US CFTC issues letter on digital asset derivatives, endorsing compliance in 3 areas

The letter is a reminder, but very specific and partly reminiscent of the SEC's recent custody rule proposal.

The United States Commodity Futures Trading Commission (CFTC) has sent an information letter to its staff to registered derivatives clearing organizations (DCOs) and DCO applicants, reminding them of the risks associated with expanding the scope of their activities. The letter from the CFTC's Division of Compensation and Risks (DCR) dealt specifically with digital assets.

Staff newsletters can remind recipients of their legal obligations or provide clarification of those obligations. The "DCR expects DCOs and applicants to actively identify new, evolving, or unique risks and implement risk mitigation measures," it said, continuing:

"Over the past few years, DCR has observed increased interest […] in expanding cleared product types and business lines, clearing models and services offered by DCOs, including related digital assets."

The DCR said it will focus on compliance in three areas: system safeguards, conflicts of interest, and physical deliveries. System backups require special attention due to the "cyber and other heightened operational risks" associated with digital assets. Potential conflicts of interest were observed in "dependencies on affiliated entities or services (i.e. dual-hatted frameworks, shared systems and resources, etc.)" .

Related: CFTC Proposes Reduced Anonymity to Manage Risk

"Physical delivery" is used in the letter in its technical sense to refer to the transfer of ownership rights, i.e. the transfer of digital assets from an account or wallet to a other. This concern...