Regulatory

New NFA Rule Defines Requirements for Digital Asset Commodity Firms

BitOoda Regulatory Analysis, 3/16/23

Tom Nath

Key Takeaway #1

NFA’s new compliance rule for digital asset commodity firms sets anti-fraud standards, market conduct expectations, and requirements for disclosures and supervision.

Key Takeaway #2

The rule is an important step to set expectations for crypto derivatives market behavior.

Key Takeaway #3

The scope is notable because the rule defines BTC and ETH as commodities, and asserts the CFTC’s jurisdiction over crypto spot markets.

Key Takeaway #4

BitOoda’s industry-leading regulatory foundation allows us to facilitate compliant institutional capital markets solutions for our clients.

Last month, the National Futures Association (NFA) submitted a letter to the CFTC proposing Compliance Rule 2-51, titled “Requirements for Members and Associates Engaged in Activities Involving Digital Asset Commodities.”

The rule defines foundational market conduct standards and compliance requirements related to (1) fraud, false communications, and price manipulation; (2) commercial standards for business conduct; (3) disclosure requirements, and (4) the need for firms to diligently supervise their employees and agents. Notably, the rule sets its scope as covering commercial activities involving digital asset commodities, defined as Bitcoin and Ether, “which have related commodity interests certified by a registered entity for listing under Part 40 of CFTC Regulations.”

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Last month, the National Futures Association (NFA) submitted a letter to the CFTC proposing Compliance Rule 2-51, titled “Requirements for Members and Associates Engaged in Activities Involving Digital Asset Commodities.”

The rule defines foundational market conduct standards and compliance requirements related to (1) fraud, false communications, and price manipulation; (2) commercial standards for business conduct; (3) disclosure requirements, and (4) the need for firms to diligently supervise their employees and agents. Notably, the rule sets its scope as covering commercial activities involving digital asset commodities, defined as Bitcoin and Ether, “which have related commodity interests certified by a registered entity for listing under Part 40 of CFTC Regulations.”

We commend NFA (and CFTC) for promulgating this standard-setting rule. While many of these provisions may seem obvious to firms focused on compliance and regulatory principles, this rule nonetheless serves an important role as the first formal set of standards related to ethical and fair trading practices applicable to CFTC-regulated digital asset firms.

In addition to its strategic importance, the rule is notable because:

It is modeled after NFA’s existing rules governing exchange-traded futures and swaps. In our view, this effort to tailor and restate existing rules for crypto is an ideal way to handle the complexities of digital asset markets. Whether regulators approve or not, digital assets are here to stay and continue to gain adoption around the world. Regulatory clarity is crucial to ensuring that the US does not fall behind technologically, and often the path of least resistance is adapting existing frameworks to new asset classes, while creating new legislation where necessary. This is why we like the approach the CFTC is taking with this rule.
The rule represents a tangible step toward defining the CFTC’s authority over the crypto spot market, which to date it has not asserted using official rules, but is a crucial part of the ongoing debate on potential digital asset legislation.
NFA officially defines BTC and ETH as commodities. This provides another useful statement in support of ETH’s classification as a commodity (vs. a security) and is consistent with the CFTC’s position to date on this question.

We assess the rule will enhance the CFTC’s position to assert itself in the space and more clearly define its intended jurisdiction, and to hold noncompliant firms accountable for unethical market conduct. Overall, we welcome this rule as a solid step to set standards for integrity and ethical behavior in the digital asset commodity market.

BitOoda has built an industry-leading regulatory foundation including a CFTC-regulated Introducing Broker and CTA, an SEC-regulated Digital Asset Broker Dealer, and a spot broker approved for a New York BitLicense. Our ability to navigate across regulatory jurisdictions and market products gives us the ability to meet a broad set of client needs. Please reach out to learn more about our regulatory capabilities and how we can facilitate compliant institutional-grade solutions for our clients.

‍

Disclosures

Purpose

This research is only for the clients of BitOoda. This research is not intended to constitute an offer, solicitation, or invitation for any securities and may not be distributed into jurisdictions where it is unlawful to do so. For additional disclosures and information, please contact a BitOoda representative at info@bitooda.io.

Analyst Certification

Tom Nath, the author of this report, hereby certifies that all of the views expressed in this report accurately reflect his personal views, which have not been influenced by considerations of the firm’s business or client relationships.

Conflicts of Interest

This research contains the views, opinions, and recommendations of BitOoda. This report is intended for research and educational purposes only. We are not compensated in any way based upon any specific view or recommendation.

General Disclosures

Any information (“Information”) provided by BitOoda Holdings, LLC, BitOoda Digital, LLC, BitOoda Technologies, LLC or Ooda Commodities, LLC and its affiliated or related companies (collectively, “BitOoda”), either in this publication or document, in any other communication, or on or through http://www.bitooda.io/, including any information regarding proposed transactions or trading strategies, is for informational purposes only and is provided without charge. BitOoda is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing the Information, and the Information may not be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The Information is being distributed as part of BitOoda’s sales and marketing efforts as an introducing broker and is incidental to its business as such. BitOoda seeks to earn execution fees when its clients execute transactions using its brokerage services. BitOoda makes no representations or warranties (express or implied) regarding, nor shall it have any responsibility or liability for the accuracy, adequacy, timeliness or completeness of, the Information, and no representation is made or is to be implied that the Information will remain unchanged. BitOoda undertakes no duty to amend, correct, update, or otherwise supplement the Information.

The Information has not been prepared or tailored to address, and may not be suitable or appropriate for the particular financial needs, circumstances or requirements of any person, and it should not be the basis for making any investment or transaction decision. The Information is not a recommendation to engage in any transaction. The digital asset industry is subject to a range of inherent risks, including but not limited to: price volatility, limited liquidity, limited and incomplete information regarding certain instruments, products, or digital assets, and a still emerging and evolving regulatory environment. The past performance of any instruments, strategies, products or digital assets addressed in the Information is not a guide to future performance, nor is it a reliable indicator of future results or performance. Commodity trading involves substantial risk of loss.

Ooda Commodities, LLC is a member of NFA and is subject to NFA’s regulatory oversight and examinations. However, you should be aware that NFA does not have regulatory oversight authority over underlying or spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.

BitOoda Technologies, LLC is a member of FINRA.

“BitOoda”, “BitOoda Difficulty”, “BitOoda Hash”, “BitOoda Compute”, and the BitOoda logo are trademarks of BitOoda Holdings, Inc.

‍

Last month, the National Futures Association (NFA) submitted a letter to the CFTC proposing Compliance Rule 2-51, titled “Requirements for Members and Associates Engaged in Activities Involving Digital Asset Commodities.”

The rule defines foundational market conduct standards and compliance requirements related to (1) fraud, false communications, and price manipulation; (2) commercial standards for business conduct; (3) disclosure requirements, and (4) the need for firms to diligently supervise their employees and agents. Notably, the rule sets its scope as covering commercial activities involving digital asset commodities, defined as Bitcoin and Ether, “which have related commodity interests certified by a registered entity for listing under Part 40 of CFTC Regulations.”

We commend NFA (and CFTC) for promulgating this standard-setting rule. While many of these provisions may seem obvious to firms focused on compliance and regulatory principles, this rule nonetheless serves an important role as the first formal set of standards related to ethical and fair trading practices applicable to CFTC-regulated digital asset firms.

In addition to its strategic importance, the rule is notable because:

It is modeled after NFA’s existing rules governing exchange-traded futures and swaps. In our view, this effort to tailor and restate existing rules for crypto is an ideal way to handle the complexities of digital asset markets. Whether regulators approve or not, digital assets are here to stay and continue to gain adoption around the world. Regulatory clarity is crucial to ensuring that the US does not fall behind technologically, and often the path of least resistance is adapting existing frameworks to new asset classes, while creating new legislation where necessary. This is why we like the approach the CFTC is taking with this rule.
The rule represents a tangible step toward defining the CFTC’s authority over the crypto spot market, which to date it has not asserted using official rules, but is a crucial part of the ongoing debate on potential digital asset legislation.
NFA officially defines BTC and ETH as commodities. This provides another useful statement in support of ETH’s classification as a commodity (vs. a security) and is consistent with the CFTC’s position to date on this question.

We assess the rule will enhance the CFTC’s position to assert itself in the space and more clearly define its intended jurisdiction, and to hold noncompliant firms accountable for unethical market conduct. Overall, we welcome this rule as a solid step to set standards for integrity and ethical behavior in the digital asset commodity market.

BitOoda has built an industry-leading regulatory foundation including a CFTC-regulated Introducing Broker and CTA, an SEC-regulated Digital Asset Broker Dealer, and a spot broker approved for a New York BitLicense. Our ability to navigate across regulatory jurisdictions and market products gives us the ability to meet a broad set of client needs. Please reach out to learn more about our regulatory capabilities and how we can facilitate compliant institutional-grade solutions for our clients.

‍

Disclosures

Purpose

This research is only for the clients of BitOoda. This research is not intended to constitute an offer, solicitation, or invitation for any securities and may not be distributed into jurisdictions where it is unlawful to do so. For additional disclosures and information, please contact a BitOoda representative at info@bitooda.io.

Analyst Certification

Tom Nath, the author of this report, hereby certifies that all of the views expressed in this report accurately reflect his personal views, which have not been influenced by considerations of the firm’s business or client relationships.

Conflicts of Interest

This research contains the views, opinions, and recommendations of BitOoda. This report is intended for research and educational purposes only. We are not compensated in any way based upon any specific view or recommendation.

General Disclosures

Any information (“Information”) provided by BitOoda Holdings, LLC, BitOoda Digital, LLC, BitOoda Technologies, LLC or Ooda Commodities, LLC and its affiliated or related companies (collectively, “BitOoda”), either in this publication or document, in any other communication, or on or through http://www.bitooda.io/, including any information regarding proposed transactions or trading strategies, is for informational purposes only and is provided without charge. BitOoda is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing the Information, and the Information may not be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The Information is being distributed as part of BitOoda’s sales and marketing efforts as an introducing broker and is incidental to its business as such. BitOoda seeks to earn execution fees when its clients execute transactions using its brokerage services. BitOoda makes no representations or warranties (express or implied) regarding, nor shall it have any responsibility or liability for the accuracy, adequacy, timeliness or completeness of, the Information, and no representation is made or is to be implied that the Information will remain unchanged. BitOoda undertakes no duty to amend, correct, update, or otherwise supplement the Information.

The Information has not been prepared or tailored to address, and may not be suitable or appropriate for the particular financial needs, circumstances or requirements of any person, and it should not be the basis for making any investment or transaction decision. The Information is not a recommendation to engage in any transaction. The digital asset industry is subject to a range of inherent risks, including but not limited to: price volatility, limited liquidity, limited and incomplete information regarding certain instruments, products, or digital assets, and a still emerging and evolving regulatory environment. The past performance of any instruments, strategies, products or digital assets addressed in the Information is not a guide to future performance, nor is it a reliable indicator of future results or performance. Commodity trading involves substantial risk of loss.

Ooda Commodities, LLC is a member of NFA and is subject to NFA’s regulatory oversight and examinations. However, you should be aware that NFA does not have regulatory oversight authority over underlying or spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.

BitOoda Technologies, LLC is a member of FINRA.

“BitOoda”, “BitOoda Difficulty”, “BitOoda Hash”, “BitOoda Compute”, and the BitOoda logo are trademarks of BitOoda Holdings, Inc.

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New NFA Rule Defines Requirements for Digital Asset Commodity Firms

BitOoda Regulatory Analysis, 3/16/23

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