Foreign Crypto Exchanges welcome to service the US? What's the Catch?

Last week Acting Chairman Pham of the Commodities Futures Trading Commission (CFTC), which regulates commodities, futures and derivatives, issued guidance to make clear that non-US exchanges could register with the CFTC to provide services to US users, as part of the CFTC's 'crypto sprint'.

Positioned as a way to 'legally onshore trading activity that was driven out of the United States due to ... regulation by enforcement", the guidance intends to give:

American companies that were forced to set up shop in foreign jurisdictions to facilitate crypto asset trading … a path back to U.S. markets. 

It is a welcome development for exchanges to be able to have a pathway to service the US market, albeit one which will be challenging. An overseas exchange wanting to register will need to register as a Foreign Board Of Trade (an FBOT). In order to do so they need to meet the criteria set out s48.2 of Title 17 which defines "Board of Trade" as:

any board of trade, exchange or market located outside the United States, its territories or possessions, whether incorporated or unincorporated.

Five compliance points are required for an FBOT to register, they must:

1. Possess the attributes of an established, organized exchange;
   

2. Adhere to appropriate rules prohibiting abusive trading practices;
   

3. Enforce appropriate rules to maintain market and financial integrity;
   

4. Have been authorized by a regulatory process that examines customer and market protections; and
   

5. Are subject to continued oversight by a regulator that has power to intervene in the market and the authority to share information with the CFTC.

Many of these will, of course, be impossible for any decentralised exchange (DEX) to comply with, given they do not have regulatory oversight and operate from smart contracts. For centralised exchanges (CEX) in addition to these requirements, s48.7 requires other matters including:

1. The operators must be fit and proper persons;
   

2. There must be rules and processes to avoid conflicts of interest;
   

3. There must be rules to prohibit disclosure of information which board / committee members have gained as a result of being part of the FBOT, including after their departure; and

   
   

4. Terms and conditions must be available in the US and offer products which could be offered to a designated contract market (DCM), be cleared, not be illegal in the USA and not be readily susceptible to manipulation.

   
   

Further requirements apply, and it will be a tall order for any CEX to obtain CFTC FBOT registration, but this is a world of difference from the position recently where CEX entities outside the US would simply not be able to serve US customers (for example FTX had FTX US as it's onshore vehicle for US customers and expanded from crypto into stocks, Binance was fined US $1.35B for letting US customers circumvent blocks etc). This gives a pathway for offshore crypto exchanges to consider how they can access one of the biggest markets in the world for their products, in a regulated way.

By Michael Bacina with Steven Pettigrove