CFTC & NASAA crack down on crypto derivatives

The U.S. Commodity Futures Trading Commission (CFTC) and the North American Securities Administrators Association (NASAA) are working together to police cryptocurrency derivatives.

With the increasing popularity of initial coin offerings, the government is beginning to pay close attention to investigating bad actors.

Commodity Futures Trading Commission (CFTC) Chair J. Christopher Giancarlo delivered a speech to NASAA members last month.

“We applaud NASAA on a new program [Operation Cryptosweep] being announced today. It complements the CFTC’s on-going virtual currency investigations with NASAA members.”

— J. Christopher Giancarlo, CFTC Chair

The CFTC was formed after the Commodity Futures Trading Commission Act of 1974. This historic act regulates open markets and investigates manipulation and fraud.

The NASAA, short for North American Securities Administrators Association, is committed to protecting investors. Like the CFTC, they investigate violations of security fraud.

Both the CFTC and NASAA traditionally oversea securities. Initial public offering (IPO) registration has declined 65%. 363 companies registered in 2014. In 2016, the number dropped to 128.

Both organizations are switching gears and focusing on defining crypto derivatives regulations.

Are cryptocurrencies securities?

There is no statement defining whether or not digital currency will be categorized as securities by the U.S. government.

With an announcement like this, we may be lead to believe there is a high probability the government can be closer to defining cryptocurrency as securities under the umbrella of cryptocurrency derivatives.

What are cryptocurrency derivatives?

To understand crypto derivatives, we must first understand traditional derivatives. A derivative is an asset contract between two or more parties. Derivatives may be traded and exchanged. Therefore, a crypto derivative is a contract between two or more parties based upon cryptocurrency.

“This interface will definitely be skewed to the long bitcoin holders,” said Paul Chou, founder of LedgerX, a former derivatives trader in Goldman Sachs’ securities division, “who will likely only deposit bitcoin who will want to earn interest off of that bitcoin.”

Currently, LedgerX, a bitcoin trading platform, is leading the ecosystem in launching crypto derivatives.

LedgerX is the first SEC regulated U.S. cryptocurrency derivative exchange. The platform holds two different CFTC licenses. In the first week of the launch, 176 contracts were traded.

After the first week, the volume of derivative contract trading ballooned to a 40% monthly increase. There are now 2,000 open interest contracts on the LedgerX platform.

Perspective

The boom in crypto derivatives may increase the liquidity of cryptocurrency and trading volumes of digital coins. Having private investors has ignited government interest in creating new standards.

These standards should protect investors and will inevitably attract traditional institutions who may trade at high volumes.