“Virtual currencies,” such as bitcoin and ether, qualify as “commodities” under the Commodity Exchange Act (“CEA”).[1]  The extent that such products are subject to regulation by the U.S. Commodity Futures Trading Commission (“CFTC”) depends upon whether the products are traded in the spot (or cash) market, on a forward basis, or as the underlying of a futures or swap contract.

A spot transaction is an exchange of a commodity for payment where immediate delivery and payment for the commodity is typically expected to occur on or within a few days of the transaction date.  A forward transaction is an exchange of a commodity for payment where the commodity is intended to be physically delivered to the buyer rather than to solely transfer price risk but the delivery is deferred to a later date for reasons of commercial convenience or necessity.  Spot and forward transactions are typically subject only to the anti-fraud and anti-manipulation provisions of the CEA and CFTC’s regulations.

In addition to anti-fraud and anti-manipulation authority, the CFTC has exclusive jurisdiction over futures and swaps, and explicit oversight authority over “retail commodity transactions.”[2]  A retail commodity transaction is a spot or forward transaction in any commodity that is entered into with, or offered to, a person that is not a sophisticated investor (i.e., neither an eligible contract participant nor an eligible commercial entity) on a leveraged, margined, or financed basis.  Retail commodity transactions, like futures, may generally only be offered on a CFTC-registered designated contract market (“DCM”) and persons that solicit or accept orders for these transactions must register as a futures commission merchant (“FCM”), unless an exception applies.

The CEA excepts retail commodity transactions from these requirements if such transactions result “in actual delivery [of the commodity] within 28 days or such other longer period as the Commission may determine by rule or regulation.”[3]  The CFTC evaluates such arrangements to determine if there was a physical transfer of the commodity and looks “beyond the four corners of contract documents” to determine if actual delivery occurred.[4]  Therefore, retail commodity transactions may be offered off-exchange provided there is actual delivery of the commodity within the required timeframe.

Actual delivery of intangible commodities, such as bitcoin and renewable energy credits, is less straightforward than for tangible commodities, such as wheat and cotton.  But the CFTC clarified that physical delivery of such products is possible in a 2013 interpretation.[5]

On December 20, 2017, the CFTC published a proposed interpretation of the term “actual delivery” in the context of retail virtual currency transactions in the Federal Register for public comment (the “Proposed Interpretation”).[6]  If finalized in its current form, the Proposed Interpretation would clarify whether certain margined, leveraged, or financed retail virtual currency transactions must be offered on a CFTC-registered DCM versus offered on an unregistered “spot” exchange.

The Proposed Interpretation follows the CFTC’s enforcement action against Bitfinex in June 2016, which resulted in a $75,000 civil monetary penalty for offering illegal off-exchange margined, leveraged, or financed retail commodity transactions in bitcoin and other cryptocurrencies.[7]  It is important that persons who operate exchange platforms that offer financed cryptocurrency and token trading to retail customers, persons that intend to offer cryptocurrencies or tokens through an initial coin offering (“ICO”) on a leveraged or financed basis, and all persons that transact in these products review the Proposed Interpretation and the questions for industry in the Request for Comment section within.

The Proposed Interpretation would clarify that the term “virtual currency,” which is not defined in the CEA or the CFTC’s regulations but is used therein, broadly encompasses “any digital representation of value,” including cryptocurrencies, such as bitcoin and litecoin, and other cryptoassets that are distributed via smart contracts, such as ERC20 tokens.  Rather than distinguish amongst cryptoassets based on use case, the CFTC proposes to refer to all such products as “virtual currencies.”

The Proposed Interpretation would require the following in the context of virtual currency transactions:

(1) A customer having the ability to: (i) Take possession and control of the entire quantity of the commodity, whether it was purchased on margin, or using leverage, or any other financing arrangement, and (ii) use it freely in commerce (both within and away from any particular platform) no later than 28 days from the date of the transaction; and

(2) The offeror and counterparty seller (including any of their respective affiliates or other persons acting in concert with the offeror or counterparty seller on a similar basis) not retaining any interest in or control over any of the commodity purchased on margin, leverage, or other financing arrangement at the expiration of 28 days from the date of the transaction.

Under the Proposed Interpretation, the seller must transfer title to the virtual currency directly to the customer’s digital wallet or a digital wallet over which the customer has possession and control within 28 days.  The offeror or counterparty must therefore enter a transaction input such that the customer will receive the virtual currency as an output in a wallet address over which only the customer (or their agent) can access.  Importantly, the customer’s wallet cannot be “affiliated with or controlled by the counterparty seller or third party offeror in any manner.”  Actual delivery would occur when the input and output(s) are broadcasts to nodes on the network and recorded on the blockchain.

“[N]o liens (or other interests of the offeror, counterparty seller, or persons acting in concert with the offeror or counterparty seller on a similar basis) resulting from the use of margin, leverage, or financing used to obtain the entire quantity of the commodity purchased” may remain after the 28 day period.

Cryptoasset exchanges that allow retail customers to buy and sell virtual currencies but do not offer margin, leverage, or financing would not be affected by this Proposed Interpretation.  Many of these platforms exercise a significant degree of control over customers’ digital wallets and might otherwise need to register as DCMs.  Similarly, cryptotoken token sales that do not involve margin, leverage, or financing need provide for actual delivery within 28 days.

The Proposed Interpretation also solicits comments on a number of questions set forth in the Request for Comment section of the document.  Notably, the CFTC requests input on what additional factors should be considered in determining whether “title” to a virtual currency has passed from one person to another and whether a person has “full control” over a virtual currency.  The Proposed Interpretation explains that “[d]epending on their use, the tokens or units issued in an ICO may be commodities, commodity options, derivatives, or otherwise fall within the Commission’s virtual currency definition described in this interpretation. However, any such tokens that are deemed securities (and trade in a manner that qualifies as a retail commodity transaction) would be excepted from the retail commodity transaction definition pursuant to section 2(c)(2)(D)(ii)(II) of the Act.”  The CFTC requests comment on the facts that it should consider in determining whether a token is a “security” excepted from the retail commodity definition.  Moreover, the Proposed Interpretation requests comments on the “circumstances under which a lien would be considered terminated for purposes of this interpretation.”  The public comment period ends on March 20, 2018.

The Proposed Interpretation is silent on certain issues that might be important to industry participants.  Accordingly, commenters are likely to ask the CFTC for further guidance.  Multisignature wallets, for example, might complicate actual delivery of virtual currencies under the Proposed Interpretation.  Moreover, the proposed approach might require that industry participants make compromises with respect to their cyber security policies for the sake of ensuring “actual delivery” of the virtual currency.

If you are interested in submitting public comments on the Proposed Interpretation individually or in association with an industry group, please contact Kari S. Larsen (klarsen@reedsmith.com) or Michael S. Selig (mselig@reedsmith.com).


[1] See In the Matter of Coinflip, Inc., et al., Comm. Fut. L. Rep. (CCH) ¶33,538, (Sep. 17, 2015).

[2] 7 U.S.C. 2(c)(2)(D).

[3] 7 U.S.C. 2(c)(2)(D)(ii)(III)(aa) (emphasis added).

[4] Retail Commodity Transactions Under Commodity Exchange Act, 78 Fed. Reg. 52426, 52428 (Aug. 23, 2013).

[5] See Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 Fed. Reg. 48208, 48233 (Aug. 13, 2012).

[6] Retail Commodity Transactions Involving Virtual Currency, 82 Fed. Reg. 60335 (Dec. 20, 2017).

[7] See In the Matter of BFXNA Inc. d/b/a Bitfinex, Comm. Fut. L. Rep. (CCH) ¶33,766, (Jun. 2, 2016).