CFTC advises FCMs on holding virtual currency in segregated accounts

The Division of Swap Dealer and Intermediary Oversight (DSIO) of the Commodity Futures Trading Commission issued an advisory to futures commission merchants (FCMs) regarding the holding of virtual currency in segregated accounts. The advisory provides guidance to FCMs on how to hold and report certain deposited virtual currency from customers in connection with physically-delivered futures contracts or swaps.

The advisory also provides guidance that FCMs should follow when designing and maintaining risk management programs concerning the acceptance of virtual currencies as customer funds.  

Custodians of virtual currencies are typically not subject to a system of comprehensive federal or state regulation and oversight, which includes safeguarding of these novel assets, and this raises potential risks to the protection of customer funds held at such custodians. For instance, virtual currencies raise complicated issues with respect to the effective safeguarding and custodianship of such assets.

There have been numerous reports of incidents involving the loss or misappropriation of virtual currencies as a result of a custodian’s failure to effectively safeguard assets or digital keys, including incidents of the hacking of systems designed to hold virtual currencies and other forms of theft. There also have been reports of owner’s or custodian’s losing the ability to access virtual currencies held in electronic wallets due to the loss or misappropriation of digital keys that are necessary to perform transfers of, or otherwise access, these virtual currencies.

These events have resulted in millions of dollars’ worth of losses to the ultimate owners of the virtual currencies. Moreover, commercial insurance to cover such losses also appears to be limited at the current time, with payouts capped at low dollar thresholds, and high premiums charged by the few firms that are willing to provide coverage.

DSIO has considered these risks in light of the existing requirements for customer funds held by FCMs. DSIO Director Joshua Sterling said in a statement: “As Chairman Tarbert has stated, the CFTC is committed to fostering responsible fintech innovation and improving the regulatory experience of registered firms where doing so is consistent with our rules. This advisory furthers these critical goals and will provide additional certainty on these issues as the Commission works to establish a holistic framework for digital asset derivatives.”

Read the full advisory

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