NFA Releases Investor Advisory on Virtual Currencies

The National Futures Association (the “NFA”) released an investor advisory on December 1, 2017, reminding investors that trading futures on virtual currencies, including Bitcoin, have certain benefits and various risks.  Futures on virtual currencies must be traded on regulated futures exchanges.  Trading these products involves a high level of risk and may not be suitable for all investors.   It is critical for investors considering these types of virtual currency futures to educate themselves about these products, understand their risks and conduct due diligence before making investment decisions.

The Commodity Futures Trading Commission (the “CFTC”) also released a statement on December 1, 2017 on self-certification of bitcoin products by CME, CFE and Cantor Exchanges.  The CFTC will also work closely with the NFA.  If the CFTC determines that the margin the derivatives clearing organizations (the “DCOs”) hold against bitcoin futures positions is inadequate, it can take measures to require that the margin held at the DCOs be increased, including requiring that they use a longer margin period of risk to generate margin requirements.

Outlined below are a few of the risks associated with trading futures on virtual currencies:

  • Virtual currency futures experience significant price volatility and fluctuations in the underlying virtual currency’s value between the time you place a trade and the time you attempt to liquidate it.  Such volatility will affect the value of your futures contract and potential profit and losses related to it.

  • Virtual currency futures contracts are bought and sold using initial margin money that can enable you to hold a virtual currency futures contract valued at more than your initial investment.  If the price of the futures contract moves in an unfavorable direction, the investment can produce large losses in relation to your initial investment.

With CFTC oversight, each futures exchange listing a virtual currency futures contract is responsible for regulating its futures market.  The NFA performs market regulation services on behalf of certain futures exchanges.

If you have questions about this Alert, please contact Daniel G. Viola at 212.573.8038, dviola@sglawyers.com.

 

CFTC Statement on Self-Certification of Bitcoin Products by CME, CFE and Cantor Exchange Press Release – December 1, 2017 http://www.cftc.gov/PressRoom/PressReleases/pr7654-17