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Heightened Surveillance And Regulatory Requirements For Virtual Currency Derivatives Exchanges Withdrawn
04/08/2025On March 28, 2025, the Commodity Futures Trading Commission (“CFTC”) Division of Market Oversight (“DMO”) and Division of Clearing and Risk (“DCR”) withdrew Staff Advisory No. 18-14, Advisory with respect to Virtual Currency Derivative Product Listings (“Advisory”) effective immediately. CFTC Advisory Letter, CFTCLTR No. 25-07 (March 27, 2025).
The Advisory, which DMO and DCR issued in 2018, invited heightened oversight of otherwise unregulated cash markets for crypto currencies when those cash markets are price linked to derivative contracts listed for trading on CFTC regulated exchanges. The Advisory was styled as “guidance” intended to clarify the Commission staff’s priorities and expectations in its review of new virtual currency derivatives to be listed on regulated exchanges. Staff linked its decision to withdraw the Advisory to additional staff experience, market growth, and market maturity.
The Advisory directed that information be shared between exchanges and underlying spot markets for virtual currencies to facilitate the exchange’s access to a broad range of trade data, including identities, prices, volumes, times, and quotes. In this way, Staff sought to ensure that virtual currency derivatives offered by the exchanges adequately tracked the cash-settlement prices of the virtual currencies and were not readily susceptible to manipulation, price distortion, and disruptions of delivery or cash-settlement. Exchanges were also required to provide surveillance information to the Commission upon request and report large trader positions of any virtual currency derivative contract at five bitcoin (or the equivalent for other virtual currencies) as part of the existing Large Trader Reporting System.
While exchanges must still comply with standards and procedures provided by the Commission or Congress, they will not be subject to enhanced surveillance requirements with respect to virtual currency derivatives. Exchanges are no longer required by DMO or DCR to agree to information sharing with spot markets above their existing requirements, are unlikely to face requests for such information from the Commission outside of ordinary channels, and no longer must report large trader positions at the five-bitcoin threshold (although they will still have to report large trader positions at the statutory level of 25 contracts). In general, the withdrawal of the Advisory suggests that the Commission will reduce oversight of exchanges facilitating virtual currency derivates trading to pre-2018 levels.
