The Commodity Futures Trading Commission (CFTC or Commission) Chairman J. Christopher Giancarlo issued a statement this week on virtual currencies. The CFTC also released a backgrounder on its oversight of and approach to cryptocurrency futures markets.
In his statement, Chairman Giancarlo noted that the Market Risk Advisory Committee will meet on January 31, 2018 to consider the process of self-certification of new products and operational rules by Designated Contract Markets (DCMs) under the Commodity Exchange Act (CEA) and the rules and regulations thereunder. The meeting will take place the week after a January 23, 2018 meeting of the CFTC Technology Advisory Committee, which will consider the related challenges, opportunities and market developments of virtual currencies.
Chairman Giancarlo noted that the CFTC declared virtual currencies to be a “commodity” subject to oversight under its authority under the CEA in 2014. Since then, the CFTC has taken enforcement action, issued proposed guidance and warnings, addressed a Ponzi scheme and produced consumer information in the virtual currency context. He reinforced that the CFTC continues to have an important role to play in the regulation of virtual currencies, and will seek to promote responsible innovation in a manner consistent with its statutory mission to enhance derivative trading markets and prohibit fraud involving commodities in interstate commerce.
The CFTC backgrounder includes an overview of the regulatory oversight of and jurisdiction over cryptocurrencies, noting that U.S. regulation of cryptocurrencies has evolved into a multifaceted, multi-regulatory approach. It confirms the CFTC’s belief that the responsible regulatory response to virtual currencies involves fostering consumer education, asserting its legal authority over virtual currency derivatives to prevent fraud and manipulation, gathering market intelligence, enforcing the law and prosecuting fraud, abuse, manipulation or false solicitation in markets for virtual currency derivatives and underlying spot trading, and coordinating with other federal regulatory bodies.
After noting that the Chicago Mercantile Exchange Inc. (CME) and the CBOE Futures Exchange (CFE) self-certified new contracts for Bitcoin futures and the Cantor Exchange self-certified a new contract for Bitcoin binary options, the backgrounder unpacks the self-certification process, which was designed by Congress to give DCMs the initiative to certify new products, consistent with a DCM’s role as a self-regulatory organization. The self-certification process, however, does not provide for public input, the creation of separate guaranty funds for clearing or value judgments about the underlying spot market, and there are limited grounds for the CFTC to “stay” self-certification. In regard to the CME’s and CFE’s self-certifications, the backgrounder notes that no grounds for “staying” self-certification were evident, but had it even been possible, blocking self-certification would not have stemmed interest in virtual currency derivatives and would have ensured that the underlying spot markets operated without federal regulatory surveillance.
The backgrounder confirms, however, that the CFTC staff has engaged in a “heightened review” with the DCMs and worked collaboratively through drafts of the terms of the CME and CBOE Bitcoin futures contracts to address issues. Heightened review involves derivatives clearing organizations setting substantially high margin for cash-settled futures, DCMs setting large trader reporting thresholds, DCMs entering into information sharing agreements with spot market platforms, DCMs monitoring data from cash markets with respect to price settlements and identifying anomalous moves in the cash markets compared to the futures markets, DCMs agreeing to engage in inquiries, DCMs agreeing to coordinate with CFTC surveillance staff on trade activities, and DCMs coordinating product launches so that the CFTC’s market surveillance branch can monitor developments. The backgrounder notes that while engaging in this heightened review, the CFTC seeks to look out for virtual currency market participants and consumers and protect the public interest, while recognizing that major global banks and brokerages that are clearing members can look out for their own commercial interests in choosing what to trade, how much margin to require and how actively to participate in derivatives clearing organization risk committees.