- US CFTC has released a staff advisory letter to registered derivatives clearing organizations and their applicants.
- Specifically, the letter reminds them of risks associated with expanding the scope of their digital assets activities.
- The address focuses on system safeguards, conflicts of interest, and physical deliveries.
- Notably, the letter was issued around the same time the SEC disclosed a settlement with former Coinbase staff and his brother.
The United States Commodities Futures Trading Commission (CFTC) released a staff advisory letter on May 30, addressing registered derivatives clearing organizations (DCOs) and DCO applicants.
Today the CFTC’s Division of Clearing and Risk issued a staff advisory on the risks associated with expanding the reach of Derivatives Clearing Organizations (DCO) to clear digital assets. Learn more: https://t.co/9lEPMVXB1W— CFTC (@CFTC) May 30, 2023
For clarity, DCOs are independent organizations that provide clearing services for derivative transactions. They act as intermediaries between buyers and sellers in derivative markets and ensure the financial integrity of these transactions.
CFTC issues a reminder to DCOs and DCO applicants
In a CFTC's Division of Clearing and Risks (DCR) letter, the regulator has addressed digital asset derivatives clearing organizations and their clientele. According to the address, the CFTC DCR wants them to remember every risk of expanding their product offerings. Notably, a staff advisory letter has multiple functions, including reminding the recipients of their legal duties and clarifying the specified obligations.
Citing a paragraph in the staff advisory letter:
The DCR expects DCOs and applicants to actively identify new, evolving, or unique risks and implement risk mitigation measures.
The address further explained that the DCR had observed increased interest among digital asset derivatives to expand their product and service range over the course of the past few years. Specifically, the letter mentioned organizations adding to their list of "products cleared and business lines, clearing models, and services offered by DCOs, including the ones related to digital assets."
The warning goes beyond the DCR staff to reach DCO applicants like Tiger Hill Partners communications firm and its vice president Alexander Grieve who presented a DCO application before the CFTC in 2020 for Bitnomial.
Having received a so-called “order of designation” from the CFTC, granting it the status of a designated contract market Bitnomial exchange has been latest to join this private party. Read: https://t.co/6uQG08OJYI#Blockchain #Cryptocurrency #Cryptonews— Trodl (@trodlcom) April 21, 2020
Among the most renowned DCOs is LedgerX, which MIAX recently acquired from FTX.
CFTC DCR key areas of focus moving forward
The CFTC DCR also disclosed a refocus in the address, saying they would be keener on compliance around:
- System safeguards
This requires attention due to the increased cyber risks, among other operational threats in the digital asset sphere.
- Conflicts of interest
These tend to occur due to over-reliance on affiliated organizations and services such as dual-hatted executives, shared systems, and resources.
- Physical deliveries
The letter refers to the technical sense of physical deliveries, meaning the transfer of ownership rights of digital assets from one account or wallet to another.
Where the CFTC staff advisory letter meets the US SEC
The CFTC staff issue letter can be linked to the US Securities and Exchange Commission (SEC). Particularly, the focus on physical deliveries reflects the financial regulator's reported plans to advocate for a new regulation set to impact cryptocurrency firms that operate as custodians of their clients' assets. Notably, this proposal by the SEC has already been the subject of criticism.
On Friday, we filed a comment letter to the SEC's safeguarding custody rule. We did not mince words.— miles jennings | milesjennings.eth (@milesjennings) May 8, 2023
The proposal is another misguided and transparent attempt to wage war on crypto, and if passed it will result in investor harm, market inefficiencies and poor capital formation. pic.twitter.com/Z7S01Z8SOw
Furthermore, the issue was released around the same time when the US SEC disclosed settling with the Wahi brothers in an insider trading case. Based on the report, the agency filed a motion for final judgment in the US District Court of the Western District of Washington.
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