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LedgerX highlights CFTC regulatory gap in client asset rules

by SuperiorInvest

The US Commodity Futures Trading Commission (CFTC) has focused its attention on how firms handle client assets. However, this new regulation does not fully encompass the LedgerX crypto platform’s innovative model, leaving key operational aspects subject to regulatory oversight.

On the regulatory side, the CFTC’s recent proposal seeks to improve rules for futures commission merchants (FCMs) and derivatives clearing organizations (DCOs). These companies are now required to invest client funds in highly liquid assets. However, this review does not take into account LedgerX’s unique operating model.

LedgerX operates as a DCO, establishing direct connections with clients and deviating from the conventional role of FCMs as intermediaries. This questions how the standard should be adapted to cover such innovative entities.

Screenshot of the CFTC’s proposed rule. Source: CFTC

Commissioner Kristin Johnson has expressed concern, noting that the regulatory framework is lagging behind the rapid evolution of the industry. LedgerX, which was previously affiliated with FTX and is currently part of Miami International Holdings, Inc. (MIH), operates in a unique sector by providing direct access to clients, deviating from established industry conventions.

Additionally, LedgerX has drawn attention for its efforts to directly settle cryptocurrency transactions for clients, diverging from the conventional practice of involving intermediaries. The company has successfully obtained several CFTC registrations, bolstering its operations with greater consumer safeguards such as asset segregation.

Importantly, Commissioner Johnson advocates for a revised regulatory framework that would provide uniform protection to retail clients, regardless of whether they trade through brokers or directly with non-brokered DCOs like LedgerX.

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This call to action coincides with the public being given 75 days to comment on the proposal. This period of contemplation and dialogue has the potential to guide the CFTC in addressing the regulatory deficiencies noted by Commissioner Johnson.

Therefore, it is the CFTC’s responsibility to ensure that regulatory measures remain aligned with the ever-changing derivatives market. This commitment is essential to protect the interests of retail customers and maintain a level and fair environment in this rapidly changing digital financial environment.

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