The Commodity Futures Trading Commission (CFTC) has issued a staff advisory on the expansion of Derivatives Clearing Organization (DCO) clearing of digital assets. The advisory was said to be driven by the rising interest of DCOs to provide services in regard to crypto.
The Advisory by the Division of Clearing:
“reminds registrants and applicants that when expanding lines of business, changing business models, or offering new and novel products, DCR will remain focused on the potentially heightened risks that may be associated with certain of those clearing activities. DCR expects DCOs and applicants to actively identify new, evolving, or unique risks and implement risk mitigation measures tailored to the risks that these products or clearing-structure changes may present.”
The Advisory highlights the increased cyber and other risks that may be associated with digital assets, noting the importance of DCO adherence to principles related to system safeguards, conflicts of interest, and physical delivery.
Simultaneously, Commissioner Kristin Johnson issued a statement calling for rulemaking on crypto:
“While I support the Staff Advisory, the rationale for such a notice indicates the increasingly urgent need for the Commission to initiate a formal rulemaking process that invites a comprehensive evaluation of “heightened” risks associated with certain crypto clearing activities, ensures parallel customer protections apply across our markets for similar clearing activities, and proposes appropriate measures to mitigate unique as well as traditional risks. Specifically, proposed rules should address:
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- Conflicts of interest arising from vertical integration of activities and functions;
- Custody and client asset protection;
- Operational and technological risk, specifically cyber-risks; and
- Market manipulation and fraud.”
Commissioner Johson urged the “Commission to initiate a rulemaking process to explore the unique challenges of introducing customer protections in non-intermediated crypto-markets, particularly those seeking to engage in marketing of leveraged, retail-focused derivatives products. Now is the time to act to further protect customers and customer funds.”
Her complete statement is available here.