NFA Adopts Compliance Rule for Spot Digital Asset Commodity Activity

On March 29, 2023, the National Futures Association (“NFA”) announced the adoption of Compliance Rule 2-51: Requirements for Members and Associates Engaged in Activities Involving Digital Asset Commodities (the “New Rule”),¹ which will implement anti-fraud, trading, and supervisory requirements for member firms, including firms registered with the Commodity Futures Trading Commission as commodity pool operators and commodity trading advisors, that are engaging in spot “digital asset commodity” activities. The effective date of the New Rule is May 31, 2023.

Under the New Rule, the NFA would, for the first time, have the jurisdiction to discipline member firms for fraud and similar misconduct relating to spot digital asset commodities, which the NFA has currently defined to mean Bitcoin and Ether. The New Rule would prevent firms engaged in spot digital asset commodity activities from, among other things:

• cheating or deceiving other persons engaged in spot digital asset commodities;
• making a false report with regard to any transaction involving a spot digital asset commodity;
• making a communication that (i) operates as a fraud or deceit, (ii) utilizes a “high-pressure approach” or (iii) asserts in any way that spot digital asset commodities are “appropriate for all persons”;
• disseminating false or misleading information meant to influence the price of a spot digital asset commodity;
• engaging in manipulative acts or practices concerning the price of a spot digital asset commodity; or
• embezzling, for its own use, any money or other assets received from any person in connection with a transaction involving a spot digital asset commodity.

The New Rule would also impose new requirements for firms regarding (i) standards of commercial honor and just and equitable principles of trade, (ii) disclosure of activities involving spot digital asset commodities (covered by the requirements of NFA Interpretive Notice 9073)² and (iii) employee supervision.

As an important action item, NFA member firms engaged in spot digital asset commodity activities must adopt and implement appropriate supervisory policies and procedures over these activities. Member firms should review existing policies and procedures and update these as necessary to cover the requirements of the New Rule.

While the NFA is limiting the applicability of the New Rule to Bitcoin and Ether, it did note that should any additional digital assets be identified as commodities in the future, the New Rule would be amended accordingly. We will continue to monitor these developments and update clients of any changes or additional action items.

¹ The full text of the proposed New Rule may be accessed here.

² NFA Interpretative Notice 9073 – Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities may be accessed here.