Data Boiler submitted a 30-page comment letter in response to the CFTC's request for information on identifying regulatory items, aimed at facilitating innovation and fostering competition in financial products and services for Fintech firms, issued pursuant to Executive Order 14405. This is also relevant to the SEC’s upcoming proposal on Crypto Market Structure Amendments. Please see below for an Executive Summary:
Unlike others who advocate for pure deregulation or temporary compliance delays to shield incumbents, we focus on market structure integrity. The existing regulatory framework focus on what is traded rather than how it is executed. It sparks a “Gresham’s Law of Microstructure” and fuels a race to the bottom. Overly prescriptive, retrospective data-hoarding rules (Part 45) and subjective, content-based product reviews (Rule 40.11) impose massive compliance friction on honest FinTech innovators while failing to detect or prevent real-time systemic risks, flash crashes, or code exploits.
To fulfill the mandates of Executive Order 14405, the Commission should reject piecemeal deregulation or discretionary “no-action” waivers that shield incumbents and instead execute a systematic market structure overhaul anchored to a five-layer behavioral risk taxonomy – Hunters (create risk), Risk Packagers (transform risk), Intermediaries (route risk), Risk-Warehouses (absorb market exposure), and Flow-Harvesters (absorb client exposure).
To establish a resilient, positive-sum Symbiotic Flat-Line equilibrium [1] where open APIs and neutral infrastructure allow any participant to seamlessly route risk, the CFTC should implement the following targeted, taxonomy-aligned reforms:
- Dismantle Entry Barriers via Tiered Intermediary (Layer 3) Pathways: Carve out a distinct Authorized Technology Router (ATR) registration under NFA supervision. This framework unburdens asset-light software aggregators, bilateral message boards, and smart order routers from heavy exchange-level SRO rules, preserving rigid surveillance solely for Tier 1 matching venues (DCMs/CLOB SEFs) and compressing transactional wastage (Objective 1a – the lowest possible total costs to transact in US markets and drive non-zero-sum growth for the economy).
- Delineate Private Rights and Restore Market Integrity: Mandate a “Powers-of-Two” litmus test on event contracts to strip away over-engineered payoff scales. Modernize the “fair and impartial access” mandates under Subpart C of Parts 37 and 38 to allow venues to deploy automated cryptographic whitelisting and real-time smart-contract risk audits at the API gate. Concurrently, the Commission should explicitly permit intent-based pricing through an automated Copyright Licensing mechanism to reward liquidity-providing Makers with royalty dividends, eliminate favorite-longshot biases, and filter out predatory speculators (Objective 1b and 2b – Private rights and social costs + utilizing enduring, principle-based rules where possible to minimize the need for frequent calibration, which inevitably introduces bias favoring select participant groups).
- Establish a Programmatic “Fully Collateralized Tech-Clearing” Safe Harbor: Formally update Part 39 rules to exempt 100% pre-funded, non-intermediated clearing utilities from traditional mutualized banking default funds, replacing manual paperwork with rigorous mathematical code audits of underlying smart contracts, liquidation scripts, and oracle price feeds to defend against flash-loan vulnerabilities (Objective 1c – Implement the simplest, most objective, and least burdensome rules possible for those who do things fairly and squarely, while proportionally intensifying scrutiny on entities/ individuals posing systemic risks).
- Deracinate Partnership Impediments: Smart contracts are an oversimplified mechanism for delineating complex real-world rights and obligations. hybrid solutions are being created, resulting in DeFi convergence to TradFi with no necessary efficiency gain. To strike a balance, modernize the vendor management framework by establishing an algorithmic safe harbor under §1.2 to shield registrants from strict principal liability for pre-vetted code, and permit programmatic smart-contract self-certifications under Part 40 to eliminate bureaucratic product stagnation (Objective 2c - halting behaviors that divert scarce resources away from innovation and stifle competition).
- Beware of the Uncountable: Tokenization serves as a lower-cost alternative to securities issuance and asset gathering processes. Much like traditional securitization, it aims to make assets tradable and liquid. Yet, current commercial reward programs lack consistent accounting standards, creating an unsustainable model where tokenization can be misused or disguise as financial instruments when left “uncountable”. They should instead be regulated under consumer laws because their value cannot be properly determined or quantified by the amount of outstanding inventory and an uncapped supply creates inflationary pressure (Objective 2a – avoiding “bare minimum compliance” norms). In additions, Dollarize the countable digital asset space to turn the tables against foreign threats (Objective 3c – creating strategic asymmetries and structural advantages for the US).
- Transition from Trade Reporting to Agentic AI: Replace the expensive Part 45 reporting tax and centralized cybersecurity honeypots with a decentralized ledger access framework. Mandate that transaction logs remain securely at rest at their native network source, enabling the CFTC and NFA to deploy localized AI Compliance Agents to audit transaction integrity and track systemic leverage in real time (Objective 3a – Against authoritarian regimes and internal bureaucracy that erodes trust and institutional declines).
Remarks:
[1] A Symbiotic Flat-Line Equilibrium describes a market‑structure state in which all layers of the industry value chain operate in mutual balance, with:
- No single layer captures outsized economic rents due to regulatory gaps or structural privilege;
- No single category becomes vertically integrated to the point of distortion;
- No structural bottlenecks (e.g., clearing, custody, prime brokerage) becomes a choke point;
- No technology layer outruns rulemaking, no regulatory lag-induced arbitrage that distorts incentives; and
- Clearing and settlement are neutral, NOT profit centers [2]
Every category in the value chain plays a distinct role. Products are priced correctly, without hidden convexity or asymmetric information. Each layer performs its function without overreaching into others, and where incentives are aligned rather than adversarial. E.g. Hunters need packagers; Packagers need intermediaries; Intermediaries need farmers; and Farmers need hunters. Risk flows smoothly across the value chain, and this mutual dependency is what makes the system “symbiotic.”
[2] Clearing and settlement should NOT be Profit Centers; they must operate like utilities and be neutral to maintain systemic stability. NOTE: Clearinghouses implicitly leverage or orchestrate the entire US financial system to provide capital to members while banks provide liquidity, the FED serves as backstop and provide settlement infrastructure. Clearing houses (CME Clearing ★, ICE Clear ★, Options Clearing Corp ★, FICC, NSCC) do not rely solely on their own balance sheets but uses a default waterfall model to add layers of protection from multiple sources.
Clearing members post guaranty fund capital, provide liquidity lines, absorb losses through assessments, provide intraday credit, backstop settlement failures. Thus, the clearinghouse is effectively leveraging the balance sheets of the largest U.S. financial institutions to guarantee trades, enforce margin calls, settle billions daily, and withstand member defaults. Clearinghouses do not have access to the FED, but through intraday credit from clearing banks, this creates an implicit guarantee chain (Federal Reserve → Clearing Banks → Clearing Members → Clearinghouse → Market Participants) with the Fedwire being the ultimate backstop settlement layer. Margining is systemically guaranteed, and this is why U.S. futures markets ★ rarely experience settlement failures and survived multiple crises (e.g. nickel event that traumatized LME). Illicit digital asset activity, coupled with weakened CFTC-SEC derivatives guardrails, could collectively overwhelm the default waterfall model. Therefore, all five Dodd-Frank regulatory agencies (SEC, CFTC, OCC, FRB, FDIC) must break down silos and work in unison to safeguard US financial stability.
By Kelvin To, Founder and President of Data Boiler Technologies Data Boiler is a Pioneer in FinTech with patented inventions (US, Canada, Singapore, Japan, Australia, and 20 European countries) in signal processing, trade analytics, machine learning, time-lock cryptography, etc. We frequently comment on regulatory policy both domestically and abroad with over 12 years in business. A type C Member of the European Commission’s Data Expert Group + former committee of BITS (Bank Policy Institute). |
