Concerned that virtual currencies and related products “may be attracting customers that do not fully understand their nature, the substantial risk of loss that could arise from trading them and the limitations of NFA’s oversight role,” the National Futures Association (“NFA”) is implementing new disclosure requirements for NFA Members engaging in virtual currency activities with customers.
Under NFA’s Interpretative Notice implementing these new disclosure requirements, futures commission merchants (“FCMs”) and introducing brokers (“IBs”) must provide each customer with the NFA Investor Advisory – Futures on Virtual Currencies Including Bitcoin and the CFTC Customer Advisory: Understand the Risks of Virtual Currency Trading before or when the customer engages in a virtual currency derivative transaction with or through the FCM or IB. For customers who have traded in a virtual currency derivative prior to the effective date of the Interpretative Notice, the FCM or IB must furnish the advisories to those customers within 30 days of the effective date of the Interpretative Notice.
FCMs and IBs that solicit customers to engage, or engage in, spot virtual currency transactions with customers must provide the customer or counterparty with specifically- worded mandatory disclosure language which provides that, although the FCM or IB is subject to NFA’s regulatory oversight of its derivatives activities, NFA does not have regulatory oversight authority over “spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.”
For institutional customers that are eligible contract participants, FCMs and IBs can provide these advisories and disclosures through website postings. For retail customers, FCMs and IBs must provide the advisories and disclosures “in writing or electronically in a prominent manner designed to ensure a customer is aware of them.”
Commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”) offering pools, exempt pools, or trading programs that trade in virtual currencies or virtual currency derivatives must customize their disclosure documents, offering memoranda, and promotional material to address the unique risks related to their specific activities. Specifically, the Interpretative Notice mandates that a CPO or CTA address in those materials the following areas, if applicable:
In addition to these disclosures which can, and should, be customized to the CPO’s and CTA’s specific product or service offerings, a CPO or CTA must include two sets of specifically-worded mandatory disclosures. The first, which must be included in its disclosure document, offering memorandum, and promotional materials, discloses that, although NFA has regulatory oversight over the CPO or CTA, NFA does not have regulatory oversight over the spot market for virtual currencies, exchanges, and custodians. In addition, the disclosure warns customers of the opaqueness of the underlying markets and the lack of acceptable practices for NFA to verify the ownership or control of virtual currencies or their valuations. The second specifically-worded mandatory disclosure must be provided before or when the CPO or CTA engages in any underlying spot virtual currency activity with the customer. The disclosure advises that, although the CPO or CTA is a member of NFA and subject to NFA’s regulatory oversight, NFA does not have “regulatory oversight authority over underlying spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.”
Clients with questions about the Interpretative Notice should contact Katherine Cooper at (212) 880-3630 or firstname.lastname@example.org, Elizabeth Davis at (202) 220-1933 or email@example.com, or Brian Walsh at (202) 661-7030 or firstname.lastname@example.org.
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