US Crypto Derivative Merchants Cautioned To Leave Customer Funds Author: Ali Raza Last Updated: 22 October 2020 The US Commodity Futures Trading Commission, or CFTC, has released a new guidance on Wednesday evening. This guidance advised businesses that partook in crypto derivative trading to hold the funds of their customers very carefully. CFTC Focusing On Crypto Derivatives This new guidance stands as the next development in the keen interest the CFTC has when it comes to carving out the rules regarding crypto custodianship. Crypto stands as an asset class all its own, and thus needs special regulations regarding it. The CFTC highlighted that virtual currency custodians typically do not stand subject to a comprehensive system of state or federal regulations or oversight. This includes regulations regarding the safeguarding of these assets, which subsequently causes risk for customer funds held at these custodians, and the protection it receives. Only Certain Firms Allowed For Custodianship As for this guidance’s specific provisions, it limits the locations where a futures commission merchant (FCM) is allowed to deposit the virtual currency of a customer. They are now mandated to only place it at a trust company, a bank, a clearing organization that clears virtual currency futures, or another FCM. The CFTC gave out further warnings to FCMs, as well. These warnings were regarding the fact that an FCM needs to keep any deposits in these accounts as clearly marked customer funds. Furthermore, the CFTC made it clear that gains in one account are not allowed to make up for another’s losses. In effect, the guidance’s overarching goal seems to be to keep the crypto funds of a customer safe and untouched, with the exception being FCMs from trading these funds in order to make collective gains. The scope of the problem regarding FCMs trading of crypto assets had not been addressed, but it’s easy to imagine what disaster could spawn from a crypto futures trading playing on volatile markets using cryptocurrencies. CFTC Working To Regulate Crypto The CFTC has been hard at work trying to cobble together a holistic framework regarding crypto-assets. At the start of October, the CFTC had promised to start protecting the rising markets for these assets. Directly after it, the CFTC announced that it was going to pursue BitMEX, charging it for operating an unregistered derivatives exchange within US borders. Time will tell how the CFTC will decide to regulate the industry at large, but it seems keen on stepping up the regulations within the space at large. Ultimately, this will benefit the US, as clear regulations will lead to higher certainty within the space.