Paradigm Urges CFTC to Embrace DeFi in Spot Crypto Trading Rules

Today, Paradigm submitted a comment letter to the Commodity Futures Trading Commission (CFTC) responding to its request for input on the listing of spot crypto assets on designated contract markets (DCMs). While the proposal focuses on allowing these assets to trade on centralized futures exchanges, our letter calls on the CFTC to ensure that any new rules also protect and enable trading over DeFi protocols.

The CFTC’s noble goal is to bring spot crypto trading into well-regulated environments that protect market integrity, prevent fraud, and foster innovation. We agree with that mission. But, as we explain in our letter, blockchain technology has already moved the market beyond the 19th-century DCM model. Today, much of the most innovative and transparent trading happens over DeFi, where users retain custody of their assets, trade peer-to-peer, and benefit from open, auditable blockchain records.

These protocols advance every single core objective of the Commodity Exchange Act, especially those focused on supporting the ultimate class of people protected by the CEA: regular traders and Americans.

• Users can place their orders straight through to the protocol using passive software that preserves full user control over their trading and assets. As a result, users do not face the front-running, misappropriation, and similar conduct risks present when trading through an intermediary. DeFi is one of the best technologies we have for empowering ordinary users.
• Protocols typically operate on a permissionless and autonomous basis. No person or group of commonly controlled persons can block or censor access or trading or otherwise exercise discretion over how the protocol operates. These characteristics natively ensure impartial access and mitigate conflicts of interest. They also create new forms of competition for existing markets and are a hotbed of innovation in trading.
• Protocols deployed on public ledgers provide users and the general public with freely available information about prices and trading, which promotes price discovery and more efficient and transparent markets. Such transparency helps confirm the sanctity and honesty of our markets and increases trust in our financial markets among users and the American people.

The President’s Working Group on Digital Asset Markets has made clear that supporting DeFi is an Administration priority, urging regulators to “embrace decentralized finance” to position the United States as a global leader. The CFTC does not need to wait for Congress to act; existing authority under Section 4(c) of the CEA allows the agency to exempt DeFi trading from outdated intermediation requirements when doing so promotes innovation and fair competition.

We urge the CFTC to use that authority to allow retail users to trade spot crypto, including leveraged or margined trades, alongside any new DCMs. Such actions should not disadvantage the ability of users to trade over DeFi protocols.This approach expands consumer choice, keeps cutting-edge markets in America, and advances the CEA’s goals better than a “one size fits all” rigid framework.

Paradigm looks forward to working with the CFTC and the broader policy community to create clear, forward-looking rules for crypto markets. Our full letter is available here.