US regulator imposes “heightened review” on bitcoin derivatives

A US regulator is defending its approach to policing cryptocurrencies after some derivatives brokerages complained that two of the world’s biggest exchanges rushed bitcoin futures to market last month without properly evaluating the risks.

In a four-page document released Thursday, the Commodity Futures Trading Commission argued there was little it could do to prevent CME Group Inc and Cboe Global Markets Inc from launching futures contracts. The exchanges took advantage of a process known as self-certification that allows them to list products after pledging to regulators that trading doesn’t run afoul of the law.

CFTC Chairman J. Christopher Giancarlo also personally pushed back against any criticism of his agency’s oversight of digital coins, which have generated a global frenzy after surging to astronomical levels last year.

“Ignoring virtual currency trading will not make it go away. Nor is it a responsible regulatory strategy,” he said in a Thursday statement. “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. The CFTC has been following this course of action and will continue to so.”

The listing of bitcoin futures was seen as a watershed because it enabled Wall Street traders to more thoroughly embrace the virtual currency and speculate on price moves. It also thrust the CFTC into the front lines of regulating products that are tied to an asset that some finance executives have called a bubble and a fraud.

In December, the Futures Industry Association published an open letter arguing that exchanges failed to get enough feedback on several issues related to bitcoin futures including margin levels, trading limits and the risk of market manipulation. The group’s members include JPMorgan Chase & Co. and Goldman Sachs Group Inc.

In its Thursday statement, the CFTC said it had imposed a “heightened review” on bitcoin derivatives, adding that exchanges and clearinghouses that handle financial products tied to digital currencies will face tough requirements and scrutiny.

Two CFTC advisory committees – one run by Republican Commissioner Brian Quintenz and one run by Democratic Commissioner Rostin Behnam – plan to hold meetings this month on virtual currencies. The one chaired by Behnam will focus on the listing of novel products through the self-certification process.

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