United States: CFTC Proposes Interpretation To Address Cryptocurrency Delivery Questions

On December 15, 2017, the U.S. Commodity Futures Trading Commission ("CFTC") issued its proposed interpretation1 of the term "actual delivery" in the context of virtual currency retail commodity transactions. Comments to the proposed interpretation are due to the CFTC by March 20, 2018.

The CFTC has exclusive jurisdiction to regulate commodity futures, options on futures and all derivatives within the definition of "swap." Further, Section 2(c)(2)(D) of the Commodity Exchange Act (the "CEA") grants the CFTC oversight authority over any transaction in a commodity that is entered into (a) with or offered to a person who is not an eligible contract participant or eligible commercial entity (a "retail customer"), (b) on a leveraged, margined or financed basis and (c) that does not result in "actual delivery" of the commodity within 28 days.2 Such transactions are referred to as "retail commodity transactions" and are treated the same as futures contracts, meaning that they are not only subject to the CFTC's anti-fraud and anti-manipulation authority, but that they must also be traded on registered futures exchanges.3

In August 2013, the CFTC released an interpretation of the term "actual delivery" that contained a list of relevant factors and examples (the "2013 Guidance").4 The 2013 Guidance distinguishes "actual delivery" of commodities from situations where the underlying commodity has not actually left the seller's control (referred to as "constructive delivery"). The examples set forth in the 2013 Guidance all require that actual delivery "involve transfer of title and possession of the commodity to the purchaser or a depository acting on the purchaser's behalf."5

In 2015 the CFTC found that virtual currencies are properly defined as commodities under the CEA and CFTC regulations.6 In 2016, the CFTC brought an enforcement action against an unregistered platform that offered virtual currency to retail customers on a leveraged, margined or financed basis on grounds that the virtual currency purchased was not actually delivered.7 With the December 2017 proposed interpretation, the CFTC aimed to clarify its construal of the term "actual delivery" with respect to virtual currency and seek comment from the public on various issues and questions created by the evolving and growing industry.

In the proposed interpretation, the CFTC did not provide a bright line definition of "virtual currency," but rather stated broadly that, in the context of the proposal,

virtual or digital currency: (e)ncompasses any digital representation of value (a "digital asset") that functions as a medium of exchange, and any other digital unit of account that is used as a form of a currency (i.e., transferred from one party to another as a medium of exchange); may be manifested through units, tokens, or coins, among other things; and may be distributed by way of digital "smart contracts," among other structures.8

The CFTC stated that it will continue to follow the interpretation of "actual delivery" set forth in the 2013 Guidance and assess whether actual delivery has occurred by examining if:

  1. A customer has the ability to (i) take possession and control of the entire quantity of the commodity (whether it was purchased on margin or using leveraging or financing) and (ii) use the commodity freely in commerce no later than 28 days from the transaction date; and
  2. The offeror and counterparty seller (and the affiliates of each) do not retain any interest in, or control over, any of the commodity purchased at the end of the 28-day period.9

The proposed interpretation also set forth several examples (summarized below) that apply the above guidelines to virtual currency transactions:

  • Actual delivery will have occurred if, within the 28-day window, there is a record of the transfer on the relevant publicly distributed ledger or blockchain of the entire amount of the purchased virtual currency being completely transferred from the counterparty seller to the purchaser in accordance with the above rules (or, in the case where a third-party intermediary is employed, a record of the two complete transfers).
  • Actual delivery will have occurred if, within the 28-day window: (i) the entire amount of the virtual currency purchased has been delivered into the possession of a depository (i.e., a wallet or similar storage system) that is not owned, operated or controlled by the counterparty seller or its affiliates, which depository has agreed with the purchaser to hold the virtual currency as agent without regard to any interest asserted by the counterparty seller; (ii) the counterparty seller has transferred title to the purchaser; (iii) the purchaser has secured complete control over the virtual currency; and (iv) no liens or other interests of the seller resulting from the use of margin, leverage or financing will continue past the end of the 28-day window.
  • Actual delivery will not have occurred (i) if evidenced only by a book entry by the offeror or counterparty seller that delivery has been made (i.e.,  there needs to be a record made on a publicly distributed ledger or a depository transfer); or (ii) if, within the 28-day window, the transaction is rolled, offset against, netted out or settled in cash or another virtual currency between the two parties.10

In addition to inviting general comment on the proposed interpretation, the CFTC requested input on several specific questions stemming from the new territory. They include such topics as how to ensure "full control" by a purchaser (possession of a unique cryptographic key?); how to clarify the meaning of "depository"; whether to create certain registration exemptions so not to discourage virtual currency platforms; whether to amend the 28-day delivery period (as virtual currency transactions should take much less time to deliver); and how to interpret the scope of the U.S. Securities and Exchange Commission's jurisdiction over virtual currency units that are deemed to be securities.

Footnotes

1. Commodity Futures Trading Commission, Retail Commodity Transactions Involving Virtual Currency, 82 Fed. Reg. 60335 (Dec. 20, 2017); available at www.gpo.gov/fdsys/pkg/FR-2017-12-20/pdf/2017-27421.pdf (hereafter, the "Proposed Interpretation").

2. CEA Section 2(c)(2)(D)(ii)(III)(aa).

3. CEA Section 2(c)(2)(D); see also CEA Sections 4(a), 4(b), 4b.

4. See Retail Commodity Transactions under the Commodity Exchange Act, 78 Fed. Reg. 52426 (Aug. 23, 2013).

5. Proposed Interpretation at 60337.

6. See In re Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-29 (Sept. 15, 2015)

7. See In re BFXNA INC. d/b/a BITFINEX, CFTC Docket No. 16–19 (June 2, 2016) (consent order). The actual delivery exception was not met by the platform because the offering entity "held the purchased bitcoins in bitcoin deposit wallets that it owned and controlled."

8. Proposed Interpretation at 60338.

9. Id at 60339.

10. Id at 60340.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions