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NFA Proposes New Requirements for Members Engaged in Digital Asset Commodities
Practical Law Legal Update w-038-8062 (Approx. 5 pages)
NFA Proposes New Requirements for Members Engaged in Digital Asset Commodities
by Practical Law Finance
| Published on 31 May 2023 • USA (National/Federal) |
The National Futures Association (NFA) submitted to the CFTC for approval new NFA Compliance Rule 2-51, covering requirements for members engaged in activities involving digital asset commodities bitcoin and ether.
On February 28, 2023, the National Futures Association (NFA), a self-regulatory organization (SRO) for the US derivatives market, submitted to the CFTC for approval proposed new NFA Compliance Rule 2-51, which would sets out requirements for NFA members and associates engaged in activities involving digital asset commodities bitcoin and ether (Rule 2-51). According to the NFA, Rule 2-51 is designed to address antifraud considerations among NFA members and associates engaging in digital asset commodity activities, including, among other things, prohibition on:
- Making a communication related to a digital asset commodity that operates as a fraud or deceit, employs or is part of a high-pressure approach, or makes any statement that trading in digital asset commodities is appropriate for all persons.
- Willfully making or cause to be made a false report, or willfully enter or cause to be entered a false record in or in connection with any transaction involving a digital asset commodity.
- Disseminating, or cause to be disseminated, false or misleading information, or a knowingly inaccurate report, that affects or tends to affect the price of any digital asset commodity.
- Engaging in manipulative acts or practices regarding the price of any digital asset commodity.
In addition, according to Rule 2-51:
- Each member engaged in digital asset commodity activities must diligently supervise its employees and agents in the conduct of their digital asset commodity activities for or on behalf of the member.
- Each associate who has supervisory duties over a member's digital asset commodity activities must diligently exercise such duties.
As adopted, Rule 2-51 only applies to spot or cash market activities in digital assets that have derivatives listed on exchanges regulated by the CFTC which would align with the CFTC's own anti-fraud jurisdiction over the spot commodity markets. As noted by the NFA, for purposes of Rule 2-51, the term digital asset commodity or commodities currently means only bitcoin and ether, which have related commodity interests certified by a registered entity for listing under Part 40 of CFTC Regulations. Rule 2-51 observes that those two digital assets have been most widely treated as commodities. If other digital assets are identified as commodities in the future, NFA could the consider amending Rule 2-51 to cover them.
The rule would also require NFA members to make the disclosures required by prior NFA Interpretive Notice 9073, adopted in 2018 (IN 9073), to address disclosure requirements for NFA members engaging in virtual currency activities (see Legal Update, Updated: NFA Interpretive Notice Requires Enhanced Virtual Currency Disclosures for CPOs, CTAs, FCMs, and IBs).
NFA noted in its submission for approval of Rule 2-51 to the CFTC that:
- Over 100 NFA member firms have reported to NFA that they engage in business activities related to digital assets, both in commodity interest and spot markets.
- With the exception of IN 9073, which only sets out limited disclosure requirements, NFA did not have any rules that specifically addressed its members' digital asset activities in the spot markets.
- Because of this, if an NFA member firm were to commit fraud or similar misconduct in respect to its spot digital asset activities, NFA would likely lack jurisdiction to discipline the firm or take other action to protect the public.
NFA concluded that this jurisdictional limit would place NFA in an untenable position and determined to adopt Rule 2-51 to fill this void.
Update: In a March 29, 2023 notice to members, the NFA announced that Rule 2-51 would become effective on May 31, 2023.
Update: On May 31, 2023, NFA Rule 2-51 (as posted on the NFA website) became effective.
For more information on NFA required reporting requirements, see Legal Updates, NFA Issues Reporting Requirements for CPOs and CTAs that Trade Virtual Currency Products and NFA Reminds Members of Ongoing Disclosure and Reporting Obligations Related to Virtual Currency).