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Virtual Currency Specific Disclosure
Virtual Currency Specific Disclosure
PLEASE BE ADVISED THAT DIRECT ACCESS USA LLC (DAUS) 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.
PURSUANT TO NFA RULES DAUS IS REQUIRED TO PROVIDE YOU WITH THE FOLLOWING MATERIALS PUBLISHED BY NFA AND THE CFTC:
NFA INVESTOR ADVISORY – FUTURES ON VIRTUAL CURRENCIES INCLUDING BITCOIN
CFTC CUSTOMER ADVISORY - UNDERSTAND THE RISKS OF VIRTUAL CURRENCY TRADING
There are a number of risks which are unique to trading in virtual currency products. Prior to entering any virtual currency investment, you should be aware of and understand the following risks:
Virtual Currency Is Not Legal Tender: Virtual currencies are not legal tender in the United States. Many question whether they even have intrinsic value. The price of many virtual currencies is based on the agreement of the parties to a transaction. As a result, virtual currencies including Bitcoins experience significant price volatility and fluctuations in the underlying virtual currency’s value. The time you place a trade for a virtual currency contract and the time you attempt to liquidate it will affect the value and the potential profit or losses related to it. Please be aware that investing in futures on virtual currencies, including Bitcoin, even those which are traded on regulated futures exchanges, does not mean that the underlying virtual currency markets are regulated in any manner. What occurs in a virtual currency’s underlying market will impact the price of a virtual currency’s futures contract.
Price Volatility: The price of a virtual currency is based on the perceived value of the virtual currency and subject to changes in sentiment, which make these products highly volatile. Certain virtual currencies have routinely experienced daily price volatility of more than 20%. The risks associated with the extreme price volatility of virtual currencies and the possibility of rapid and substantial price movements could result in significant losses.
Valuation and Liquidity: Virtual currencies can be traded through privately negotiated transactions and through numerous virtual currency exchanges and intermediaries around the world. The lack of a centralized pricing source poses a variety of valuation challenges. In addition, the dispersed liquidity may pose challenges for market participants trying to exit a position, particularly during periods of stress. Valuation policies and procedures throughout the virtual currency landscape may not be uniform. Although digital currency futures traded on regulated exchanges may have a uniform valuation policy, the underlying spot market virtual currencies those policies are based upon may not be reliable under periods of market stress.
Cybersecurity: The cybersecurity risks of virtual currencies and related “wallets” or spot exchanges include hacking vulnerabilities and a risk that publicly distributed ledgers may not be immutable. A cybersecurity event could result in a substantial, immediate and irreversible loss for market participants that trade virtual currencies. Even a minor cybersecurity event in a virtual currency is likely to result in downward price pressure on that product and potentially other virtual currencies.
Opaque Spot Market: Virtual currency balances are generally maintained as an address on the blockchain and are accessed through private keys, which may be held by a market participant or a custodian. Although virtual currency transactions are typically publicly available on a blockchain or distributed ledger, the public address does not identify the controller, owner or holder of the private key. Unlike bank and brokerage accounts, virtual currency exchanges and custodians that hold virtual currencies do not always identify the owner. The opaque underlying or spot market poses asset verification challenges for market participants, regulators and auditors and gives rise to an increased risk of manipulation and fraud, including the potential for Ponzi schemes, bucket shops and pump and dump schemes. This type of behavior within the spot market may lead to additional risks in futures products traded on regulated exchanges.
Virtual Currency Exchanges, Intermediaries and Custodians: Virtual currency exchanges, as well as other intermediaries, custodians and vendors used to facilitate virtual currency transactions, are relatively new and largely unregulated in both the United States and many foreign jurisdictions. Virtual currency exchanges generally purchase virtual currencies for their own account on the public ledger and allocate positions to customers through internal bookkeeping entries while maintaining exclusive control of the private keys. Under this structure, virtual currency exchanges collect large amounts of customer funds for the purpose of buying and holding virtual currencies on behalf of their customers. The opaque underlying spot market and lack of regulatory oversight creates a risk that a virtual currency exchange may not hold sufficient virtual currencies and funds to satisfy its obligations and that such deficiency may not be easily identified or discovered. In addition, many virtual currency exchanges have experienced significant outages, downtime and transaction processing delays, have halted redemptions or withdrawals, and may have a higher level of operational risk than regulated futures or securities exchanges. The impact of failures within unregulated virtual currency exchanges, intermediaries, or virtual currency custodians could have a material impact on virtual currency futures traded through a regulated exchange.
Regulatory Landscape: Virtual currencies currently face an uncertain regulatory landscape in the United States and many foreign jurisdictions. In the United States, virtual currencies are not subject to federal regulatory oversight but may be regulated by one or more state regulatory bodies. In addition, many virtual currency derivatives are regulated by the CFTC, and the SEC has cautioned that many initial coin offerings are likely to fall within the definition of a security and subject to U.S. securities laws. One or more jurisdictions may, in the future, adopt laws, regulations or directives that affect virtual currency networks and their users. Such laws, regulations or directives may impact the price of virtual currencies and their acceptance by users, merchants and service providers. Since new regulatory developments are unpredictable and largely unknown, you should be aware that decisions in this area may impact your ability to invest in virtual currency products including regulated exchange cleared futures.
Technology: The relatively new and rapidly evolving technology underlying virtual currencies introduces unique risks. For example, a unique private key is required to access, use or transfer a virtual currency on a blockchain or distributed ledger. The loss, theft or destruction of a private key may result in an irreversible loss. The ability to participate in forks could also have implications for investors. For example, a market participant holding a virtual currency position through a virtual currency exchange may be adversely impacted if the exchange does not allow its customers to participate in a fork that creates a new product. Virtual currencies are underpinned by nascent technology. You should ensure that you are familiar with the technology risk posed to you when making a crypto currency investment even in a regulated exchange cleared product.
Transaction Fees: Many virtual currencies allow market participants to offer miners (i.e., parties that process transactions and record them on a blockchain or distributed ledger) a fee. While not mandatory, a fee is generally necessary to ensure that a transaction is promptly recorded on a blockchain or distributed ledger. The amounts of these fees are subject to market forces and it is possible that the fees could increase substantially during a period of stress. In addition, virtual currency exchanges, wallet providers and other custodians may charge high fees relative to custodians in many other financial markets. The impact of these transaction fees on the underlying spot market value of digital assets may impact the price of regulated virtual currency futures in unpredictable ways.
Margin Risks: DAUS reserves the right to impose more restrictive limits that may, at our discretion, be revised from time to time. DAUS also has the contractual right to liquidate all or any part of your position(s) through any means available, without prior notice to you. The regular risks associated with trading commodity futures contracts also apply to the trading of regulated digital currency futures.
Liquidity Risks: Digital currency futures contracts have limited history trading on a U.S.-regulated futures exchange. As noted throughout the various risks disclosed above, the price of the underlying digital currency indexes on which the futures contracts are based upon can be and often are highly volatile or unpredictable. Further, a limited number of futures commissions merchants may offer trading in digital currency futures contracts to their customers. For all of these reasons, and others which may as yet be unknown to DAUS, there might be limited volume or liquidity in digital currency futures. Limited liquidity or low volumes of transactions within these markets may impact market efficiencies and price movements. Each customer should conduct his or her own due diligence prior to deciding to trade in these products. The following link from the National Futures Association should be considered for more information. https://www.nfa.futures.org/investors/investor-advisory.html
Additionally, the Commodity Futures Trading Commission ("CFTC") has made available a Virtual Currency Resource Web Page designed to educate and inform the public about this topic and its risks. See the link that follows for further information from the CFTC: http://www.cftc.gov/bitcoin/index.htm.