The National Futures Association ("NFA") submitted a proposal to the CFTC to adopt an interpretive notice imposing disclosure requirements on NFA members engaged in virtual currency activities. The interpretive notice provides separate guidance for (i) futures commission merchants ("FCMs") and introducing brokers ("IBs"), and for (ii) commodity pool operators ("CPOs") and commodity trading advisors ("CTAs"). The proposal will become effective 10 days after CFTC receipt of the NFA submission unless the CFTC elects to review the proposal for approval.

Under the proposal, an FCM or IB would be required to (i) provide the NFA Investor Advisory and CFTC Customer Advisory on Virtual Currencies to any customer involved in a virtual currency derivative transaction, (ii) inform a customer or counterparty involved in underlying or spot virtual currencies of the lack of NFA regulatory oversight of these activities, (iii) present retail customers with advisories and standardized disclosure language in writing or electronically and (iv) display standardized disclosure language in any promotional materials.

A CPO or CTA would be required to (i) display standardized disclosure language in its disclosure document, offering document and promotional material related to virtual currencies in any pool or account trading program that trades underlying or spot virtual currencies, (ii) notify a customer or counterparty of the NFA's limited regulatory oversight of spot virtual currency transactions and (iii) provide a separate standardized disclosure to customers and also display the disclosure in virtual currency promotional materials. Additionally, the NFA noted that CPOs and CTAs must address the following risks associated with the unique features of virtual currencies in their disclosure agreements:

  • price volatility;
  • valuation and liquidity;
  • potential implications of cyberattacks;
  • anonymity within the spot market and the potential for fraud;
  • the new and largely unregulated nature of virtual currency exchanges, intermediaries and custodians;
  • regulation by multiple agencies and laws that may impact the price of virtual currencies;
  • rapidly evolving technology supporting virtual currencies; and
  • transaction fees.

Commentary / Bob Zwirb

For years, regulators have been concerned with fraud in the retail forex sector (for good reason), and have imposed a separate comprehensive regulatory regime there to address that. Today, their focus has shifted to the commodity du jour – virtual currency – and they are just beginning to create a regulatory structure for that area. Both fiat and virtual currencies, however, are transacted, in large part, in spot markets that are not subject to CFTC regulatory authority (though they are subject to its enforcement authority). The NFA's proposal is a way to impose disclosure obligations on its regulated entities transacting in the spot market, even if it is not possible to regulate entities that avoid becoming subject to CFTC registration and NFA membership.

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