Hyperliquid Policy Center and Phantom Directly Challenge CFTC's Regulatory Approach to On-chain Protocols

On July 9, 2026, the Hyperliquid Policy Center (HPC) and Phantom issued a joint statement calling on the U.S. Commodity Futures Trading Commission (CFTC) to stop attempting to fit on-chain protocols into existing definitions of 'brokers' or 'exchanges.' This intervention comes in response to a Request for Information (RFI) on financial innovation released by the federal government in mid-June, demonstrating intensified industry efforts to protect the non-custodial nature of decentralized finance (DeFi).

On-chain protocols are inherently different from traditional intermediaries, and forcing them into existing regulatory frameworks ignores technical realities.

In their letter to the CFTC, HPC and Phantom emphasized that smart contract-based protocols cannot bear the same responsibilities as human intermediaries. They argued that it is unreasonable to impose the same compliance obligations as traditional exchanges on non-custodial software developers, given that they do not have direct control over customer assets. This reflects the industry's consistent call for a regulatory environment that maintains technical neutrality without stifling innovation.

Timeline of Regulatory Changes in 2026

The first half of 2026 was a period of rapid change in the cryptocurrency regulatory landscape. In particular, a joint interpretation released by the Securities and Exchange Commission (SEC) and the CFTC on March 17 established a new regulatory foundation by classifying Bitcoin and Ethereum as non-security digital commodities. This classification is based on the principle of 'dynamic analysis,' which suggests that the regulatory nature of a network can change once it achieves sufficient decentralization.

• March 17, 2026: SEC-CFTC joint interpretation released and 'No-Action Letter' issued to Phantom.
• May 5, 2026: CFTC Chair Michael Selig proposes rulemaking to protect non-custodial software developers.
• Mid-June 2026: CFTC and SEC issue a joint Request for Information (RFI) on financial innovation.
• July 9, 2026: HPC and Phantom submit a letter urging the cessation of broker classification for on-chain protocols.

At the core of this controversy lies the No-Action Letter received by Phantom on March 17. At the time, the CFTC's Market Participants Division stated it would not recommend enforcement action regarding Phantom's non-custodial wallet activities, but this came with strict conditions. Phantom had to acknowledge the CFTC's jurisdiction and agree to 'Joint and Several Liability' for protocol violations.

The industry views this 'deal-based' regulation as a long-term threat to the survival of decentralized infrastructure. Concerns have been raised that holding developers infinitely liable for violations across an entire protocol could hinder innovation in the U.S. and stifle software development itself. HPC and Phantom pointed out that this joint and several liability model conflicts with the essence of non-custodial services.

Technical Differentiation: Separation of Protocol and Intermediary

Citing the Hinman principles mentioned in the March 17 joint interpretation, HPC argued for differentiated regulation based on the technical structure of the network. They clarified that non-custodial software developers should not be evaluated by the same standards as brokers who custody assets. The logic is that software code is an automated tool that does not involve the subjective judgment of an intermediary.

CFTC Chair Michael Selig mentioned on May 5 that he is considering rulemaking to codify protections for non-custodial software developers. This is interpreted as an attempt to establish more formal legal safeguards based on the March No-Action Letter. However, the industry is calling for a fundamental redefinition of on-chain protocols beyond simple protection.

This movement aligns with Hyperliquid and Paradigm's submission of a joint comment letter regarding the Treasury's proposed GENIUS Act. The industry is forming a united front to ensure that U.S. market participants can safely access decentralized markets based on public blockchains. This is part of a strategy to pressure regulators to understand the unique characteristics of on-chain technology.

In conclusion, the current conflict reflects the tension between the new model of on-chain compliance and traditional law enforcement methods. Whether the CFTC moves forward with the rulemaking proposed by Chair Selig or sticks to the existing no-action deal model is expected to be a key variable determining the future of on-chain protocols. The industry is likely to continue raising its voice until clear legal standards reflecting technical realities are established.