CFTC tightens digital currency rules for futures commission merchants

The Commodity Futures Trading Commission has issued a new advisory to futures commission merchants (FCMs) on holding of digital currencies in segregated accounts. The regulator addressed how customer protection provisions of the Commodity Exchange Act apply to digital currencies deposited by futures customers.

In its press release, the regulator revealed that the new advisory will guide FCMs on holding and reporting “certain deposited virtual currency from customers in connection with physically-delivered futures contracts or swaps.”

An FCM is an individual or company that accepts orders of the purchase or sale of a commodity for future delivery. JPMorgan Securities, Goldman Sachs and SG Americas Securities are among the leaders in this field.

The CFTC issued the guidance through its Division of Swap Dealer and Intermediary Oversight (DSIO). The division’s director Joshua Sterling stated, “…the CFTC is committed to fostering responsible fintech innovation and improving the regulatory experience of registered firms where doing so is consistent with our rules. This advisory furthers these critical goals and will provide additional certainty on these issues as the Commission works to establish a holistic framework for digital asset derivatives.”

In an accompanying letter, the regulator delved into its view regarding the accepting and holding of customers digital assets by FCMs. It however clarified that the advisory will not apply to digital currencies held by FCMs on behalf of customers trading futures or options on foreign markets.

Holding a customer’s digital currency as segregated funds increases the risks for an FCM’s other customers, the CFTC stated. This is because digital currencies present a degree of risk that’s beyond other depositories such as banks and trust companies. The CFTC cited the billions of dollars’ worth of digital currencies that has been lost to hackers in the past few years.

One of the guidelines that FCMs must adhere to is depositing a customer’s digital currencies with a bank or trust company. This account must be held under an account name that clearly shows the funds belong to a certain client. The funds must be available for withdrawal at request, with the FCM required to prepare daily and month-end segregation statements. These funds should be accessible upon demand at a timeframe “that is technologically and operationally possible, but should not exceed one day.”

The DSIO can decide to examine any FCM that accepts digital currencies for customers, director Sterling stated. This will enable the division to determine how the FCM is meeting its obligations. The division is also at liberty to instruct an FCM to cease accepting digital currencies if it determines that all the obligations haven’t been met.

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