Shearman & Sterling | FinTech | NFA Proposes Disclosure Requirements for Members Engaging in Virtual Currency Activities
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  • NFA Proposes Disclosure Requirements for Members Engaging in Virtual Currency Activities

    The National Futures Association last week proposed an interpretive notice that would require its members to disclose the potential risks involved when dealing with virtual currencies and virtual currency derivatives.  The notice, titled “Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities,” reflects the NFA’s concern that customers may not fully understand the nature of these products, the potentially significant losses that could be sustained or the limitations of the NFA’s oversight of virtual currency activities.

    The first section of the notice provides disclosure requirements for futures commission merchants and introducing brokers.  When engaging in any virtual currency transactions, FCMs and IBs would be required to provide customers with advisories published by the NFA and the Commodity Futures Trading Commission outlining the potential risks of virtual currency trading.  For virtual currency transactions entered into prior to the effective date of the notice, FCMs and IBs must provide customers with the advisories no more than 30 days following the issuance of the notice.  Further, the notice would require that FCMs and IBs provide counterparties with specific language indicating that the NFA does not maintain regulatory oversight authority over virtual currency spot markets, exchanges or custodians.

    The second section of the notice applies to commodity pool operators and commodity trading advisors.  In disclosure documents, offering documents and promotional materials related to underlying or spot virtual currency transactions in a pool or managed account program, CPOs and CTAs must address a number factors that could put customers at risk or affect the products’ value.  These include the unique features of virtual currencies, price volatility and cybersecurity, among several others.  CPOs and CTAs would also be required to provide specific language notifying customers of the limitations to the NFA’s oversight of virtual currency markets and the fact that there are currently no means for the NFA to verify the ownership or valuation attributed to a virtual currency.  Additionally, CPOs and CTAs should disclose the potential risks associated with virtual currency derivatives and explain the impact these risks may have on a pool’s or managed account program’s performance.

    The interpretive notice will become effective ten days following the CFTC’s receipt of the NFA’s proposal, unless the CFTC notifies the NFA that it wishes to review the proposal for approval.  While it is currently unclear whether or not the CFTC will do so, the NFA’s interpretive notice, along with the Financial Industry Regulatory Authority’s request that firms disclose digital asset activity, reflects the fact that self-regulatory organizations may start to play a more prominent role in this space.  It also bears monitoring whether their involvement may have any impact on the status of Cameron and Tyler Winklevoss’s proposed virtual currency SRO, which has garnered some support from members of the CFTC.  We will continue to provide updates on the role that SROs play in shaping the virtual currency regulatory landscape going forward.