CFTC no longer sees need for crypto-specific risk review in clearing process

The Commodity Futures Trading Commission (CFTC) has withdrawn two staff advisories previously issued on the crypto industry. The Division of Clearing and Risk (DCR) announced the withdrawals in two letters published today.

According to the DCR, Staff Advisory No. 18-14, which deals with Virtual Currency Derivative Product Listing, is no longer effective because its staff have more experience with crypto derivative listings, and the crypto sector has matured.

It said:

“Given additional staff experience in the intervening years, as well as increasing market growth and maturity, DMO and DCR believe the Virtual Currency Listing Advisory is no longer needed.”

The regulator initially issued the advisory in May 2018, stating that the crypto derivatives sector is emerging and innovation should be allowed to thrive as long as it is in compliance with the rules. However, it identified what was considered to be staff priorities and expectations when reviewing crypto derivatives products.

The CFTC staff highlighted some key areas that required particular attention, including enhanced market surveillance, large trader reporting, stakeholder outreach, CFTC staff coordination, and risk management by derivatives clearing organizations (DCOs).

However, the recent letter , endorsed by Amanda Olear, Acting Director of the Division of Market Sights (DMS), and Richard Haynes, Acting Director of the DCR, noted that the Commodity Exchange Act (CEA) already has standards and procedures for listing all kinds of derivative products.

Therefore, there is no need for further guidance for the crypto industry. Nevertheless, the two divisions noted that the letter only represented their opinion and did not necessarily reflect the CFTC’s general view.

CFTC DCR says crypto does not need special treatment

Meanwhile, the DCR also withdrew the Staff Advisory No. 23-07   on Review of Risks Associated with Expansion of DCO Clearing of Digital Assets. It stated that the withdrawal is to show that digital asset derivatives are not subjected to different treatment from other products.

The earlier advisory issued in May 2023 raised concerns about the rising interest in crypto derivatives. It stated that the Division will emphasize the risks associated with such products when reviewing any applications. It added that there would also be an assessment of conflict of interest, system safeguards, and physical settlement procedures.

However, the regulator believes all this is unnecessary again as they impose stricter standards of assessment on crypto derivatives than on other products.

It said:

“DCR is withdrawing the Advisory to ensure that it does not suggest that its regulatory treatment of digital asset derivatives will vary from its treatment of other products.”

Despite the withdrawal, the division noted that it will continue to monitor cleared transactions in the derivatives markets and supervise all clearing activities in compliance with the CEA.

Crypto market struggles despite pro-crypto regulations

The move by the CFTC continues the trend of reversal of anti-crypto policies that have been the hallmark of President Donald Trump’s administration. In less than three months in office, Trump-appointed regulators have created an enabling environment for the industry in multiple ways.

The Securities and Exchange Commission (SEC) has dropped several crypto enforcement litigation while issuing guidance on memecoins. The Office of the Comptroller of Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) also reversed the previous guidance that required banks to get approval before engaging in certain crypto activities.

In Congress, the controversial Internal Revenue Service (IRS) rule requiring DeFi platforms to provide user information to the IRS has been repealed, and the Treasury’s Office of Foreign Assets Control (OFAC) has removed Tornado Cash from the sanctions list.

Despite all these, the crypto market continues to struggle. Bitcoin is down 12.42% year to date, and altcoins have had a worse performance, with Ether firmly below $2,000 after a more than 44% decline this year.

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