Physically Delivering Digital Assets In Order To Satisfy CFTC's Observation

June 5, 2023

Recently, the Commodity Futures Trading Commission published both a Staff Advisory and a Press Release that articulated its observations and disclosed its placement of emphasis on the potential risks involved with the physical delivery of digital assets. Okay, sure . . . and, y'know, like what's next? A CFTC Advisory and Release on how many digital angels can dance on the head of a physical pin? Consider this:

CFTC’s Division of Clearing and Risk Issues Staff Advisory on the Risks Associated with Expansion of Derivatives Clearing Organization Clearing of Digital Assets (CFTC Release)
https://www.cftc.gov/PressRoom/PressReleases/8708-23

May 30, 2023

Washington, D.C. — Today, the Commodity Futures Trading Commission Division of Clearing and Risk (DCR) issued a staff advisory on the risks associated with the expansion of Derivatives Clearing Organization (DCO) clearing of digital assets. In the past several years, DCR has observed increased interest by DCOs and DCO applicants in expanding the types of products cleared and business lines, clearing models, and services DCOs offer, including related to digital assets.

The advisory issued today, “reminds registrants and applicants that when expanding lines of business, changing business models, or offering new and novel products, DCR will remain focused on the potentially heightened risks that may be associated with certain of those clearing activities. DCR expects DCOs and applicants to actively identify new, evolving, or unique risks and implement risk mitigation measures tailored to the risks that these products or clearing-structure changes may present.”

Today’s staff advisory specifically notes that because of the increased cyber and other risks that may be associated with digital assets, DCR will emphasize DCO applicant and registrant compliance with the DCO Core principles related to system safeguards, conflicts of interest, and physical delivery.

Full text of the advisory can be found here: https://www.cftc.gov/csl/23-07/download

So, lemme see if I got this (which I sure as hell don't).

The CFTC issued a Press Release about a "Staff Advisory." In keeping with the nature of bureaucracies, its wasn't enough to simply pen and post an Advisory -- no -- the government agency also had to pen and post a Press Release about the Advisory. The old double-dip!!

As to the nature of the advice that prompted the release, CFTC's Division of Clearing and Risk ("DCR") "has observed increased interest by DCOs and DCO applicants in expanding the types of products cleared and business lines, clearing models, and services DCOs offer, including related to digital assets." Apparently, the CFTC published a Staff Advisory because its DCR "observed" something. As to the nature of what DCR observed, well, it was an "increased interest." As to what the increased interest involved, well it was in expanding the products/services related to digital assets. The CFTC issued an Advisory about something it spied with its little eye! 

As the car full of DCO kids makes its way to the CFTC's DCR office replete with whining about "are we there yet," the federal regulator explains what it spied with its little eye:

The advisory issued today, “reminds registrants and applicants that when expanding lines of business, changing business models, or offering new and novel products, DCR will remain focused on the potentially heightened risks that may be associated with certain of those clearing activities. DCR expects DCOs and applicants to actively identify new, evolving, or unique risks and implement risk mitigation measures tailored to the risks that these products or clearing-structure changes may present.”

And that necessitated an Staff Advisory and a follow-on Press Release?

The "Staff Advisory" in the CFTC Release is more formally designated as "CFTC Letter No. 23-07." Among my favorite portions of CFTC Letter No. 23-07 is this tidbit:

In light of DCR’s observations articulated above, and through DCR’s general supervisory authority, application review authority, and examination authority, DCO registrants and applicants should expect that DCR will be placing emphasis on the potential risks and DCO core principles related to system safeguards, physical settlement procedures, and conflicts of interest. 

Oh my!  The CFTC Letter asserts that because DCR has articulated its observations and has three types of authority that somehow combining those observations and authorities means that "DCO registrants and applicants should expect that DCR will be placing emphasis on the potential risks and DCO core principles . . ." Wow, CFTC's division is not just going to remain focused on risk but will now ratchet things up to the DefCon 2 Level of "placing emphasis" on risk!

Stripped of all pretense, the CFTC issued a Press Release about a Staff Advisory that detailed how a CFTC division is now placing emphasis on risk. Of course, I'm still wondering how you physically deliver a digital asset? Out of curiosity, I entered the following question into ChatGPT, and received this digital-world's response to my physical-world question:

How do you physically deliver a digital asset?
  
ChatGPT
 
Physically delivering a digital asset involves transferring the digital data from one physical storage medium to another. This process is typically used when there is a need to transport or distribute large amounts of data quickly and efficiently, or when a physical copy of the data is required for archival or security purposes. Here are a few common methods used to physically deliver digital assets:

1. External Storage Devices: One of the simplest methods is to use external storage devices such as USB flash drives, external hard drives, or solid-state drives (SSDs). The digital asset is copied onto the storage device, which can then be physically transported to the desired location.
2. Optical Media: Another method is to use optical media such as CDs, DVDs, or Blu-ray discs. The digital asset is burned onto the disc using a computer's optical drive, and the disc can be sent or delivered to the recipient.
3. Tape Drives: For large-scale data storage and transportation, magnetic tape drives can be used. Tape drives allow for high-capacity storage, and the data can be written onto magnetic tapes that can be shipped to the destination. This method is commonly used for archival purposes.
4. Network Attached Storage (NAS): In some cases, a network-attached storage device can be physically transported. NAS devices are essentially storage servers that connect to a network. They can be disconnected from the network and transported to another location along with the stored data.
5. Cloud Storage Migration: If the digital asset is stored in the cloud, it can be physically migrated from one cloud service provider to another. This involves downloading the data from the source cloud storage, transferring it to physical storage media (e.g., hard drives), and then uploading the data to the destination cloud storage.

It's worth noting that physically delivering digital assets can be time-consuming and may incur additional costs for shipping, handling, and storage media. It's important to ensure the security and integrity of the data during transportation and to consider any legal or contractual obligations related to the asset's transfer. 

 

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