NFA Issues New Disclosure Requirements for Registered CPOs/CTAs Engaging in Virtual Currency Activities
On July 20, 2018, the National Futures Association (“NFA”) issued new disclosure requirements for registered commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”) to address certain risks stemming from the recent growth of the virtual currency and virtual currency derivatives markets. The new requirements will require, among other things, CPOs and CTAs trading in spot virtual currency or related derivatives to update their disclosure documents and marketing materials to reflect the new standards. The requirements became effective on July 30, 2018. 
For CPOs and CTAs engaged in virtual currency activities, the NFA’s notice implements new disclosure requirements for offering and marketing materials aimed to highlight the unique risks posed to investors from such activities. Specifically, the NFA will require mandated standardized disclosures related to spot virtual currency activities to be included in offering and marketing materials. The mandatory disclosures must be prominently displayed and generally cover issues that the NFA believes investors need to be made aware of when trading in these markets, including disclosure highlighting a lack of centralized pricing sources, a lack of acceptable practices for the NFA to adequately verify the ownership/control of a virtual currency, and issues around virtual currency valuation.
The NFA will also require CTAs and CPOs engaging in spot virtual currency transactions to address each of the following topics in their disclosure documents, offering documents and promotional material related to virtual currencies, but will not mandate the precise language of the disclosure:
- unique features of virtual currencies (e.g., virtual currencies are not legal tender and may have no intrinsic value);
- price volatility (e.g., virtual currencies may experience extreme price volatility);
- valuation and liquidity (e.g., the lack of a centralized pricing source poses valuation challenges);
- cybersecurity (e.g., potential “hacking vulnerabilities” of virtual currencies and related wallets or spot exchanges pose risks);
- opaque spot market (e.g., transactions on decentralized markets are pseudonymous);
- virtual currency exchanges, intermediaries and custodians (e.g., such entities are largely unregulated in the US and foreign markets);
- regulatory landscape (e.g., the regulatory landscape is rapidly evolving and changes in laws may have an impact on virtual currency networks and users);
- technology (e.g., the new technology associated with virtual currencies and the possibility of forks may impact market participants); and
- transaction fees (e.g., blockchain recording fees)
In addition, any CPO or CTA engaging in an underlying or spot virtual currency transaction must prominently display a mandated legend in its disclosure document, offering document and promotional materials related to such activity. Please see Annex A for a copy of the mandated legend.
Notably, the NFA will not mandate any specific disclosure language for CTAs or CPOs engaging in virtual currency derivatives transactions. However, the NFA requires that “unique features” of such transactions must be addressed in their disclosure documents, offering documents and promotional material related to their virtual currency derivatives activity. These include that virtual currency transactions may sustain significant price volatility and that margin requirements may be set as a percentage of the value of a particular contract (e.g., that initial margin requirements will increase for long positions as market prices rise).
Registered CPOs and CTAs trading in virtual currencies or related derivatives must carefully review and update their offering/disclosure documents and promotional material to address these new requirements. Given that precise language has not been provided in all cases, CPOs and CTAs must make a determination as to the appropriate scope and level of risk disclosures and ought to err on the side of being overly inclusive and descriptive when discussing certain risks involved in the virtual currency markets. As for unregistered CPOs and CTAs, while the NFA’s new disclosure guidelines will not directly apply, unregistered CPOs and CTAs trading virtual currencies should similarly consider updating their disclosure documents to ensure the risks mentioned by the NFA are properly disclosed as a matter of best practice.
 See here for the NFA Proposed Interpretive Notice.