CFTC Requests Comment on Proposed Interpretation of “Actual Delivery” in Virtual Currency Transactions

The CFTC requested comment on a Proposed Interpretation of the term “actual delivery” in the context of virtual currency retail transactions. The CFTC describes the “actual delivery” exception to regulation of leveraged transactions in virtual currencies as retail commodity transactions.

The CFTC restated the position that a virtual currency is a commodity, which means that leveraged, margined or financed transactions in virtual currencies with non-eligible contract participants (“non-ECPs”) are “retail commodity transactions” subject to CFTC oversight under Section 2(c)(2)(D) of the Commodity Exchange Act. Regulation of retail commodity transactions is subject to a statutory exemption for transactions in which actual delivery of the commodity occurs within 28 days of the transaction. In connection with virtual currency, the CFTC pointed to an Eleventh Circuit decision finding a virtual currency trading platform liable for failing to register with the CFTC on the grounds that the platform “did not actually deliver bitcoins purchased from them,” but instead “held the purchased bitcoins in bitcoin deposit wallets that it owned and controlled.”

The CFTC’s Proposed Interpretation includes a “broad” interpretation of the term “virtual currency.” In the CFTC’s view, virtual currency “encompasses 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.”

In order to prove “actual delivery” of virtual currency in connection with retail commodity transactions, the proposal would establish that a market participant would be required to be able to demonstrate:

  • that 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 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
  • 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) does not retain 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.

The Proposed Interpretation provides several examples to illustrate practical applications.

Comments will be due 90 days after publication in the Federal Register.

In addition, the CFTC launched a resource page on virtual currency. The page includes a new Customer Advisory on understanding the risks associated with trading in virtual currency.

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