U.S. Crypto Regulatory Fragmentation and the Case for a Bespoke Market Structure Bill

The U.S. digital asset market stands at a crossroads. Despite historic legislative efforts like the CLARITY Act and GENIUS Act, regulatory fragmentation persists, creating a patchwork of overlapping and conflicting oversight that stifles innovation and drives liquidity offshore. This fragmentation not only undermines investor confidence but also risks ceding U.S. leadership in the global crypto race to jurisdictions like Singapore, the UAE, and Brazil. To address this, Congress must prioritize a bespoke crypto market structure bill—one tailored to the unique characteristics of digital assets and designed to incentivize offshore exchanges to return to U.S. shores.

The Current Landscape: A House Divided

The CLARITY Act, passed by the House in 2025, sought to clarify jurisdictional boundaries by classifying digital assets into three categories: digital commodities (CFTC oversight), investment contract assets (SEC oversight), and permitted payment stablecoins (regulated under the GENIUS Act) [1]. While this framework reduces legal uncertainty for traditional financial institutions, it has not resolved the deeper issue of market structure fragmentation. Decentralized finance (DeFi) platforms and decentralized exchanges (DEXs) continue to operate in regulatory gray areas, leading to liquidity dispersion across multiple blockchain networks and trading venues [3]. This fragmentation raises transaction costs and limits the efficiency of trade execution, deterring institutional participation [4].

Meanwhile, the CFTC’s Foreign Board of Trade (FBOT) framework, updated in August 2025, aims to allow offshore exchanges to serve U.S. traders without converting into Designated Contract Markets (DCMs) [5]. However, the framework’s rigid requirements—such as compliance with traditional settlement and clearing standards—fail to account for the decentralized and borderless nature of crypto markets. As Eli Cohen of Centrifuge notes, these requirements are “not tailored to the unique nature of crypto exchanges,” creating compliance hurdles for platforms like Binance and OKX [2].

Why the FBOT Framework Fails to Incentivize Onshoring

The CFTC’s advisory on the FBOT framework explicitly states that offshore exchanges must demonstrate they are regulated by a foreign authority with an information-sharing agreement with the CFTC [6]. This creates a Catch-22 for many crypto firms: to qualify for the FBOT framework, they must first operate in a jurisdiction with a regulatory regime compatible with U.S. standards—a barrier for platforms in unregulated or lightly regulated regions like Seychelles.

Moreover, the FBOT framework does not address the structural challenges of crypto markets. For instance, decentralized exchanges lack centralized oversight mechanisms, making it difficult to meet the CFTC’s requirement that exchanges “possess the attributes of an established, organized exchange” [3]. These limitations mean that even if offshore exchanges comply with FBOT rules, they may still struggle to attract U.S. users due to operational inefficiencies and regulatory ambiguity.

The Strategic Imperative for a Bespoke Bill

The U.S. cannot afford to rely on legacy frameworks like the FBOT to address the complexities of digital assets. A bespoke crypto market structure bill must:
1. Create a Crypto-Native Regulatory Framework: Establish a unified regulatory body or task force to oversee digital assets, ensuring alignment between federal agencies and state regulators.
2. Tailor Compliance Requirements: Design rules that accommodate decentralized and tokenized assets, such as flexible settlement standards and interoperable cross-chain protocols.
3. Incentivize Onshoring: Offer tax incentives or reduced compliance burdens for offshore exchanges that return to the U.S., while ensuring robust investor protections.

The urgency for such a bill is underscored by global competition. As the Trump administration’s Working Group on Digital Asset Markets notes, jurisdictions like Singapore and the UAE are aggressively positioning themselves as crypto-friendly hubs, leveraging streamlined regulations to attract innovation and capital [4]. Without a cohesive U.S. strategy, the risk of losing market leadership—and the associated economic benefits—grows exponentially.

Conclusion: A Call to Action

The CLARITY and GENIUS Acts represent important steps toward regulatory clarity, but they are insufficient to address the systemic challenges of market fragmentation. The CFTC’s FBOT framework, while well-intentioned, fails to incentivize offshore exchanges to return due to its misalignment with crypto’s unique characteristics. To retain U.S. leadership in digital finance, Congress must act swiftly to draft a bespoke market structure bill—one that balances innovation with investor protection and aligns with the realities of a decentralized, global asset class.

The time to act is now. As the global crypto landscape evolves, the U.S. cannot afford to lag behind.

Source:
[1] Clarifying the CLARITY Act: What To Know About ... [https://www.arnoldporter.com/en/perspectives/advisories/2025/08/clarifying-the-clarity-act]
[2] FBOT registry won't bring offshore crypto exchanges to the ... [https://www.coinglass.com/de/news/689921]
[3] Blockchain Bites: Foreign Crypto Exchanges welcome to service the US? What’s the Catch? [https://piperalderman.com.au/insight/blockchain-bites-foreign-crypto-exchanges-welcome-to-service-the-us-whats-the-catch-ready-set-go-new-aml-ctf-rules-tabled-in-parliament-hang-ten-gemini-joins-the-crypto-ipo-wave/]
[4] A Closer Look at the Trump Administration's Comprehensive Report on Digital Assets [https://www.skadden.com/insights/publications/2025/08/a-closer-look-at-the-trump-administrations-comprehensive-report-on-digital-assets]
[5] CFTC Issues Advisory to Clarify FBOT Registration [https://www.jdsupra.com/legalnews/cftc-issues-advisory-to-clarify-fbot-982459/]
[6] U.S. CFTC Staff Issues Advisory on Foreign Boards of Trade [https://www.lexology.com/library/detail.aspx?g=bcbb03c5-30ec-4d96-b4d3-12caee706705]