US derivatives regulator to review bitcoin futures risks

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US derivatives regulator to review bitcoin futures risks

As SEC issues fresh warning to investors.

The US derivatives regulator will hold two meetings to discuss the procedure and operational controls for listing and trading digital currency futures, it said Thursday, amid rising concerns over the risks bitcoin poses to the financial system.

The Commodity Futures Trading Commission (CFTC) said it would convene its technology and risk advisory committees this month to discuss its “self-certification” process for listing digital currency futures and how those products are risk-managed and policed.

The Securities and Exchange Commission (SEC) and the North American Securities Administrators Association (NASSA) have issued new warnings to investors over the risks of investing in bitcoin, cautioning regulators may not be able to protect them from fraudsters.

CME Group and CBOE Global Markets launched bitcoin futures in December, sparking criticism from some industry participants who said the regulator should have consulted the market more widely before allowing the products.

In December, the Futures Industry Association wrote to the CFTC expressing concern about the risks potentially posed by allowing futures in volatile virtual currencies to be traded alongside more traditional financial products.

The price of bitcoin soared to record highs of more than US$19,000 ($24,154) in December, only to slump more than 28 percent - although it still ended the year up 1300 percent.

The CFTC has been increasing its jurisdiction over the cryptocurrency market, which has no overriding federal regulator, but is restricted by its limited legal power to actively block exchanges from launching futures products.

CFTC regulations allow designated exchanges to list products for trading without prior CFTC approval by filing a written self-certification with the regulator.

Under the self-certification process, which is a quirk of the futures market, the exchanges file a submission to the CFTC confirming the product complies with the US Commodity Exchange Act and CFTC regulations - including a key provision that requires that the contract is not susceptible to manipulation.

The CFTC has the power to block the contract but can only do so under exceptional circumstances.

The pair of advisory committee meetings are aimed at giving stakeholders the opportunity to discuss the issue.

“The responsible regulatory response to virtual currencies is consumer education, asserting CFTC authority, surveilling trading in derivative and spot markets, prosecuting fraud, abuse, manipulation and false solicitation and active coordination with fellow regulators,” CFTC chair Christopher Giancarlo said in the statement, adding the CFTC was following this course of action.

On Thursday, his counterpart at the SEC Jay Clayton along with commissioners Kara Stein and Michael Piwowar, warned investors that many actors in the virtual currency market were violating state and federal laws.

“The SEC and state securities regulators are pursuing violations, but we again caution you that, if you lose money, there is a substantial risk that our efforts will not result in a recovery of your investment,” they said in the statement.

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