Shearman & Sterling | Fintech 2020 | CFTC Discusses Approach to Virtual Currency Futures Markets 
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  • CFTC Discusses Approach to Virtual Currency Futures Markets 
    The Commodity Futures Trading Commission has released a backgrounder on the federal oversight of virtual currencies and its approach to regulating the virtual currency derivatives markets. Because virtual currencies have been deemed a commodity, certain derivative and other transactions in virtual currencies may be subject to CFTC oversight under the Commodity Exchange Act.

    The CFTC outlined its 5-pronged approach to the regulation of derivatives involving virtual currencies, which will focus on (1) consumer education; (2) asserting legal authority; (3) market intelligence; (4) robust enforcement; and (5) government-wide coordination.

    Additionally, the CFTC provided further detail on the self-certification process for new derivatives products involving virtual currencies at a futures exchange, as well as an explanation of the "heightened review" it has undertaken for such filings, within the limits of the CFTC's ability to stay or block such a filing. The CFTC noted in particular certain standards it would expect to apply to virtual currency futures, including substantially higher margin requirements as compared to other products, reporting requirements and surveillance coordination. The CFTC also noted it has limited authority to block or stop derivative trading on virtual currencies, and further argued that attempting to do so would have "ensured that the virtual currency spot markets continue to operate without federal regulatory surveillance for fraud and manipulation."

    The CFTC considered the impact of virtual currency derivatives on three particular constituencies: (1) market participants and consumers; (2) the public interest generally; and (3) derivatives clearing organization clearing members. The CFTC notes that it has these constituencies in mind when reviewing proposals regarding the virtual currency derivatives markets.

    The CFTC also announced that its Market Risk Advisory Committee will meet on January 31, 2018 to discuss the statutory and regulatory process for listing new derivatives products, such as those based on virtual currencies, through the self-certification process on CFTC-regulated designated contract markets and swap execution facilities. This follows an announcement that the CFTC's Technology Advisory Committee will meet on January 23, 2018 to discuss new and emerging technology such as virtual currencies, digital ledger technology, cybersecurity and more.