CFTC Position On Cryptocurrency



I’m attorney Laura Anthony founding partner
of Legal & Compliance, a full service corporate, securities, and business transactions law
firm. Today’s LawCast talks about the CFTC and
cryptocurrencies. The SEC and the U.S. Commodity Futures Trading
Commission or CFTC have been actively policing the crypto or virtual currency space. Both regulators have filed multiple enforcement
actions against companies and individuals for improper activities including fraud. On January 25, 2018, the SEC Chairman Jay
Clayton and the CFTC Chairman J. Christopher Giancarlo published a joint op-ed piece in
the Wall Street Journal on the topic. Backing up a little, on October 17, 2017,
the LabCFTC office of the CFTC published “A CFTC Primer on Virtual Currencies” in which
it defines virtual currencies and outlines the uses and risks of virtual currencies and
the role of the CFTC. The CFTC first found that Bitcoin and other
virtual currencies are properly defined as commodities in 2015. As such, the CFTC has regulatory oversight
over futures, options, and derivatives contracts on virtual currencies and has oversight to
pursue claims of fraud or manipulation involving a virtual currency traded in interstate commerce. Beyond instances of fraud or manipulation,
the CFTC generally does not oversee “spot” or cash market exchanges and transactions
involving virtual currencies that do not utilize margin, leverage or financing. Rather, these “exchanges” are regulated
as payment processors or money transmitters under state law. The role of the CFTC is substantially similar
to the SEC. It has a mission to “foster open, transparent,
competitive and financially sound markets” and to “protect market users and their funds,
consumers and the public from fraud, manipulation and abusive practices related to derivatives
and other products subject to the Commodity Exchange Act.” The definition of a commodity under the Commodity
Exchange Act, or CEA, is as broad as the definition of a security under the Securities Act, including
a physical commodity such as an agricultural product, a currency or interest rate or “all
services, rights and interests in which the contracts for future delivery are presently
or in the future dealt with” i.e., futures, options and derivatives contracts. Where the SEC regulates securities and securities
markets, the CFTC does the same for commodities and commodity markets. At times the jurisdiction of the two regulators
overlaps, such as related to swap transactions and now, virtual currencies. Right now while there are no SEC licensed
securities exchanges which trade virtual currencies or any other tokens, there are several commodities
exchanges that trade virtual currency products such as swaps and options, including the TeraExchange,
North American Derivatives Exchange and LedgerX. The Commodity Exchange Act would prohibit
the trading of a virtual currency future, option or swap on a platform or facility not
licensed by the CFTC. Moreover, the National Futures Association
or NFA is now requiring member commodity pool operators called CPO’s and commodity trading
advisors, called CTA’s to immediately notify the NFA if they operate a pool or manage an
account that engages in a transaction involving a virtual currency or virtual currency derivative. The CFTC refers to the IRS’s definition
of a “virtual currency” in its own document, and in particular: A virtual currency is a
digital representation of value that functions as a medium of exchange, a unit of account,
and/or a store of value. In some environments, it operates like real
currency but it does not have legal tender status in the U.S. Virtual currency that has
an equivalent value in real currency, or that acts as a substitute for real currency, is
referred to as a convertible virtual currency. Bitcoin is one example of a convertible virtual
currency. I note that neither the CFTC’s definition
of Bitcoin as a commodity, nor the IRS’s definition of a virtual currency, conflicts
with the SEC’s position that most cryptocurrencies and initial cryptocurrency offerings today
are securities requiring compliance with the federal securities laws. The SEC’s position is based on an analysis
of the current market for ICO’s and the issuance of “coins” or “tokens” for
capital raising transactions and as speculative investment contracts. In my view, a cryptocurrency which today may
be an investment contract or security can morph into a commodity, i.e. a currency or
other type of digital asset. For example, an offering of XYZ token for
the purpose of raising capital to build a software or blockchain platform or community
where the XYZ token can be used as a currency would rightfully be considered a securities
offering that needs to comply with the federal securities laws. However, when the XYZ token involved has been
fully issued, the platform fully built, its utility established and it can be used as
a form of currency, it could become a commodity. Obviously, the bundling of a token securities
offering to include options or futures contracts may implicate both SEC and CFTC compliance
requirements. The CFTC primer gives a little background
on bitcoin which was created in 2008 by a person or group using the pseudonym Satoshi
Nakamoto. As an electric payment system based on cryptographic
proof, allowing any two parties to transact directly without the need for a trusted third
party, such as a bank or credit card company. Bitcoin is partially anonymous with individuals
being identified by an alphanumeric address. Bitcoin runs on a blockchain decentralized
network of computers and uses open source software and “miners” to validate transactions
to resolving complex algorithm mathematical equations. A virtual currency can be used as a store
of value. However, virtual currencies are not a yield
asset and they do not generate dividends or interest. Virtual currencies can generally be traded
with resulting capital gains or losses. The CFTC , like all regulators points out
the significant speculation to volatility risk. The CFTC reiterates the large incidences of
fraud involving crypto marketplaces. Furthermore, there is a significant cyber
security risk if a “wallet” holding crypto securities is hacked or crypto currencies
hacked. They are likely gone without any chance of
recovery. Although there are many virtual currencies,
including bitcoin market themselves as a payment method. The ability to utilize bitcoin and other virtual
currencies for everyday business services has not really come to fruition as of yet. Notably, payment processors Stripe, tech giant
Microsoft and gaming platform Steam discontinued bitcoin support due to lengthy transaction
times and increased transaction failure rates . I’m securities attorney Laura Anthony,
founding partner of Legal & Compliance, and producer of LawCast. Should you have any questions about today’s
topic, please visit SecuritiesLawBlog.com and LawCast.com, or contact me directly. Inquiries of a technical nature are always
encouraged.

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