US regulators continue to evolve with the explosive growth of cryptocurrency in recent years. Today, issued an advisory expanding the notifications and reporting requirements for virtual currencies held by futures commission merchants (FCMs).
The new rules build upon the CFTC’s existing customer protection regime, as amended by Dodd-Frank, under which FCMs are required to segregate from their proprietary assets all money, securities and other assets deposited by customers. It’s also intended to enhance these protections and to specifically posed by the nature of virtual assets that also surrounded the recent hacks of crypto exchanges.
In particular, the advisory provides guidance to FCMs on how to hold and report virtual currency deposited by customers in connection with physically-delivered futures contracts or swaps. It also provides guidance that FCMs should follow when designing and maintaining risk management programs concerning the acceptance of virtual currencies as customer funds.
Citing unique custodian risks related to digital assets, the CFTC requires FCMs to deposit cryptocurrencies they hold on behalf of customers only with a bank, trust company, or another FCM, or with a clearing organization that clears crypto derivatives.
Furthermore, a futures commission merchant must obtain a written letter from each depository that clearly identifies the crypto deposits as segregated funds belonging to its customers. These letters will require such depositories to consent to new CFTC access and examination requirements.
These arrangements, however, should in no way restrict an FCM’s ability to make withdrawals from each segregated account so that it can meet customers’ requests to retrieve their cryptos without delay.
As outlined, the advisory also imposes new FCM reporting requirements in addition to substantially revising existing obligations. The most significant of these reporting requirements include the following:
Restriction on accepting crypto deposits
In addition, the new rules have narrowed the scope to which FCMs can receive and maintain customers’ cryptocurrencies. Specifically, these firms can only accept a cryptocurrency that relates customer trading, i.e Bitcoin deposits are only allowed for trades involving the same coin. In such a case, Ether or other cryptocurrencies would not be accepted to margin, guarantee, or secure customer trading in Bitcoin.
Additionally, the amount of crypto deposits must be quite commensurate with the customer’s trading volumes, assessed on a quarterly basis.
The advisory further states that each FCM will also be required to contact it customer within 30 days to return his crypto balances once this customer ceases trading in cryptocurrency contracts.
Finally, FCMs will be required to establish comprehensive risk management programs with respect to its customer accounts, including the development of written procedures to enforce the program.
This advisory, however, does not address crypto assets held by FCMs on behalf of customers trading derivatives outside the US nor those held by these merchants on their own behalf.
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