Investment managers and fintech providers in the crypto space should take note of two recent Commodity Futures Trading Commission (“CFTC”) regulatory developments.
First, in late-August, the CFTC issued a consent order determining that a trade signal aggregator improperly failed to register as a commodity trading advisor (“CTA”). As its name suggests, a trade signal aggregator is a service provider that aggregates trade signals generated by third parties. Historically, this type of service provider has not been subject to CTA registration, provided that it was not “directing” a customer’s trade account. (Generally, a party directs a customer’s trading account when it is authorized to cause a transaction to be effected for the customer’s account with the customer’s specific authorization.)
Second, in early-September, the CFTC issued orders against the operators of three digital asset decentralized finance (“DeFi”) protocols for illegally offering leveraged and margined retail commodity transactions in digital assets. In addition, the CFTC determined that two of the operators failed to maintain appropriate registrations with the CFTC.
The events are noteworthy for any CFTC-registered CTA since:
- Every registered CTA is required to be a member of the National Futures Association (“NFA”);
- NFA Bylaw 1101 provides, in pertinent part, that no NFA member may carry an account, accept an order, or handle a transaction in commodity futures on behalf of any non-member that is required to be registered as a CTA or in some other capacity; and
- NFA Interpretive Notice 9055 contains specific guidelines that apply to CTAs and technology providers that develop third-party trading systems. In short, in order to avoid liability under NFA Bylaw 1101, a registered CTA may have to terminate its relationship with any third-party technology provider that should be, but is not, an NFA member.
Whether the recent regulatory developments are related to one another—and whether this post connects dots or makes unconnected leaps of logic—remains to be seen. Regardless of the ultimate resolution of those issues, CTAs that use DeFi platforms and other fintech solutions, as well as the technology providers themselves, would do well to take note of these developments, especially in light of the NFA’s Guidelines in Interpretive Notice 9055.