The U.S. Commodity Futures Trading Commission (CFTC) has come up with its latest update around bringing tokenization and blockchain-based infrastructure closer to the existing regulatory framework.
Instead of creating an entirely new set of rules for crypto the CFTC’s Market Participants Division (MPD), Division of Market Oversight (DMO), and Division of Clearing and Risk (DCR) updated their FAQs to address two specific issues.
The first being whether customer funds can be invested in tokenized versions of investments that are already permitted under CFTC rules. And the second one involves whether regulated firms can use blockchain technology to meet their recordkeeping obligations.
Remarking on the same, CFTC Chairman Michael S. Selig said,
I’m pleased to see staff update these frequently asked questions consistent with the agency’s ongoing efforts to provide regulatory clarity for the crypto industry.
CFTC’s updated rule for assets in tokenization
That said, in its updated FAQs, the CFTC clarified that assets already permitted under its rules can be held in tokenized form.
This means traditional assets such as U.S. Treasuries, corporate bonds or money-market fund shares can potentially be represented as blockchain-based tokens, provided the token gives holders the same legal and economic rights as the traditional asset.
This marked a major change for customer funds because Regulation 1.25 sets strict rules on where FCMs and DCOs can invest that money. But now with the new guidance eligible investment can be tokenized, but it must still meet requirements covering liquidity, concentration limits, maturity, other investment conditions, and custody.
However, this still does not mean the CFTC has approved direct investment of customer funds in cryptocurrencies such as Bitcoin or Ether. Staff Letter 26-05 did not expand the list of permitted customer-fund investments. Instead, its framework concerns certain crypto assets being accepted as margin collateral, subject to specific conditions.
Regulatory obligations updtaed by the CFTC
Moving ahead, the CFTC also gave greenlight to blockchain and distributed ledger technology to be used for regulatory recordkeeping.
So from now on instead of relying entirely on traditional databases, regulated entities can maintain on-chain records. But here too the records must meet existing requirements for authenticity, reliability, retention, and accessibility.
This change would allow blockchain to create transparent, time-stamped, and auditable records while at the same time, reduce the need to maintain separate on-chain and off-chain records. However, CFTC has also made the firms responsible for producing records even during network outages or other disruptions.
Bottlenecks in the U.S. regulatory arena
This comes as the CLARITY Act failed to advance in the Senate on the 15th of September, following months of stalled negotiations between Republicans and Democrats.
Yet, despite the failure, Circle CEO Jeremy Allaire and Michael Saylor argued that blockchain adoption and industry development will continue even without a comprehensive market-structure law.
Final Summary
- CFTC new FAQs addresses two specific issues around bringing tokenization and blockchain-based infrastructure closer.
- But the CFTC has not yet approved direct investment of customer funds in cryptocurrencies such as Bitcoin or Ether.
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