep your private keys safe and stay informed on how local laws impact your digital wallet. The rules are changing fast, and staying compliant is the best way to protect your long-term gains.
Key Takeaways
- Advocate for code-based regulation rather than treating software like human-led brokerage firms.
- Respond to the CFTC’s formal Request for Information regarding financial innovation and digital assets.
- Highlight the technical impossibility of decentralized protocols complying with traditional audit rules.
- Protect retail access to decentralized finance (DeFi) tools by preventing overly restrictive US mandates.
- Support a regulatory framework that acknowledges the transparency of immutable public blockchains.