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CFTC To Examine Self-Certification




The self-certification process, used by some trading houses like CBOE and CME, will be examined by regulators after cryptocurrency derivatives come under the spotlight.

Remarks made by Chairman J. Christopher Giancarlo of the Commodity Futures Trading Commission (CFTC) on this day, January 4, 2018, acknowledged "one thing is certain: ignoring virtual currency trading will not make it go away."

Giancarlo today announced that the CFTC Market Risk Advisory Committee (MRAC) would convene upon January 31, 2018, in order to examine the self-certification process pursuant to regulations and rules set forth by the Designation Contract Markets under the Commodity Exchange Act (CEA). "The MRAC meeting … will consider the related challenges, opportunities, and market developments of virtual currencies," said Giancarlo.

Previously, the CFTC chair referred to "extensive discussions with … CME, CFE and Cantor," resulting then in what Giancarlo deemed "an appropriate standard for oversight over these bitcoin contracts."

But perhaps regulators feel the investment landscape merits a closer inspection, because the CFTC has now issued a backgrounder document to provide more clarity on federal jurisdiction and oversight of cryptocurrencies. The commission noted that because US law provides no direct federal oversight of cryptocurrency spot markets, the resulting regulatory landscape comprises a "multifaceted multi-regulatory approach."

The document goes on to highlight specific instances of these approaches:

  • "State Banking regulators oversee certain US and foreign virtual currency spot exchanges largely through state money transfer laws.
  • The Internal Revenue Service (IRS) treats virtual currencies as property subject to capital gains tax.
  • The Treasury's Financial Crimes Enforcement Network (FinCEN) monitors Bitcoin and other virtual currency transfers for anti-money laundering purposes.
  • The Securities and Exchange Commission (SEC) takes increasingly strong action against unregistered initial coin offerings."

The contents of the backgrounder provide a historical reference to the CFTC's regulatory actions; and it commits to ongoing discussions between representatives of the public, cryptocurrency futures trading platforms, and members of the CFTC, to explore self-certification and the future of the derivatives underpinning spot markets.

In his statement, Giancarlo said that there are "both significant opportunities and challenges" surrounding cryptocurrencies and the developing derivatives market built atop them:

"As a Federal market regulator, the CFTC is cognizant of the considerable risks of virtual currencies like Bitcoin. In addition to the nascent stage of the technology itself, risks associated with virtual currencies include: operational risks of unregulated and unsupervised trading platforms; cybersecurity risks of hackable trading platforms and virtual currency wallets; speculative risks of extremely volatile price moves; and fraud and manipulation risks through traditional market abuses of pump and dump schemes, insider trading, false disclosure, Ponzi schemes and other forms of investor fraud and market manipulation."

Giancarlo also expressed that the CFTC has been active in its regulation of cryptocurrencies, having declared them a commodity, and thus subject to the agency's oversight, in 2014. "Since then," he said, "the CFTC has taken action against unregistered bitcoin futures exchanges, enforced the laws prohibiting wash trading and prearranged trades on a derivatives platform, issued proposed guidance on what is a derivative market and what is a spot market in the virtual currency context, issued warnings about valuations and volatility in spot virtual currency markets and addressed a virtual currency Ponzi scheme." He went on to reference the CFTC's efforts to inform consumers by setting up an informational website dedicated to cryptocurrency, as well as a primer on cryptocurrency. In addition, the CFTC has distributed several podcasts on the subject.

Giancarlo asserted that ignoring cryptocurrency trading will not diminish its presence, "nor is it a responsible regulatory strategy." To that end, the CFTC desires to cultivate compliant development of derivative trading markets that do not lend themselves to fraud related to commodities and cross-border commerce.

"The responsible regulatory response to virtual currencies is consumer education, asserting CFTC authority, surveilling trading in derivative and spot markets, prosecuting fraud, abuse, manipulation and false solicitation and active coordination with fellow regulators," said Giancarlo. "The CFTC has been following this course of action and will continue to do so."

Jeremy Nation

Jeremy Nation is a writer living in Los Angeles with interests in technology, human rights, and cuisine.

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