Regulators Tackle Crypto's Offshore Dilemma with Outdated Rules

The Commodity Futures Trading Commission (CFTC) has moved to clarify its stance on offshore crypto exchanges serving U.S. traders through its advisory on the Foreign Board of Trade (FBOT) framework. While the move is framed as a step toward regulatory alignment with the fast-paced nature of the crypto market, experts argue the approach is ill-suited to the unique structure and operations of digital asset platforms. The FBOT framework, originally designed for traditional futures and commodities markets, imposes stringent requirements around settlement, clearing, and regulatory licensing that many offshore exchanges—particularly those based in jurisdictions like Seychelles—were not built to meet.

Eli Cohen, general counsel at Centrifuge, emphasized that the framework does not align with the operational realities of crypto-native platforms. He noted that only heavily regulated exchanges overseas are even eligible to apply under the current rules, which excludes a vast majority of the crypto exchanges U.S. traders commonly use. This mismatch between regulatory intent and practical execution raises questions about the feasibility of the CFTC’s plan in effectively expanding access to U.S. traders while maintaining regulatory oversight.

The CFTC’s advisory is part of a broader effort to modernize regulatory practices in the U.S. financial system, including initiatives with the SEC to explore joint oversight and 24/7 trading cycles. However, the advisory’s limited scope means it is more symbolic than functional. According to Cohen, the underlying issue remains the absence of a tailored regulatory framework for digital assets. Offshore exchanges are unlikely to restructure their operations to meet the demands of a decades-old regulatory model unless Congress enacts a dedicated market structure bill.

The regulatory uncertainty surrounding crypto continues to drive U.S. users to offshore platforms, which offer faster access and fewer restrictions. Until a comprehensive and industry-specific legal framework is established, the CFTC’s efforts may not significantly alter the current landscape. The advisory, while a step in the direction of greater clarity, does not resolve the structural barriers that prevent offshore exchanges from serving U.S. customers within existing regulatory parameters.

The CFTC's actions are being watched closely as part of a larger regulatory "crypto sprint," in which the agency and the SEC are exploring ways to bring Wall Street-style oversight to the crypto market. However, without a fundamental shift in how digital assets are regulated, the effectiveness of these efforts remains in question. The absence of a stable, industry-specific rulebook continues to hinder meaningful progress in aligning regulatory practices with the realities of the crypto market.