CFTC clarifies crucial derivatives rule for bitcoin and cryptocurrencies
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Derivatives

CFTC clarifies crucial derivatives rule for bitcoin and cryptocurrencies

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The US Commodity Futures Trading Commission on Friday proposed an interpretation of a crucial derivatives rule with regard to virtual currencies like bitcoin.

Under the Commodity Exchange Act, the CFTC has oversight of “leveraged, margined, or financed retail commodity transactions”, unless “actual delivery” of the underlying commodity occurs within 28 days from the date of the transaction.

As pointed out by commissioner Brian Quintenz in October, it is more difficult to ascertain when a virtual currency has been delivered than it is for a typical commodity.

“Would someone here like to tell me how to define the 'actual delivery' of a virtual commodity?” he asked audience members at the Symphony Innovate 2017 conference at the time.

Friday’s interpretation suggests that in order to be exempt from CFTC oversight when entering into retail commodity transactions, the customer should be able to “take possession and control of the entire quantity of the commodity”, and “use it freely in commerce no later than 28 days from the date of the transaction”.

The CFTC also clarified that the offeror and counterparty seller cannot retain “any interest in or control over any of the commodity purchased on margin, leverage or other financing arrangement” after the 28 days have passed.

The public can comment on the interpretation for 90 days before it is published in the Federal Register. 

The question behind what constitutes “actual delivery” of a cryptocurrency entered the spotlight when the CFTC fined Bitfinex, a bitcoin exchange, $75,000 in 2016 for not registering as a futures commission merchant.

The CFTC alleged that Bitfinex held the private keys of the bitcoin wallets of its customers, and thus had not delivered the commodity to them in time to be eligible for the exemption. 

The news comes as bitcoin took a major step into regulated capital markets this week as the Chicago Board Options Exchange introduced bitcoin futures on Sunday. 

The Chicago Mercantile Exchange will be launching its own contracts this weekend, and even European derivatives bourse Eurex is considering a bitcoin derivatives offering. 

The price of bitcoin has risen 15-fold since the beginning of the year, and was roughly $17,600 on Friday afternoon, according to website coinmarketcap.com. 

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