United States

New NFA disclosure requirements for virtual currency activities

FINANCIAL REPORTING INSIGHTS  | 

The National Futures Association (NFA) recently implemented an Interpretive Notice, Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities, which is effective October 31, 2018. The new disclosure requirements are intended to address concerns that customers may not fully understand the nature of virtual currencies and virtual currency derivatives, the substantial risk of loss that could arise from trading them, and the limitations of NFA’s regulatory authority over underlying or spot virtual currencies. The disclosure obligations in the Interpretive Notice apply to:

  • Commodity pool operators (CPOs) and commodity trading advisors (CTAs) engaging in virtual currency derivatives and virtual currency transactions — CPO and CTA NFA Members are required to provide customers with new robust disclosures related to their activities in underlying or spot virtual currencies and virtual currency derivatives. In their disclosure documents, offering documents and promotional material related to virtual currencies, CPOs and CTAs should address the following risk areas that are applicable to their activities:
    • Unique features of virtual currencies
    • Price volatility
    • Valuation procedures and liquidity
    • Cybersecurity
    • The opaque nature of the underlying or spot virtual currency market
    • Use of virtual currency exchanges, intermediaries and custodians
    • The regulatory landscape
    • Nascent technology
    • Impact of transaction fees on performance
  • Futures commission merchants (FCMs) and introducing brokers (IBs) engaging in virtual currency derivatives and virtual currency transactions — FCM and IB NFA Members are required to provide virtual currency derivatives customers with the NFA Investor Advisory – Futures on Virtual Currencies Including Bitcoin and the CFTC Customer Advisory: Understand the Risks of Virtual Currency Trading. If an FCM or IB Member engages in a virtual currency derivatives transaction with a customer or counterparty prior to the issuance of this Interpretive Notice, the Member must provide the advisories in the manner described in the Interpretive Notice. The Member must prominently display the disclosure language in any of its promotional materials related to underlying or spot virtual currencies.

In addition, NFA Members engaging in activities with customers or counterparties involving underlying or spot virtual currencies must provide standardized disclosure language that NFA does not have regulatory oversight authority for underlying or spot market virtual currency products or transactions or virtual currency exchanges, custodians or markets.

Further information is available in the Interpretive Notice.