Law and Ledger, a column musing upon the curious affairs of crypto legality, is brought to you by Kelman Law – a firm most diligently engaged in the prattle and hustle of digital commerce.
The ensuing editorial, a discourse of wisdom if ever there was, was composed by the esteemed minds of Alex Forehand and Michael Handelsman for Kelman.Law.
A Sojourn Through the CFTC’s Mire for Crypto Investment Funds
As those in authority appropriately, and with no small measure of zeal, decree digital monies such as Bitcoin and Ethereum to be of a commodity nature, the landscape of governance wanders from familiar SEC territory towards the oft-unchartered realms of the Commodity Exchange Act and the ubiquitous oversight of the Commodity Futures Trading Commission.
This slight shift, akin to the ebb and flow of society itself, grants not only a newfound openness to opportunity but also unyielding demands of accountability, particularly for those bold enough to delve into the enigma of crypto derivatives such as futures, swaps, or perpetual contracts. Should your sole venture into the world of crypto present itself as a commodity pool, you might find yourself christened a Commodity Pool Operator (CPO)-a title fraught with sundry registration and compliance toils. Likewise, many of those operating in such ventures perchance need to register as a Commodity Trading Advisor (CTA).
Comprehending the Regulatory Actors
The CFTC, much like Tsar Nicholas beginning to reassert an ordinance over his Russian lands, stands centric as the steward of U.S. commodity derivative markets. While it seldom concerns itself with the mere direct dealings in commodities, this is not the case for matters such as futures, options, and swaps on commodities. By 17 C.F.R. § 180.1, the nation’s commerce overseer can intervene in spot markets only when deceit or manipulation weaves through the transactional fabric (oh dear, the inevitable CFTC v. McDonnell, a tale of woe and jurisprudence).
The National Futures Association (NFA), as though a requisite cousin in these matters, acts as the self-regulatory body for those under CFTC’s registry. Membership with them becomes inescapable should one accept the mantle of CPO or CTA.
The Securities and Exchange Commission (SEC), ever vigilant, watches over especially if your assets – tokens of a tradeable nature or other non-commodity treasures – weigh heavily or if you also wear the badge of investment adviser.
The Enigma of Commodity Pools and Pool Operators
In the grand design of the Commodity Exchange Act (CEA), a commodity pool is a gathering, a fund or similar venture into which investor contributions are pooled together, much like tributes being gathered for a royal levee, to engage in transactions of commodity interests on behalf of the participants.
Such commodity interests span futures contracts, options on futures, swaps, and certain retail leveraged commodity transactions. Ah, and now even the fresh and burgeoning realm of crypto derivatives – those Bitcoin and Ether futures, perennial contracts, have found their place within. If your crypto fund partakes in such activities, even as part of a grander strategy, it may find itself deemed a commodity pool.
To be a Commodity Pool Operator (CPO) is to solicit, accept, and thereafter wrangle with the contribution of funds from investors for the operation of this very pool, much like a general leading his army into the forbaying fields of battle, responsible for tending to the pool’s trading engagements.
Crypto fund managers should make note – if you gather capital from those who place their trust in you, aiming to trade crypto derivatives, the specter of the CFTC may well cast you as a CPO. On the other hand, if raising capital serves solely to trade in the age-old realm of crypto spot markets, one may escape the CPO designation, though not the vigilant eye of the CFTC, should deceit or manipulation find purchase in the spot markets – the bane of transparency and fair trade.
Furthermore, crypto fund managers are likely to don the title of Commodity Trading Advisors under the CEA. A Commodity Trading Advisor (CTA) is one who, seeking compensation or profit, engages – either in direct explication or through subtleties of implication – in the dispensation of advice on the worth of or the advisability of trading commodity interests. Crypto derivatives, beloved Bitcoin, Ether futures, options, or perpetual swaps fall within this definition’s grasp, intentionally broad and encompassing to capture not only those who advise on commodity trading but also those managers of discretionary accounts who trade on behalf of a client.
If your treasure chest contains crypto assets considered securities – such as yielding tokens, investment contracts, or other offerings that satisfy Howey‘s test – or derivatives resting upon those securities, a registration must be sought with the Securities and Exchange Commission (SEC) as an investment adviser, or an exemption-clad escape must be cunningly employed.
The intricacies discussed herein pertain to those funds dealing with crypto assets discerned as commodities in U.S. law, such as Bitcoin and Ether. While political winds and regulatory shifts may turn about like an autumn leaf, the current trend in the United States seems to be that one must treat most native blockchain coins, non-yield-bearing stablecoins, utility tokens, and even certain memecoins as commodities rather than securities.
However, one cannot help but cast a wondering eye toward the SEC’s pursuit of enforcement actions – an entreaty that approximately thirty distinct crypto assets are securities. The outcomes may very well alter the compliance obligations in significant measure for those who partake in the management of crypto funds.
Requisitions for Registration and Reporting
A martial-like precision is required of a crypto fund manager qualifying as both a Commodity Pool Operator or a Commodity Trading Advisor: an arduous registration with the Commodity Futures Trading Commission (CFTC) is necessitated, alongside a formal membership to the National Futures Association (NFA), most importantly before calling forth prospective capital from investors.
The journey to registration thus begins with the submission of Form 7-R for the establishment, and Form 8-R for all associates, through the NFA’s electronic registry. Each individual fellow to you in this endeavor must also be subject to a fingerprint-based background probe. Nobility and select employees may have to prove their mettle in examinations such as the Series 3 National Commodity Futures, and perhaps also the Series 31 Managed Funds, unless an exemption deems such toils unnecessary.
Once ensconced in registration, both CPOs and CTAs must craft and impart a CFTC-compliant Disclosure Document to prospective participants or clients afore soliciting or accepting funds or entering an advisory relationship. While the precision and cadence of these disclosures differ slightly, information regarding the trading strategy, risks, prior performances, expenses, frictions of interest, and sundry pivotal disclosures, remains steadfastly required. It is the NFA’s duty to review and accept such a document – a colossus to clients’ interpretations of their engagements with these funds – every twelve moons or upon any substantial alteration in circumstance.
Thereupon ensues a continued ritual of submissions to the mighty NFA. A CPO must file Form CPO-PQR, a ledger of sorts, depicting the pool’s stature, prowess, and the risks it carries, whilst CTAs must submit Form PR, revealing the size and scope of their advisory prowess. Such rituals affirm to both CFTC and NFA the vigilance over our trades and the collective risk they present.
In addition, CPOs and CTAs have further plates to spin in the grand tableau of documentations, with statements regular to pool participants and clients alike, and the hiring of independent public accountants to confer legitimacy upon the latter. Each record, be it of subscriptions, financial movements, or internal compliance directives, must be held in accordance with the rule, ever ready for inspection.
And yet, even with walls upon walls of bureaucracy climbed and the ocean of regulations navigated, the voyage does not cease. CPO status bears the weight of ongoing obligations, admonishing all who wear it to act with honor and truth in their ventures, and the NFA stands at the ready to cast disciplinary shadows upon violators. Thus, in this brave new world of digital asset commerce, one must tread cautiously, preparing for this sprawling labyrinth of compliance lest you wish to find the path closed behind you, ensnared by disputes and operational upheaval.
An Inquiry into Exemptions for CPOs and CTAs
In the grand tapestry of CFTC regulations, two rules emerge as pearls for crypto fund managers seeking sanctuary from the yoke of full CPO registration.
Rule 4.13(a)(3), the “De Minimis” Exemption
As though a precisely carved notch in the imposing decree, this exemption welcomes potential CPOs with the following criteria:
- The managing of commodity interest trading confined to but a trifle of the net asset value (granted under the 5% margin or 100% net notional), and
- Participants who are not mere plebeians but accredited investors or certain persons of qualification.
Still, even with this boon, a notice of exemption must be filed electronically with the NFA, and one must not be remiss in their candidness regarding the fund’s risks, oversight, and ventures. The anti-fraud banners of the CEA stay unfurled.
Rule 4.7, the Qualified Eligible Person (QEP) Exemption
A banner of relief for the uninitiated, this rule opens its embrace to assets that:
- Limit participation to those deemed Qualified Eligible Persons-these individuals rise above the status of mere accredited investors, often reposing in institutions flush with capital and seasoned in commodity endeavors-and
- The CPO must consent to weave through the market with reduced encumbrances of disclosure, reporting, and archival labor.
This exemption finds favor among the astute private funds and their heftier entities, allowing unfettered engagement amidst the trade of commodities.
There is also an exemption from CTA registration for those funds acting as CTAs only towards their own pools. Rule 4.14(a)(4) holds that if a fund is the CTA but solely for pools where it also bears the CPO standard, and the fund’s advisory actions are confined within the walls of the pool itself, it escapes the separate CTA registration. Thus, these funds align with the CPO declaration, not that of a CTA, because the advisory acts therein do not exceed the pools’ internal limits.
If one should consider the de minimis exemption as a favored yet unostentatious choice to circumvent CTA registration, it beckons to funds with a mere handful of clients naturally limited to less than fifteen within the span of the last year, provided the CTA pursuits do not form the core of the business. Alas, the fund accounts itself among its own fifteen clients should it take the guise of a pool participant.
Constraints and Mandates for Marketing and Investor Relations Under the Exemptions
Even within the sheltering wings of an exemption, fund managers are duty-bound to remain steadfast in their fidelity to both investors and the myriad fspectres of regulation. Status unburdened by full registration affords no license for deception or dearth of truth regarding the fund’s perils or the nature of scrutiny it endures. Any call to offer must be fraught with reminders of the dangers, akin to the whispers of the unknown trails one may embark upon in the stealthy world of digital assets and derivatives.
In addition, managers exempted from the full weight of CPO and CTA registration must keep registers and memories clear and unblemished, producing them promptly at the beckoning of the CFTC or NFA. In practice, an exempt crypto fund, often assured by the slightest of exemptions, must construct a framework of compliance, as vigilant as it is prepared to meet the scrutinous gaze of regulatory bodies.
Considerations of Structure for Crypto Funds
The worth and dint of a CPO or CTA registration or an exemption incline heavily upon an evaluation so thorough it would make even the most erudite scholars take pause. A crucial aspect lies in the breadth and depth of advice and trading given – those funds engaging in crypto derivatives, be it Bitcoin futures or Ether options, are surely ensnared within the Commodity Exchange Act’s definition of a commodity pool, whilst those of a mere spot-trading persuasion may well slip through the meshes unbound by CPO and CTA obligations.
The distinguished nature of your investor base also weaves a crucial thread – exemptions necessitating creeds such as Rule 4.13(a)(3) or Rule 4.7 impose aspirational thresholds, from accredited investor standards to Qualified Eligible Person measures, which may limit the pursuits of capital gathering.
Jurisdictional factors are of equal import, as funds flourishing domestically yet appealing to U.S. investors compel a CPO and CTA analysis, whilst those offshore still stir the waters of U.S. obligation should they embrace American capital.
And should one entertain the notion of hybrid funds entwined in both securities and commodities, one finds oneself in the overlapping fray of SEC and CFTC regulation, necessitating resolutions most harmonious and synchronized.
As is the case with the best of musings, the correct alignment of structure must be deduced on an individual basis, balancing multifarious interests with the precision of a master chess player.
Key Reflections for Managers of Crypto Funds
The implications laid bare by this CPO and CTA architecture are direct, though they carry great portent. Should your fund partake in trading crypto derivatives, one might very well declare it to be operating as a commodity pool under the CEA and dispensing commodity trading advice. In such circumstances, he who or which guides this pool’s fate shall don the mantle of a CPO and CTA, choosing to register under the aegis of the CFTC and joining the ranks of NFA – or to discover the path of an exemption and earnestly claim it.
The most readily relied upon exemptions are but narrow straits and laden with specific eligibility requirements for investors. Let it not escape recollection that exempt status offers no immunity from the vigilant gaze of anti-fraud provisions, the sanctity of recordkeeping, or the might of enforcement power.
In the present shifting regulatory winds, early decisions made with deliberate care – spanning jurisdiction, standards for investor qualification, and strategies of trade – can very well dictate whether one sails a sea of compliance smooth and serene or faces stormy seas of remedial action most costly.
A Perspective Rooted in Experience
At Kelman PLLC, we stand as both advisors and architects to fund managers embarking upon crypto fund ventures, determining whether CPO obligations apply, and, when the winds show them to be necessary, implementing efficient routes of registration, ascertaining eligibility for exemptions, and constructing compliance programs robust enough to withstand the true test of regulatory scrutiny. With the CFTC and NFA redoubling efforts to oversee digital asset derivatives, those who choose to ignore the call for proactive compliance do so of their own volition.
If you stand upon the precipice of launching a crypto fund, or perhaps find yourself navigating its currents without prior thoughtful analysis, the time is upon you to synchronize with the framework of the Commodity Exchange Act. Should you reckon we might aid you in these endeavors, a call – or rather, a request for counsel – can be made through this channel of communication: here.
This narrative, an account of wisdom and insight, first graced the pages of Kelman.law afore finding its way to you. Embark, dear reader, upon your journey with caution and preparation, and may your ventures be fruitful and your burdens light. 🌐📜✨
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2025-08-19 08:02