CFTC Staff Advises FCMs on Holding Virtual Currency

The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") informed futures commission merchants ("FCMs") as to the requirements that FCMs are subject in connection with their accepting and holding virtual currency as customer funds in connection with physically delivered futures contracts or swaps.

In its advisory letter, the DSIO provided a substantial laundry list of instructions to FCMs holding virtual currency as customer funds under Sections 4d(a)(2) and 4d(f) of the CEA including the following

• the virtual currency is required to be deposited with a (i) bank, (ii) trust company, (iii) separate FCM or (iv) clearing organization that clears virtual currency futures, options on futures or cleared swap contract transactions (each, a "Depository");

• the Depository must acknowledge the deposit in writing and hold the virtually currency in a segregated account;

• the virtual currency must be withdrawable upon demand by an FCM;

• an FCM must report the total fair market value, in U.S. dollars, of its customers' virtual currencies in its daily and month-end segregation statements;

• an FCM is prohibited from offsetting a debit or deficit in a futures or cleared swap customer's account using the value of any virtual currency in the customer's account (this may require an FCM to deposit its own funds to cover a debit or deficit);

• an FCM is prohibited from depositing its own virtual currencies into a futures or cleared swap customer's segregated accounts; and

• an FCM is prohibited from investing any segregated futures or cleared swap customer funds in virtual currency that will be held on behalf of its customers.

The DSIO emphasized that its guidance does not address FCMs that hold virtual currency for (i) customers "trading futures or options on futures in foreign markets (i.e., Part 30 transactions)" or (ii) on their own behalf.

Additionally, the DSIO provided the following guidance to FCMs holding virtual currency as customer funds under CFTC Rule 1.11(e)(3)(i)(J) ("Risk Management Program") requirements:

• FCMs should limit their acceptance of virtual currency into segregated and cleared swaps segregated accounts, unless:

  • the type of virtual currency solely relates to the customer trading of contracts (e.g., futures, options on futures and cleared swaps contracts) that allow for the physical delivery of the virtual currency, contingent on (i) the virtual currency being used to margin, guarantee or secure such customer trading, and (ii) the relevant designated clearing organization determining that such virtual currency is an acceptable form of collateral; and

  • the amount of virtual currency accepted is in reasonable relation to the customer's quarterly trading levels of such contracts, documented in the FCM's books and records;

• FCMs are discouraged from accepting virtual currencies that provide margin value to contracts outside of futures, options on futures, and cleared swaps contracts, unless an FCM is entitled to use the virtual currencies to cover a customer's default that results from losses in connection with virtual currency or non-virtual currency futures or cleared swap transactions;

• if a customer has ceased trading the contracts relating to the virtual currency, then the FCM holding the virtual currency should contact the customer within a reasonable timeframe to return the virtual currency;

• withdrawals from a Depository of virtual currency by demand of an FCM for the purpose of liquidating customer accounts or returning customer funds should be completed within one day of the request, unless the Depository has procedures in place that specify a different timeframe; and

• an FCM should provide prior written notice to all futures and cleared swap customers 45 days before it begins accepting virtual currency into segregation.