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U.S. Crypto Derivative Merchants Cautioned about Customer Funds



Oct 23, 2020
U.S. Crypto Derivative Merchants Cautioned about Customer Funds

On Wednesday evening, a new guidance was issued by the US Commodity and Futures Trading Commission (CFTC). This guidance was directed towards businesses that are involved in crypto derivative trading and advised them to hold the funds of their clients very carefully. The CFTC has taken a keen interest when it comes to coming up with rules relating to crypto custodianship and this new guidance is just another example of it. Since cryptocurrency is identified as an asset class on its own, special regulations have to be developed relating to it. It was highlighted by the CFTC that custodians of virtual currency are not typically subjected to a comprehensive system of federal and state oversight or regulations.

This also includes regulations relating to the security and safeguarding of these digital assets, which can subsequently be a risk for customer funds that are held in them, and the protection they are provided. As for the specific provisions of the guidance, it restricts the locations where a futures commission merchant (FCM) is permitted to deposit a customer’s virtual currency. Under the new rules, it is mandatory for them to keep them in a bank, a trust company, another FCM or a clearing organization that uses virtual currency futures for clearing.

Further warnings were also issued by the CFTC to FCMs. These warnings were about the deposits kept by FCMs and indicated that they could only be kept in accounts that were specifically marked for customer funds. In addition, the CFTC also clarified that gains in one account couldn’t be used to make up for the losses in a different account. Put simply, the overarching goals of the guidance appear to be to keep the cryptocurrency funds of clients untouched and safe, with the exception of FCMs being able to use these funds for making collective gains.

The scope of risk associated with the trading of crypto assets by FCMs hasn’t been addressed as yet, but it is not difficult to determine how disastrous it could be for a crypto futures trading company to play in markets as volatile as that of cryptocurrencies. The CFTC has been putting in a lot of time and effort to put together a holistic framework related to crypto-assets. At the beginning of October, the CFTC had promised that they would protect the rising markets for these assets. It wasn’t long after that it announced that it was going to charge BitMEX for running an unregistered derivatives platform within the borders of the United States.

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They have already done so and it has put BitMEX is a great deal of trouble. With the cryptocurrency industry growing at a rapid pace, only time will tell what measures will be taken by the CFTC for regulating it as a whole. However, they seem to be quite keen in stepping up the regulations relating to the space, and ultimately, this is going to benefit the United States because having clear regulations in place will provide a great deal of uncertainty and prevent customer exploitation.


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