Crypto firms offer ideas to break market structure gridlock

The protracted regulatory ambiguity surrounding digital asset market structure, particularly in the United States, has been labeled a ‘gridlock,’ hindering institutional adoption and regulatory clarity. In response, leading cryptocurrency exchanges and trading firms are actively submitting proposals designed to reconcile the innovative capabilities of distributed ledger technology (DLT) with the requirements of established financial regulation.

A primary point of contention is the legacy separation of functions (exchange, broker-dealer, clearinghouse). Crypto firms argue that DLT inherently allows for a more efficient, vertically integrated model. Proposals often center on creating a specialized regulatory designation—such as a ‘Digital Asset Trading Platform’—that can combine execution, clearing, and custody functions, provided they maintain robust compliance checks and strict segregation of customer assets. This integrated model aims to reduce capital inefficiencies and counterparty risk often associated with traditional, multi-layered financial infrastructure.

Firms are also advocating for clear regulatory pathways to classify tokens, rather than relying solely on the subjective application of the Howey Test for every asset. One idea involves amending existing broker-dealer rules to create limited-purpose broker-dealers (LPBDs) specifically tailored for handling tokenized securities while maintaining minimum capital requirements. Additionally, a key technical proposal relates to settlement. Leveraging instant DLT settlement capabilities is seen as a means to move past the traditional T+2 (two-day) settlement cycle, arguing that mandated delays introduce unnecessary systemic risk that instantaneous clearing can mitigate.

Following recent market crises, all proposed structures emphasize enhanced investor protection. This includes strict requirements for segregation of customer funds, prohibiting the use of customer assets for proprietary trading, and mandating transparent, audited proof-of-reserves mechanisms. The industry’s message to regulators, including the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), is that adopting tailored, practical rules that acknowledge DLT’s distinct functionalities is the only viable path forward to breaking the current regulatory gridlock.

Source: Crypto firms offer ideas to break market structure gridlock: Report