Virtual Currency Trading Risk — NFA Sets New Disclosure Requirements

The promise of lucrative and rapid profits in virtual currency trading, including its derivatives, has attracted a high number of investors who may not understand the unique and potentially significant risks involved.

Virtual Currency Trading Risk 

The NFA (National Futures Association) has released statements, including an Investor Advisory dated December 1, 2017, expressing concern that potential investors lack sufficient knowledge to safely engage in virtual currency trading, including derivatives such as futures, options, and cleared swaps.

The NFA has specifically expressed concerned about a lack of investor knowledge in the following areas:

  • How virtual currencies work
  • The substantial risk of financial loss when purchasing with an initial margin
  • The NFA's Board of Directors limited powers to regulate virtual currency markets

The NFA warns investors to take action to protect themselves through education and has mandated that individuals and organizations involved in virtual currency trading on behalf of clients involve themselves in that educational process.

Virtual Currency Risks — Requirements for Client Education and Disclosure

In Interpretive Notice 9073 — Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities, which takes effect October 31, 2018, the NFA has laid down specific requirements for NFA-affiliated FCM or IB members.

  1. FCM or IB members must provide the NFA Investor Advisory to all customers who engage in cryptocurrency derivative transactions, and retroactive notice must be provided to all current account holders within 30 days.
  2. To clarify the NFA’s lack of oversight of virtual currency markets, any member engaging in spot virtual currency transactions must provide customers with specific cautionary disclosure language.
  3. CPO and CTA members must update their disclosure documents and promotional materials to inform investors of potential losses associated with virtual currency trading, including pools and managed account programs.
  4. NFA Compliance Rule 22-2 prohibits any member from claiming NFA approval for engaging in spot virtual currency trading, and specific disclosure guidelines and language must be provided.

Details on each of the above items, including specific disclosure language, can be found in the NFA’s Interpretive Notice 9073 - Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities — click here.

Virtual Currency Risks — Know the Rules to Avoid Disciplinary Action

We strongly encourage NFA members  to note the following warning from NFA regarding a failure to comply with their mandates for disclosure of risks involved in virtual currency trading:

“Failure to follow the disclosure guidelines in this Interpretive Notice may be deemed conduct inconsistent with a Member's obligations under NFA Compliance Rule 2-4 to observe high standards of commercial honor and just and equitable principles of trade as well as violations of NFA Compliance Rule 2-29.”

Compliance is key to avoiding NFA enforcement.

Questions Regarding Virtual Currency Risk Disclosure?

With the NFA taking a stern look at virtual currency trading practices, it’s important that your firm comply with the updated client disclosure rules.

If you have any questions, concerns, or require assistance to be sure you’re in compliance, we’re here to help. Contact Core Compliance & Legal Services now.