On October 21, 2020, the Division of Swap Dealer and Intermediary Oversight (DSIO) of the United States Commodity Futures Trading Commission issued an Advisory to futures commission merchants (FCMs) regarding the holding of virtual currency in segregated accounts. The advisory provides guidance to FCMs on how to hold and report certain deposited virtual currency from customers in connection with physically-delivered futures contracts or swaps. The Advisory also provides guidance that FCMs should follow when designing and maintaining risk management programs concerning the acceptance of virtual currencies as customer funds.
The Advisory does not address virtual currency held by FCMs on behalf of customers trading futures or options on futures on foreign markets. It also does not address virtual currency assets held by FCMs on their own behalf, including in a proprietary account.
Custodians of virtual currencies are typically not subject to a system of comprehensive federal or state regulation and oversight, which includes safeguarding of these assets, which raises potential risks to the protection of customer funds held at such custodians. For instance, virtual currencies raise complicated issues with respect to the effective safeguarding and custodianship of such assets. There have been numerous reports of incidents involving the loss or misappropriation of virtual currencies as a result of a custodian’s failure to effectively safeguard assets or digital keys, including incidents of the hacking of systems designed to hold virtual currencies and other forms of theft. There also have been reports of owner’s or custodian’s losing the ability to access virtual currencies held in electronic wallets due to the loss or misappropriation of digital keys that are necessary to perform transfers of, or otherwise access, these virtual currencies. These events have resulted in millions of dollars’ worth of losses to the ultimate owners of the virtual currencies.
Among the requirements mentioned in the Advisory are: (1) the entities at which virtual currency may be deposited, (2) using an account name that clearly identifies the funds as customer funds, (3) virtual currency must be available for withdrawal from a Depository upon the demand of an FCM, (4) customer’s virtual currencies must be reported at fair market value, and (5) each withdrawal of virtual currency from a Depository upon demand by the FCM in order to liquidate customer accounts or return customer funds should be completed within a time that is technologically and operationally possible, but should not exceed one day.