We note that the NFA exercises its jurisdiction differently, depending on the category of the regulated entity: 

•  For IBs and Futures Commission Merchants (FCMs), NFA notices only apply with respect to contracts and transactions involving “commodity interests”⁷ (i.e., derivatives—swaps, options and futures involving virtual currencies) and not spot transactions in virtual currencies (i.e., transactions in virtual currencies that generally settle within 2 business days).⁸
• However, for CTAs and CPOs, the NFA notice applies to both “commodity interest” transactions and spot transactions.⁹

This means that if a CTA were advising regarding a cash bitcoin transaction that settles in two business days, the reporting requirements in NFA Notice I-17-28 would apply; while if an IB were introducing its clients to a bitcoin spot exchange where no bitcoin derivatives trade, the reporting requirements under NFA Notice I-17-29 would not apply.¹⁰ 

Reporting requirements for cryptocurrency products (the 2017 NFA notices)

(a) IBs. Under Notice I-17-29, an IB that solicits or accepts any orders in virtual currency derivatives must meet two additional requirements. First, an IB must notify the NFA by amending the firm-level section of its annual questionnaire¹¹ and keep the information current. The annual questionnaire added the following new question: “Does your firm solicit or accept orders involving a virtual currency derivative (e.g., a bitcoin future, option or swap)?”

Second, an IB must report the number of accounts an IB “introduced that executed one or more trades in a virtual currency derivative during each calendar quarter. This information must be submitted to NFA through the firm’s questionnaire no later than 15 days after the end of a quarter.” This volume reporting will be made on their quarterly statements.

(b) CPOs and CTAs. Under Notice I-17-28, two similar requirements apply to CPOs and CTAs that execute transactions involving any virtual currency or virtual currency derivative on behalf of a pool or managed account.¹² Note, again, that in contrast with the IB requirement, reporting requirements for CPOs and CTAs apply to both spot and derivatives on virtual currency.

Thus, the NFA required its CPO, CTA and IB members to report not only whether they facilitate transactions in virtual currencies and virtual currency derivatives, but also the volume of their business involving virtual currencies. 

The clarifying notice (the 2018 NFA notice)

On March 27, 2018, the NFA issued Notice I-18-07, which reminds CPOs, CPAs and IBs that the requirement to amend the annual questionnaire to reflect dealings in virtual currencies is an ongoing obligation,¹³ and that any CPO, CTA or IB that does not currently deal in virtual currency products must notify NFA immediately if it begins trading in, soliciting or accepting orders in virtual currency products (virtual currency spot and derivatives), as applicable, by amending its annual questionnaire.

Note that Notices I-17-28 and I-17-29 also described additional reporting requirements for CPOs, CTAs and IBs regarding virtual currencies; however, the notice did not clarify what these “additional reporting requirements” are.  The NFA informally clarified that these requirements relate to only additional questions included in the annual questionnaire and all other reporting requirements remain effective (the NFA notes that it may reach out to individual registrants on a case-by-case basis for this additional information).  Therefore, the requirement to report to the NFA the number of accounts IBs introduced or the number of the CPOs’ pools or CTAs’ managed accounts that executed one or more trades in a virtual currency derivative during each calendar quarter is effective, as is the requirement to note that a registrant engages in transaction involving virtual currencies.

NFA’s compliance reminder

On April 5, 2018, the NFA issued Notice I-18-08 with a regulatory requirements reminder for CPO, CTA, FCM, Forex Dealer Member (FDM) and IB members.¹⁴

(a) Annual Updates. The NFA reminded members that, in addition to reporting relating to virtual currency products, there are routine regulatory reporting requirements. First, the Notice reminds NFA members to update their Annual Questionnaire¹⁵ and pay NFA membership fees within 30 days of the anniversary of their NFA membership. Second, members must annually review and conduct their self-assessment under the Self-Examination Questionnaire.¹⁶

 (b) Ongoing Updates. In addition to the annual updates, members must ensure that any material changes to their business are reported on the Annual Questionnaire, such as where a member commences trading in virtual currency derivatives, as discussed above. Further, members must ensure that Form 7-R (the form completed by a member to register with the NFA) remains accurate on an ongoing basis and all other reporting requirements are fulfilled.¹⁷

1. See CFTC v. McDonnell et al. (E.D.N.Y. March 6, 2018). This decision follows several other enforcement actions by the CFTC involving cryptocurrencies in the past two years.
2. Any commodity pool operator (CPO), commodity trading adviser (CTA) and introducing broker (IB) registered with the NFA also must become a member of the NFA. CPOs, CTAs and IBs that are exempted or excluded from registration generally are not NFA members. 
3. See The Commodity Exchange Act, Registered Futures Associations, § 17 (7 USC § 21), and § 17(b)(7) stating: “the rules of the association are designed to prevent fraudulent and manipulative acts and practices, to include just and equitable principles of trade, in general, to protect the public interest, and to remove impediments to and perfect the mechanism of free and open futures trading.” 
4. See Notice I-17-28 (Dec. 14, 2017), available at nfa.futures.org.
5. NFA Notice I-17-29 (Dec. 14, 2017), available at nfafutures.org.
6. Notice I-17-29 (Dec. 14, 2017), available at nfa.futures.org. Also, on December 6, 2017, the NFA issued Notice I-17-27 on additional reporting requirements regarding virtual currency futures products for FCMs for which NFA is the Designated Self-Regulatory Organization (DSRO). 
7.  CFTC Rule 1.3(yy). 
8. The language of Notice I-17-29 states: “NFA is requiring each IB to immediately notify NFA if it solicits or accepts any orders in virtual currency derivatives.”
9. The language of Notice I-17-28 references “[CPOs] and . . . [CTAs] that execute transactions involving virtual currencies or virtual currency derivatives.” This language clearly indicates that the NFA draws a distinction between spot transactions and derivatives. 
10. The NFA informally clarified that these requirements apply only per individual registrant’s category.  For example, if an IB under CFTC Rule § 4.14(a)(6) is acting in its commodity advisory capacity that is solely incidental to its business, such IB would not be also covered by NFA Notice I-17-28 applicable to CPOs and CTAs. 
11. Annual Questionnaire. 
12. The annual questionnaire was amended to include the following CPO questions: “Does your firm operate a pool that has executed a transaction involving a virtual currency (e.g., bitcoin)? Does your firm operate a pool that has executed a transaction involving a virtual currency derivative (e.g., a bitcoin future, option or swap)?”
13. See Notice I-18-07 (March 27, 2018), available at nfa.futures.org.
14. See Notice I-18-08 (April 5, 2018), available at nfa.futures.org.
15. Annual Questionnaire. 
16. Self-Examination Questionnaire. 
17. Each registered category of CPOs, CTAs, IBs, FCMs and FDMs has its own set of reporting requirements. For example, reporting requirements applicable to IBs may be found at Independent IB Reporting Requirements. 

Client Alert 2018-088