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The CFTC issues stringent guidelines for FCMs seeking to custody digital assets in connection with physically delivered futures contracts or swaps.

By Yvette D. Valdez, Adam Bruce Fovent, and Deric Behar

The US Commodity Futures Trading Commission’s (CFTC’s) Division of Swap Dealer and Intermediary Oversight (DSIO) issued CFTC Staff Letter No. 20-34 (the Advisory) on October 21, 2020, clarifying its views on the acceptance, holding, and reporting of virtual currency (e.g., bitcoin or ether) in segregated accounts by futures commission merchants (FCMs) and the development of appropriate risk management programs in relation thereto.

Specifically, the Advisory relates to virtual currencies deposited by customers with FCMs in connection with physically delivered futures contracts or swaps. Due to the “custodian risk” associated with holding virtual currency as segregated funds, the Advisory lays out specific guidance for FCMs on virtual asset acceptance and custody, and their responsibility to implement appropriate policies, procedures, and oversight programs. The Advisory does not address virtual currency held by FCMs on behalf of customers trading derivatives on markets outside of the US, or virtual currency held by FCMs on their own behalf, including in a proprietary account.

The OCC greenlights bank custody of cryptoassets, opening a significant door to mainstream adoption and innovation.

By Alan W. Avery, Todd Beauchamp, Yvette D. Valdez, Pia Naib, Loyal T. Horsley, Charles Weinstein, and Deric Behar

On July 22, 2020, the US Office of the Comptroller of the Currency (OCC) issued Interpretive Letter #1170 (the Letter), giving national banks and federal savings associations (FSAs) the greenlight to provide customers with custody services for cryptocurrencies and digital assets that are not broadly used as currencies (collectively, cryptoassets). The Letter, addressed to an unspecified recipient bank seeking to offer cryptoasset custody services as part of its existing custody business, noted that the opinion applies to national banks and FSAs of all sizes.

The long-awaited guidance clarifies the application of the “actual delivery” exception to leveraged virtual currency transactions with retail purchasers.

By Yvette D. Valdez, J. Ashley Weeks, and Deric Behar

Earlier this year, the US Commodity Futures Trading Commission (CFTC) approved final interpretive guidance (Guidance) concerning retail commodity transactions involving certain digital assets. The Guidance clarifies the CFTC’s views regarding the “actual delivery” exception to Section 2(c)(2)(D) of the Commodity Exchange Act (CEA) in the context of virtual currencies, and is intended for exchanges, trading platforms, custodians, and other market participants transacting in virtual currencies that are considered commodities (such as Bitcoin and Ether) and traded via leverage, margin, or other financing provided by the seller, trading platform, or other third party.

Product innovation (including in pooled investment vehicles) is encouraged, but innovation must be consistent with the law.

By Yvette D. Valdez, Douglas K. Yatter, J. Ashley Weeks, and Deric Behar

The US Commodity Futures Trading Commission’s (CFTC’s) Division of Swap Dealer and Intermediary Oversight (DSIO) Director Joshua B. Sterling issued a statement on February 10, 2020, supporting responsible digital asset product innovation, including pooled investment vehicles seeking exposure to digital assets and digital asset derivatives. The statement included an offer to assist innovators with the evaluation of new digital asset products that may not be subject to existing National Futures Association (NFA) disclosure and document review requirements.

Operators of pools that trade futures and options, swaps, or leveraged transactions referencing commodities (including digital assets such as Bitcoin and stablecoins) are required to register as commodity pool operators (CPOs) and must comply with attendant disclosure, record-keeping, and reporting requirements (unless otherwise exempt). Regardless of whether CPOs are exempt from supervisory oversight by the CFTC, they remain subject to the anti-fraud provisions of the Commodity Exchange Act when they market and offer interests in commodity pools to investors, in addition to regulatory and enforcement authority by the US Securities and Exchange Commission.

The US derivatives regulator continues to foster FinTech adoption and leadership in US markets.

By Yvette D. Valdez, Douglas K. Yatter, and Deric Behar

The US Commodity Futures Trading Commission (CFTC) has affirmed its commitment to engaging the fast-moving financial technology world by elevating its LabCFTC unit to be an independent operating office within the CFTC, reporting directly to Chairman Heath Tarbert. LabCFTC is the agency’s FinTech hub, led since October 10, 2019, by Chief Innovation Officer and Director Melissa Netram. The announcement about LabCFTC’s new status was made at the agency’s second annual FinTech conference, “Fintech Forward 2019: Exploring the Unwritten Future,” held on October 24, 2019.

LabCFTC initiatives such as the annual FinTech conference provide a way for FinTech innovators to access the CFTC, while also allowing the CFTC to keep apace of new technologies and ideas impacting the financial markets. The CFTC also uses the forum to evaluate the potential of new technology for agency oversight activities.

Latham & Watkins provides an in-depth look at the intersection of CFTC and SEC regulatory jurisdiction in the crypto context.

By David L. Concannon, Yvette D. Valdez, and Stephen P. Wink, with Paul M. Dudek and Miles P. Jennings

With the rapid growth in the development of blockchain technology, virtual currencies, and token sales (sometimes referred to as initial coin offerings, or ICOs), token offerings came under increased regulatory scrutiny, particularly in the US. Since the US…

The online document generator helps startups raise capital with customizable market standard terms and optional digital token provisions.

By David L. Concannon, Yvette D. Valdez, Stephen P. Wink, Miles P. Jennings, and Shaun Musuka

In collaboration with ConsenSys and OpenLaw, Latham & Watkins recently launched the Automated Convertible Note Generator, a complimentary tool designed to assist startups with capital raises. The Automated Convertible Note is a potential solution for capital formation that also addresses future token sales in a manner compliant with US securities and commodities regulations.

Federal legislators introduce two bills in an attempt to provide the blockchain economy with regulatory certainty.

By Stephen P. Wink, Morgan E. Brubaker, Cameron R. Kates, and Shaun Musuka

US regulators and federal legislators may be heeding the calls of crypto-enthusiasts for legal clarity regarding the status of digital assets and cryptocurrencies (collectively, Tokens). Two weeks ago, the Securities and Exchange Commission (SEC) released an analytical framework for determining when a Token constitutes a security. Last week, US federal legislators followed up by introducing two bills that are designed to “provide regulatory certainty for businesses, entrepreneurs, and regulators in the US’ blockchain economy,” the Token Taxonomy Act of 2019 (H.R. 2144) (TTA) and the Digital Taxonomy Act of 2019 (H.R. 2154) (DTA, and together with the TTA, the Bills).

A new white paper explores jurisdictional conflicts and the regulatory status of digital assets.

By Yvette D. Valdez, J. Ashley Weeks, and Jacqueline M. Rugart

Members of the American Bar Association’s (ABA’s) Derivatives and Futures Law Committee recently published a white paper exploring the US regulatory landscape for digital assets (White Paper), including a 50-state survey and overview of certain non-US crypto regulatory regimes. The White Paper primarily focuses on the jurisdictional overlap between the US Commodity Futures Trading Commission (CFTC) and the US Securities and Exchange Commission (SEC) pertaining to the regulation of digital assets.

Latham & Watkins lawyers previously discussed the intersection of CFTC and SEC regulatory jurisdiction in the crypto context here and here.