Source: http://crowcushing.com/newsletters/
Timestamp: 2018-02-18 19:57:44
Document Index: 692362461

Matched Legal Cases: ['§ 12', '§ 19', '§77', '§78', '§21', '§77']

November 2017 - THE FUTURE OF CRYPTOCURRENCY FUTURES REGULATION
Cryptocurrencies do not have a mature, regulated and tested market. The products and their markets have existed for fewer than 10 years and bear little if any relationship to any economic circumstance or reality in the real world.1
The risk is so great that “a catastrophe in the cryptocurrency market that destabilizes a clearing organization will destabilize the real economy.” Peterffy’s solution is for the CFTC to require that any clearing organization that wishes to clear cryptocurrencies or their derivatives do so in a wholly separate clearing system which is isolated from the systems for other products.
The CFTC’s reach is quite broad. The agency’s regulatory powers extend to exchange actions and the review and approval of futures contracts, and it has the power to issue any rule it finds necessary to accomplish the mission of the Commodity Exchange Act, to foster open, transparent and financially sound markets.2 Before it approves a contract for trading, the CFTC must determine that it is in the public interest by assessing whether its use for price discovery and hedging serve a genuine economic purpose.3 The CFTC also uses its power to prevent fraud and market manipulation to assert jurisdiction over commodity trading in spot markets.
The CFTC took the occasion of a settlement with an unregistered swap execution facility to declare that Bitcoin and other virtual currencies are commodities and subject to regulation as such.4 Only recently, the CFTC circulated a “Primer” on virtual currencies to educate the industry and investing public on their nature and, perhaps most importantly, the risks they pose.5
It’s a point well taken. Consider this. Futures margin rates range from 2 to 8%. The more aggressive trading firms set their rates at the lower end of the range to attract business. When losses exceed the amount margined, the broker must cover them first and then try to collect from the client.
This year, the price of Bitcoin has been up by as much as 1000%, that of Ethereum over 2000%. Those prices might rise. But no one should be surprised if they collapse by 50% or more. Unlike, say, an agricultural commodity or an equity index, cryptocurrencies have no real economic function, and there is often no apparent or fundamental reason for their price movements.
1 “Dangers of Clearing Bitcoin and Cryptocurrency Derivatives in Same Clearing Organization as Other Products,” The Wall Street Journal, Nov. 15, 2017, p. B5
2 7 U.S.C. § 12(a)(5)
3 7 U.S.C. § 19 (a)(2)
4 In the Matter of Coinflip, Inc. d/b/a Derivabit and Francisco Riordan, CFTC Docket No. 15-29 (Sept. 17, 2015)
5 A CFTC Primer on Virtual Currencies (Oct. 17, 2017)
September 2017 - THE SEC AND THE ICO
The SEC, perhaps because it lacks the sweeping powers of China’s Central Bank, has taken a more measured approach in warning potential ICO sponsors and online platforms that support trading of tokens that they might be subject to US securities laws, which they have pretty much ignored to date. The SEC picked on one particular ICO, which called itself The DAO, which stands for Decentralized Autonomous Organization, a term used to describe a “virtual” organization embodied in computer code and executed on a distributed ledger or block chain.
The DAO was able to get investors their money back, but an unwelcome consequence was that the contretemps got the attention of the SEC, which saw a larger issue: Whether the tokens were securities under the Securities Act of 19332 and the Securities Exchange Act of 19343, necessitating registration with the SEC of both the tokens and the exchanges on which they are traded (unless they qualified for an exemption from the registration requirements). You get the feeling that the SEC knew the answer before it undertook what it described as an “investigation.”4
1 Roose, “Such Currency. Much Risk,” NY Times, September 16, 2017, p.B3.
2 15 U.S.C. §§77a et seq.
3 15 U.S.C. §§78a et seq.
4 Report of Investigation Pursuant to §21(a) of the Securities Exchange Act of 1934: The DAO, Release No. 81207, (July 25, 2017). The facts in the text are those related in the SEC’s report.
5 15 U.S.C. §§77b(1).
6 SEC v. W.J. Howey Co., 321 U.S. 293, 299 (1946).