Paradigm Comments on SEC and CFTC’s Joint Reporting and Definition Requests
Last week, Paradigm filed comment letters responding to the CFTC and the SEC’s joint requests for comment, one on swap and security-based swap data reporting and the other on the definition of “swap” and “security-based swap.” These rules matter because they strike at something important: how to bring the last generation of our financial system onchain.
The two requests for comment come down to a simple choice between giving effect to the statutory text or elevating formality over function. In each case, we urge the Commissions to choose the former, and to update their rules to take advantage of technology that already delivers what those statutes require.
Reporting. Three core themes should guide the agencies’ overall approach:
Technological neutrality: Reporting rules should specify the desired regulatory outcome, not the mechanism for achieving it. An on-chain swap is transparent, immutable, timestamped, and publicly auditable at execution. We therefore ask the Commissions to recognize an alternative pathway under which credible public blockchain data satisfies the reporting obligation and to bring the framework onchain, which will facilitate price transparency while ensuring that counterparty identity remains confidential.
Harmonization: While alignment should not be pursued for its own sake, it is a worthy goal where different frameworks do nothing but increase regulatory burden and costs for firms active in both markets. Where a specification is workable for both agencies it should be identical, and we encourage the SEC to codify its alignment with the CFTC’s rules before the 2019 Compliance Statement expires in 2029. We also support harmonized requirements for platform-executed uncleared trades, materiality thresholds for correcting errors, and machine-readable rule structures, which pair naturally with on-chain reporting.
Decentralized finance: Reporting obligations have always attached to responsible persons and intermediaries, not to software code, protocol developers, validators, or node operators that exercise no custody, control, or discretion. Where a transaction runs through genuinely non-custodial infrastructure and no traditional reporting party exists, the obligation should run to the participants, not to the software itself.
Definitions. Our second letter answers two separate questions, each of which concern different products but both of which present the choice between form and function in its sharpest form.
On Question 8, we encourage the agencies to recognize that an event contract is an option “on” a security when, and only when, its payout is determined by the price of a security. We ask the Commissions to confirm both halves of that reading: A contract with a payout determined by reference to where a stock closes is a securities option, while contracts that reference another indicator that may have some incidental effect on stock price–such as an election, macroeconomic release, or operating metric–is a swap. The critical question, in other words, is how a contract pays, not what determines whether it pays.
On Question 11, we make clear that we support the CFTC’s decision to find that “future delivery” is satisfied for a BTC perpetual, and encourage the agencies to find the same terms for other forms of perpetuals, including those on equities. These contracts easily satisfy the hallmarks of a futures contract–they are standardized, fungible, traded multilaterally under transparent rules, and tethered to spot by a rules-based convergence mechanism–and the Commissions are correct to recognize as much.
The Commissions deserve credit for taking these difficult questions up jointly and on principled criteria. We look forward to continued engagement, and you can read our full reporting comment here and our definitions comment here.