CFTC Issues Advisory Mandating New Rules for Crypto Deposits

The amount of crypto deposits must be commensurate with the customer’s trading volumes, assessed on a quarterly basis.

US regulators continue to evolve with the explosive growth of cryptocurrency in recent years. Today, the CFTC 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. Additionally, it is intended to enhance these protections and to specifically address systemic risks posed by the nature of virtual assets that surrounded the recent hacks of crypto exchanges.

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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. Further, it 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.

However, these arrangements 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.

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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:

  • An FCM in preparing its daily and month-end segregation statements must report customer’s virtual currencies at fair market value on Line 1.B. (‘Net ledger balance – Securities (at market)’) and on Line 12 (‘Segregated funds on hand’).
  • The FCM must report the total fair market value of customer virtual currency held as supplemental information. The fair market value of the virtual currencies must be reported in U.S. dollars, and must reflect the FCM’s reasoned judgment based on spot market or other appropriate market transactions.
  • An FCM, in computing its daily and month-end segregation requirement, may not offset a debit or deficit in a futures customer’s or cleared swaps customer’s account by the value of any virtual currency held in the respective customer’s account. Therefore, an FCM may be required to deposit its own funds into segregation to cover any debit or deficit.
  • An FCM may not deposit its own virtual currencies in futures customer or cleared swaps customer segregated accounts for any reason, including in order to meet targeted or residual interest requirements.

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 to customer trading, i.e Bitcoin deposits are only allowed for trades involving the same coin. In such a case, Etherium 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 be required to contact its 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 their customer accounts, including the development of written procedures to enforce the program.

However, this advisory 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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