CFTC shields passive crypto software—but Tornado Cash cases remain exposed

The US Commodity Futures Trading Commission [CFTC] has widened regulatory relief for software companies that connect users to regulated derivatives markets.

The decision could help crypto wallets add access to products such as perpetual futures and event contracts without registering as brokers. But this new decision does not offer any direct protection to developers facing criminal allegations like those brought in the Tornado Cash case.

CFTC expands earlier Phantom relief

The new no-action position was announced by the CFTC’s Market Participants Division on September 17.

It expands relief that was previously granted to crypto wallet provider Phantom in March. Other qualifying software companies may now rely on the same position without requesting individual permission.

What this means is that a crypto wallet could add a section where users view and trade regulated derivatives. The software provider could advertise the service, direct customers to a particular registered company, and receive a share of trading revenue.

It would not have to register as an introducing broker only because it provides those features, meaning it continues to operate ONLY as an interface to the trading venues and DOES NOT become a trading venue of its own.

Users only trade on CFTC-registered exchanges, so any intermediaries must be CFTC-registered too, and money remains at regulated companies and not with the software provider. 

The provider is not allowed to control customer assets and decide on execution or signal buy/sell messages. Also, they would be requested to disclose information, retain records, and accept CFTC oversight.

Why it does not protect Tornado Cash developers

The ruling also advances the discussion on when software developers can be considered financial intermediaries. 

A company is deemed to be engaging in the business of brokerage when it only provides its customers with access to financial products, without taking in money or getting involved with people’s trading activities, by doing what was considered the duty of a financial broker.

But its legal reach is narrow.

While the CFTC letter only applies to registration under derivatives law, it does not bind the Justice Department or change other federal laws related to money transmission, sanctions, and money laundering.

Roman Storm was prosecuted due to the accusations of involvement in a crypto-mixing service, not just because of a software providing access to a registered derivatives company.

In the future, defendants may be able to appeal to the distinction between passive software and an active intermediary. Although this claim would be more persuasive than binding upon the court, and also only valid, subject to their non-possession of the necessary funds and the passivity in their participation in transactions.

Such an argument, in effect, could serve as defense to those running similar platforms.

Final Summary

Approved software providers can link people to derivatives without being a broker.

It does not give developers relief from money transmission, sanctions, or money laundering allegations.