Crypto Market Structure: Don’t Let DeFi Be Miscast as a CEX Clone

This week, the U.S. Senate Banking Committee reignited the crypto market structure debate with a hearing that could shape the direction of global regulation. For those of us building infrastructure in DeFi, this matters. It’s not just a U.S. discussion—historically, U.S. clearing policy has shaped global norms, with its approach to independent clearing replicated in financial systems across Europe, Asia, and beyond. What gets decided in Washington often becomes the model elsewhere.

We’re especially focused on this at Pascal because clearing is our domain. Derivatives still dominate crypto, generating more than eight times the fees seen in stablecoin platforms. As traditional finance seeks scalable entry points into crypto, derivatives—and more specifically, how they’re cleared—will be the main arena. Real efficiency won’t come from copying CEX mechanics. It will come from rebuilding clearing infrastructure natively, on-chain. That’s where Pascal fits in.

In 1936, the Commodity Exchange Act codified the role of regulated clearinghouses. During congressional debate, Rep. Marvin Jones (TX) emphasized that clearinghouses exist to mutualize risk, enforce margin discipline, and prevent manipulation in commodity markets.

By the 1970s, further amendments reinforced this intent. When the CFTC was created in 1974, Sen. Herman Talmadge and others argued that centralized clearing was the backbone of market integrity—ensuring trades could be settled regardless of counterparty solvency. Clearing was positioned as infrastructure, not a business model. Its independence from trading desks and matching was intentional, not a bug.

This approach didn’t just shape U.S. markets—it became the blueprint for how modern financial systems around the world structured their futures and derivatives oversight. The U.S. model, with independent clearing at the core, informed regulatory architecture in Europe, Asia, and Latin America. Like it or not, the U.S. is still setting the tone. Whatever comes out of this round of hearings is likely to ripple far beyond Washington.
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Fast forward to today’s Senate Banking Committee hearing: Senator Warren’s proposed “Principles for Crypto Market Structure” call for a clear separation between trading venues, market makers, and custody providers. On the surface, this might seem like a step toward investor protection. But peel it back, and it risks hardcoding a centralized exchange (CEX) mindset into law. That misses the point.

The entire purpose of DeFi and crypto rests on two key features: deterministic outcomes through smart contracts, and composability. These principles don’t just enable programmable finance—they unlock new solutions that were never possible in legacy markets. Enforcing rigid structural separation might sound protective, but it creates artificial integration points that constrain how these systems can evolve.

We don’t regulate structure in traditional finance anyway—we regulate behavior. Abstracting policy down to structural assumptions risks freezing innovation before it even begins. The assumptions here don’t track—and they’re outdated.

We agree with some core tenets:

• Platforms shouldn’t self-deal or obfuscate risk.
• Market participants should be subject to transparent, real-time solvency controls.
• Retail should never be the systemic backstop.
  

But the current TradFi-inspired proposals overlook what DeFi uniquely enables: deterministic outcomes through smart contracts, and composability between systems. These aren’t just technical features—they represent a fundamentally different design space, where innovation comes from how things are composed, not just what they do.

Enforcing structural templates from traditional finance risks introducing the same rigid integration points that caused friction there. We don’t regulate structure in practice; we regulate behavior. Freezing innovation at the structural level blocks better solutions before they have a chance to emerge.

Let’s talk about open access. Traditional financial systems are built on layers of permission—settlement banks, primary dealers, clearing members—all protected by an access hierarchy that grew out of credit risk and delayed settlement. Because collateral, clearing, and payments took time, markets evolved to concentrate access among a few trusted participants. Stability through exclusivity.But in a world of deterministic, real-time settlement and on-chain portfolio risk, those constraints no longer make sense. Major on-chain entities, like DAO treasuries—despite being transparent and solvent—are excluded from key parts of the financial system. Not because of risk, but because the system was never designed to recognize transparent, non-custodial actors.

KYC and KYB frameworks emerged from a need to manage counterparty credit, not prevent crime. But that narrative has been co-opted. In trustless systems, identity data has become a tool not for security, but for gatekeeping. Traditional payments providers and incumbents have lobbied to turn access into a weapon—building walls and calling them controls. Identity isn’t portable. Each entity must rerun the same checks under slightly different rulesets, creating friction by design.

We don’t need that.
A composable identity layer that is portable, permissionable, and transparent solves this once—with triggers only for suspicious behavior. But incumbents aren’t trying to solve it. They’re trying to freeze the system, using legislative language to mask protectionism as public safety. Clever words—same old moat.

Most of today’s crypto exchange venues that purport to manage collateral aren’t clearing houses. They’re risk warehouses. They blur the lines between broker, principal, and clearing agent. Deribit doesn’t clear; it collects. A currently popular exchange is commonly understood to allow market makers to operate with last-look style mechanics. This isn’t marketed, but gives preferred participants a window to reject trades after seeing the other side’s intent—something from FX 15 years ago. It’s subtle, but it breaks the fairness assumptions users think they’re trading under.

Centralized venues routinely mix execution, custody, and leverage in one opaque bucket. If you ask major market makers—those that operate in both traditional finance and crypto—what their margin arrangements are with the largest crypto CEX, they’ll tell you: handshakes and spreadsheets. That does not breed stability or scale.

This is not innovation. That’s just TradFi theater with better branding.

DeFi needs to lay out a vision for how regulation should actually be written—not based on legacy abstractions or outdated structural assumptions, but grounded in the realities of modern programmable markets. That means writing rules that focus on outcomes, not labels—on risk, not form.

Regulation should target behavior and solvency, not architecture or corporate structure. To succeed, DeFi needs open access frameworks, real-time verification, and, above all, clearing that works without intermediaries. If policy defaults to the same institutional wiring as before, it will miss the opportunity to solve the very problems it was meant to address. Focus on behaviors, not entities.We deliberately named ourselves Pascal. Pascal’s Wager lays out an argument about belief—in our case, that argument applies to DeFi. If you want DeFi to succeed, you must want it to compete with traditional finance on equal footing. That means DeFi must match the capital efficiency of traditional finance and adopt the same core primitives.

Which leads us to this: If you believe in DeFi, then you believe in on-chain clearing.

We’ve built a clearing protocol that allows markets to launch with their own data, effectively spinning up deterministic clearing entities tailored to their products. This eliminates the massive frictional cost of relying on centralized entities to assess creditworthiness or underwrite actions. It means market development and access around the world does not depend on a handful of prime brokers and clearing members.


We believe in a future where:

• Execution venues compete on user experience and routing logic.
• Clearing is deterministic, verifiable, and separate from execution.
• Margin is netted, capital is optimized, and abuse has nowhere to hide.
• Market access and development are not controlled by a small cadre of banks.

That’s why we built Pascal Protocol—a decentralized clearing layer that operates independently of trading venues, enabling real-time risk checks, portfolio margin, and settlement netting, without requiring trust in any single actor.

Jetstream is our reference venue—the first of many. Pascal is the clearing layer. Anyone can plug in. The architecture enforces discipline. No bailout required.

Legislators: don’t miscast DeFi as just another CEX. If you regulate the wrong way, you kill the innovation before it scales. Focus on deterministic outcomes, not structural familiarity.

Let’s build the infrastructure that makes regulation easier—not obsolete.

About the Author

James Davies is the CEO of Pascal Protocol and Jetstream, the first platform launched on Pascal. He began writing high-frequency trading software in the 1990s and has worked at Trayport and BGC Partners—then chaired and controlled by Howard Lutnick, now U.S. Secretary of Commerce. His experience in traditional market infrastructure informs his current work: building the clearing layer DeFi needs—transparent, deterministic, and accessible.

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