U.S. CFTC Warns About Clearing Derivatives Tied to Digital Assets

U.S. Commodity Futures Trading Commission (CFTC) staff are warning companies to be wary of and actively counter risks from clearing digital asset transactions, and Commissioner Kristin Johnson said the agency should turn this advisory into a full-blown rule-writing effort.

The CFTC's Division of Clearing and Risk sent out the advisory on Tuesday, saying it would put a special focus on the emerging risks in crypto in response to an upswing in its supervised entities clearing such trades. These risks include potential conflicts of interest, protections against cyber threats and how firms are managing physical delivery of digital assets in transactions requiring delivery.

The agency said it expects companies “to actively identify new, evolving, or unique risks and implement risk mitigation measures tailored to the risks.”

Commissioner Kristin Johnson followed the agency's statement with one of her own, calling on the CFTC to start a formal process to set up new rules.

"We observe increased registration activity for crypto-commodity derivatives clearing and note that several proposed models adopt a non-intermediated market structure," she said in a Tuesday statement. “Unless we introduce parallel regulation, these crypto-commodity derivatives clearing models may not be subject to the most rigorous regulatory standards.”

Some crypto firms – including the former FTX.US subsidiary, LedgerX – have joined the ranks of derivatives clearing organizations overseen by the agency. A LedgerX effort to set up direct crypto clearing without go-between firms – famously pushed by ex-FTX CEO Sam Bankman-Fried – was later abandoned, but it opened up a controversial possibility that remains unresolved.

Johnson argued that the CFTC's new advisory illuminates the need for something more – “a rulemaking process to explore the unique challenges of introducing customer protections in non-intermediated crypto-markets.”

When such a regulator issues public warnings about certain activities, as the agency did Tuesday, it’s often followed later by sanctions in that arena. Meanwhile, the CFTC has already been pursuing major enforcement actions against crypto companies, including a recent action against Binance’s global operations.

The derivatives regulator directly regulates crypto futures and has an enforcement reach into fraud and manipulation of spot markets for the trading of non-security crypto assets. It’s expected to have a wider future role as an industry watchdog, but bills that would enhance its authority haven’t yet moved through Congress.

Read more: DeFi to Go Under Microscope at US CFTC Advisory Group’s Opening Session

UPDATE (May 30, 2023, 20:43 UTC): Adds proposal from CFTC Commissioner Johnson to engage in rulemaking.