The National Futures Association (NFA) announced today that it will be adopting new disclosure requirements for firms that engage in virtual currency activities. From October 31, 2018, members of the US-based regulator will need to disclose certain information such as outlining the risks of investing in cryptocurrencies.
The new disclosure requirements will apply to futures commission merchants (FCM), introducing brokers (IB), commodity pool operators (CPO) and commodity trading advisors (CTA). It is necessary for firms to meet these requirements if they engage in activities related to cryptocurrencies and crypto derivatives.
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The upcoming requirements are based on an interpretive notice. This was decided on May 17, 2018, by the watchdog’s Board of Directors. According to the notice, as the virtual currency market attracts more investors, the NFA has grown concerned over their safety.
Specifically, the regulator believes investors might not completely understand the nature of the assets. It also highlights that traders may not be aware of the risks of investing in cryptocurrencies and might not comprehend the NFA’s limited oversight role.
New NFA requirements for FCM and IB
From October, FCM and IB members will be required to give customers who trade virtual currency derivatives two advisory notices. These must be given at or before the time they trade the asset. The two notices are the NFA Investor Advisory – Futures on Virtual Currencies Including Bitcoin and the CFTC Customer Advisory: Understand the Risks of Virtual Currency Trading.
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In addition, if a customer has traded a cryptocurrency derivative through the firm before the October deadline, the company must still provide these advisories to them before November 30, 2018. If an FCM or IB allows investors to trade spot market virtual currencies, then from October, they must provide clients with a standardised disclosure warning. The wording for the disclosure warning can be found on the NFA’s website.
CPO and CTA requirements
The requirements for CPO and CTA members are a lot more extensive. These firms will need to provide in-depth disclosures to clients in regards to their pools, exempt pools or trading programs.
These companies will also need to provide a standardised disclosure to customers which clearly explains the NFA’s limited oversight of spot market virtual currencies. This disclosure is the same as what is required of FCM and IB.
Furthermore, the watchdog has outlined key areas where CPO and CTA must disclose certain information if they are applicable to their activities. This information must be in their disclosure documents, offering documents or promotional materials.
These areas are Unique Features of Virtual Currencies, Price Volatility, Valuation and Liquidity, Cybersecurity, Opaque Spot Market, Virtual Currency Exchanges, Intermediaries and Custodians, Regulatory Landscape, Technology and Transaction Fees.