Hyperliquid Policy Center, Phantom urge CFTC to stop treating onchain protocols like traditional brokers and exchanges

The Compliance Gap

Regulators love categories. If you handle money, you are a broker. If you facilitate trades, you are an exchange. If you hold assets, you are a custodian. For nearly a century, these boxes have worked reasonably well for the legacy financial system. But as we move toward an on-chain economy, these old definitions are starting to feel like trying to run a modern operating system on a floppy disk. It just doesn't fit.

Recently, the Hyperliquid Policy Center and the team at Phantom weighed in on a Request for Information issued by the CFTC and the SEC. Their message was blunt: stop treating on-chain protocols like traditional financial intermediaries. For builders in this space, this isn't just a legal debate; it is a fundamental fight for the survival of decentralized architecture.

The Ghost in the Machine

Phantom’s argument hits on a point that I have been shouting about for years. A wallet is not a broker. When you use a software interface to talk to a blockchain, that interface isn't making decisions for you. It isn't holding your funds in a vaulted bank account. It is a tool—a window into a decentralized network.

If the CFTC decides that a software provider is a "Introducing Broker" simply because they provide a button that initiates a transaction, we have a massive problem. In the traditional world, a broker has a fiduciary duty and a middleman's control. In the crypto world, the user holds the keys. Forcing a non-custodial wallet to act like a regulated broker is fundamentally impossible because the wallet provider physically cannot stop, move, or seize the user's assets. Expecting them to perform the duties of a broker is asking for a lie.

Hyperliquid and the Logic of the Code

Hyperliquid’s stance focuses more on the protocol level. They are arguing that decentralized platforms operate through pre-set, immutable code rather than human discretion. In a standard exchange, there is a central clearinghouse and a board of directors. In a decentralized perpetual exchange, there is a smart contract.

The policy group argues that the current regulatory framework assumes there is always a central actor who can be subpoenaed or forced to change the rules. When you build on-chain, that actor often doesn't exist. If the CFTC continues to ignore this technical reality, they aren't protecting consumers; they are just banning the technology by proxy.

Why Builders Should Care

If you are building a dApp or a toolkit today, you are likely looking over your shoulder. The risk isn't that you are doing something ethically wrong; it's that you are doing something technically 'wrong' according to a manual written in 1934. We see this tension everywhere. Founders are spending more on legal opinions than on engineering because the lines are so blurred.

The push from Hyperliquid and Phantom is an attempt to create a third category. We need a regulatory lane that acknowledges 'disintermediated' services. If there is no middleman, you cannot regulate it like a middleman business. It sounds simple, but for a government agency, it requires admitting that some parts of the financial system can operate without them in the center of the circle.

The Custody Myth

One of the biggest hurdles remains the definition of custody. Traditional regulations are obsessed with who 'possesses' the asset. On a blockchain, possession is math. If I have the private key, I have the asset. If a protocol uses an escrow contract, the code has the asset. Neither of these scenarios looks like a New York bank vault.

Hyperliquid and Phantom are pushing the CFTC to realize that 'control' in the digital age is different. If the agency insists that every smart contract needs to be registered as a Derivative Clearing Organization (DCO), they are effectively saying that permissionless innovation is illegal in the United States. No startup can afford the $50 million and three years of legal fees required to become a DCO.

The Risk of Stagnation

I am naturally skeptical of any 'industry group' lobby, but in this case, the builders are right. If we force every interface to be a broker-dealer, we lose the 'De' in DeFi. We end up with a high-tech version of the existing banking system—walled gardens, high fees, and gatekeepers. That is exactly what we started this movement to avoid.

What we need is a disclosure-based system rather than a permission-based system. If a protocol is open-source and the risks are visible on the ledger, that should count for something. We should be regulating the behavior of humans, not the execution of code.

The Founder's Takeaway

Don't assume your 'non-custodial' status is a magic shield. The regulators are actively looking for ways to bridge the gap between your code and their rulebooks. The work being done by groups like Hyperliquid and Phantom is essential because it provides the technical education that these agencies lack. However, until the rules actually change, the safest bet for builders is to remain modular. The more you can separate the interface from the protocol, and the protocol from the asset, the harder it is for a legacy bucket to be dumped over your head. We aren't out of the woods yet, but at least someone is finally explaining to the CFTC how a wallet actually works.

Read the original at The Block →