Software developers can build regulated derivatives trading into self-custodial crypto wallets without registering as brokers, CFTC staff said Thursday, extending to any developer that meets its conditions a position that until now only one company could rely on.
The Market Participants Division issued Staff Letter 26-25, which says it will not recommend enforcement against a provider of “passive software” for failing to register as an introducing broker, or against its relevant personnel for failing to register as associated persons. It gave substantially the same relief in March to Phantom Technologies, the company behind the Phantom crypto wallet, in Letter 26-09. Only Phantom could rely on that one, and the division said it then heard from “other similarly situated providers of passive software” seeking similar relief.
What the Relief Covers
Under the letter, a provider can distribute front-end software that lets users send orders directly to a registered exchange, futures commission merchant or introducing broker, and the covered products include “event contracts, perpetual contracts, and other Commission-regulated derivatives.” The provider may take a share of the registrant’s revenue, charge users a per-transaction fee, market specific venues, and embed the software in its own wallet, which then must “clearly and conspicuously” show when a user is trading a regulated product.
The letter calls this a “custodial” model of trading, “consistent with existing market structure for exchange-traded derivatives”: users hold margin at the venue’s clearinghouse or a clearing member, and the provider at no point holds user assets, generates express “buy” or “sell” signals, or exercises discretion over routing. Users sign on as the registrant’s own members or customers and keep the ability to reach it without the app.
The Conditions
The letter attaches 10 conditions. The seventh reaches the trading venues themselves: the provider and each registered venue or broker it works with must sign an undertaking making them “jointly and severally liable” for the provider’s violations in the covered activities it conducts with that venue, and consenting to CFTC jurisdiction to investigate and bring enforcement actions against them. Providers must also file a notice accepting the conditions, give users conflict-of-interest disclosures and, unless the venue already owes them one, a risk disclosure statement, and follow National Futures Association marketing rules as if they were registered. A provider tied to a state or tribal government must add a waiver of sovereign immunity, “limited or otherwise,” if one is needed to make that consent enforceable.
The position is the division’s alone, “not binding on the Commission,” and lasts only until a CFTC rule or guidance on when software developers must register takes effect. The relief is not limited to crypto software.
It came the same day the SEC 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 the bill.
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