Under title VII of the Dodd Frank act, the Commodity Futures Trading Commission (CFTC) has jurisdiction over “leveraged, margined, or financed retail commodity transactions". These definitions also capture digital currencies such as Bitcoin, as the Commission decided in 2015 that they did not have "legal tender status" in any jurisdiction.
But intermediaries like exchanges can become exempt from the CFTC's remit, and thus exempt from registering as a futures commission merchant (FCM), if the “contract of sale” results in “actual delivery” of the commodity within 28 days.
“Obviously, 'actual delivery' in this context becomes an enormously important term,” said Commissioner Brian Quintenz, speaking at the Symphony Innovate 2017 Conference on Wednesday.
“Would someone here like to tell me how to define the “actual delivery” of a virtual commodity? The CFTC is working very hard to provide a suitable response to that question.”
He also added that a “proposal” was in the works, and that he would request the Technology Advisory Committee’s input on the issue, to achieve “regulatory consistency” with other commodities.
The TAC is formed of futures exchanges, financial intermediaries, traders and others involved with technological innovations in markets to help advise the CFTC on policy.
Paul Chou, the CEO of LedgerX, a CFTC-regulated cryptocurrency exchange and derivatives clearing organisation, told GlobalCapitalin July that a third of a recent TAC meeting, of which he is a member, had been dedicated to Bitcoin.
“There is definitely a push to get into that area,” he said.
The news comes after a string of enforcement actions by the CFTC in 2015 and 2016 announced the regulator's intentions to start policing cryptocurrency derivatives and spot trading.
In 2016, the CFTC fined Bitfinex, a Hong Kong-based bitcoin exchange, $75,000 for failing to register as a FCM, as it allegedly held the private keys of the wallets of its customers.
In the order, the CFTC interpreted "actual delivery" to mean "there has been a 'real and immediate' transfer of 'possession and control' to the 'buyer or the buyer's agent' of the commodity".
So while Bitfinex facilitated trades, under the definitions laid out, the Commission alleged that the exchange never "delivered" the cryptocurrency to counterparties.
But Matthew Kluchenek, global head of derivatives at Baker & McKenzie, noted that the CFTC’s existing rules on the “actual delivery” exception did not contemplate cryptocurrencies, which have “unique delivery characteristics”.
He said: “We know that delivery of a hard commodity such as wheat or corn is relatively straightforward, but when is a cryptocurrency actually delivered? When it’s transferred to a private wallet? When the transaction is validated?
“What if, such as that alleged in the CFTC’s case against Bitfinex, the customer associated with the wallet does not control the private key to the wallet, but a third party holds the private key or is the custodian of the private key? These are questions that need to be addressed by the CFTC.”