NFA Rule Submission Letter: Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities
The National Futures Association has sent a rule submission letter to the CFTC regarding new disclosure obligations for FCMs, IBs, CPOs, CTAs, and Pools and Managed Account Programs engaging in virtual currency derivatives and virtual currency transactions as well as other activities in underlying or spot virtual currencies would require the new disclosure.
This interpretive notice comes as the NFA’s Board of Directors take notice of Bitcoin futures listed by designated contact markets where investors may not fully understand the nature of cryptocurrency nor virtual currency derivatives. The NFA has but limited regulatory authority over spot market virtual currencies and there is a significant risk of loss from trading these products. As stated in the letter to the CFTC,
“NFA’s Board is also concerned that FCM and IB Member customers may not understand that although they may be engaging in spot virtual currency activities with an NFA Member, NFA does not have regulatory oversight over those activities. Therefore, the Interpretive Notice also requires that FCM and IB Members offering services in spot market virtual currencies provide customers with a standardized disclosure that specifically states that NFA does not have regulatory oversight authority over underlying or spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.”
The NFA Board feels it is important for customers to understand the limited capacity of NFA’s regulatory oversight over such virtual currency activities. The new rule would require that Future Commission Merchants and Introducing Brokers provide customers with the NFA Investor
Advisory – Futures on Virtual Currencies Including Bitcoin and the CFTC Customer Advisory: Understand the Risk of Virtual Currency Trading. If the FCM or IB Member has any customers who traded a virtual currency derivative prior to the issuance of the Interpretive Notice, the FCM and/or IB Member must provide the advisories to the customer within thirty calendar days of the Interpretive Notice’s effective date.
Proposed Interpretive Notice: Disclosure
Requirements for Virtual Currency Activities
NFA Compliance Rule 2-22 prohibits members from stating or implying that the NFA sponsors, recomments, or approves spot virtual currencies. As such, it’s members must provide the customer or counterparty with such disclosure. Merely displaying them in their website is not enough for retail customers and must be provided in writing or electronically, in a prominent manner, ensuring the customer is fully aware.
Disclosure Obligations of FCMs and IBs Engaging in Virtual Currency Derivatives and Virtual Currency Transactions
[NAME OF NFA MEMBER] IS A MEMBER OF NFA AND IS SUBJECT TO
NFA’S REGULATORY OVERSIGHT AND EXAMINATIONS. HOWEVER, YOU
SHOULD BE AWARE THAT NFA DOES NOT HAVE REGULATORY
OVERSIGHT AUTHORITY OVER UNDERLYING OR SPOT VIRTUAL
CURRENCY PRODUCTS OR TRANSACTIONS OR VIRTUAL CURRENCY
EXCHANGES, CUSTODIANS OR MARKETS.
Disclosure Obligations of CPOs and CTAs Engaging in Virtual Currency Derivatives and Virtual Currency Transactions
The NFA has provided Commodity Pool Operators and Commodity Trading Advisors with “robust” dosclosures related to Virtual Currency and Cryptocurrency derivatives. CPOs and CTAs must address any of the following applicable to their activities, for their full definitions see the entirety of the NFA letter here:
- Unique Features of Virtual Currencies
- Price Volatility
- Valuation and Liquidity
- Cybersecurity
- Opaque Spot Market
- Virtual Currency Exchanges, Intermediaries and Custodians
- Regulatory Landscape
- Technology
- Transaction Fees
Virtual Currency Derivatives Disclosure Requirements for Pools and Managed Account Programs
[NAME OF NFA MEMBER] IS A MEMBER OF NFA AND IS SUBJECT TO
NFA’S REGULATORY OVERSIGHT AND EXAMINATIONS. [NAME OF NFA
MEMBER] HAS ENGAGED OR MAY ENGAGE IN UNDERLYING OR SPOT
VIRTUAL CURRENCY TRANSACTIONS IN A [COMMODITY POOL OR
MANAGED ACCOUNT PROGRAM]. ALTHOUGH NFA HAS JURISDICTION
OVER [NAME OF NFA MEMBER] AND ITS [COMMODITY POOL OR
MANAGED ACCOUNT PROGRAM], YOU SHOULD BE AWARE THAT NFA
DOES NOT HAVE REGULATORY OVERSIGHT AUTHORITY FOR
UNDERLYING OR SPOT MARKET VIRTUAL CURRENCY PRODUCTS OR
TRANSACTIONS OR VIRTUAL CURRENCY EXCHANGES, CUSTODIANS OR
MARKETS. YOU SHOULD ALSO BE AWARE THAT GIVEN CERTAIN
MATERIAL CHARACTERISTICS OF THESE PRODUCTS, INCLUDING LACK
OF A CENTRALIZED PRICING SOURCE AND THE OPAQUE NATURE OF
THE VIRTUAL CURRENCY MARKET, THERE CURRENTLY IS NO SOUND OR
ACCEPTABLE PRACTICE FOR NFA TO ADEQUATELY VERIFY THE
OWNERSHIP AND CONTROL OF A VIRTUAL CURRENCY OR THE
VALUATION ATTRIBUTED TO A VIRTUAL CURRENCY BY [NAME OF NFA
MEMBER].
Any Other Activities in Underlying or Spot Virtual Currencies
[NAME OF NFA MEMBER] IS A MEMBER OF NFA AND IS SUBJECT TO
NFA’S REGULATORY OVERSIGHT AND EXAMINATIONS. HOWEVER, YOU
SHOULD BE AWARE THAT NFA DOES NOT HAVE REGULATORY
OVERSIGHT AUTHORITY OVER UNDERLYING OR SPOT VIRTUAL
CURRENCY PRODUCTS OR TRANSACTIONS OR VIRTUAL CURRENCY
EXCHANGES, CUSTODIANS OR MARKETS.
Failure to follow the disclosure guidelines in this Interpretive Notice may be deemed conduct inconsistent with a Member’s obligations under NFA Compliance Rule 2-4 to observe high standards of commercial honor and just and equitable principles of trade as well as violations of NFA Compliance Rule 2-29.1
The Full NFA letter can be found here.
