CFTC issues guidelines for digital asset delivery, chairman promises to encourage innovation

The U.S. Commodity Futures Trading Commission (CFTC) announced on Tuesday that it unanimously voted to pass an explanatory guide to determine what constitutes a "delivery" of digital assets.

The CFTC stated that "the final interpretation guide discusses two main factors that demonstrate the 'actual delivery' of retail merchandise transactions in the form of virtual currencies."

"(1) Customer protection: (i) owning and controlling the complete quantity of goods, whether to purchase margin or use leverage, or any other funding arrangement, (ii) to use the goods freely (not at any designated execution venue) Trades are made 28 days after the start of the trading day;

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(2) The bidder and counterparty seller (including any respective members or others on a similar basis with the offeror or counterparty seller) will not retain the deposit, leverage or other funding arrangements at the expiration of 28 days from the transaction date. Any interest, legal right or control over any goods purchased. " The move marks the end of a multi-year process, the origin of this guide can be traced to a settlement agreement between CFTC and cryptocurrency exchange Bitfinex. The agreement revolved around the allegation that Bitfinex did not “deliver” tokens to its leveraged trading service customers (Bitfinex was fined $ 75,000 for this and neither acknowledged nor denied the agency's findings at the time).

Following the settlement, U.S. law firm Steptoe & Johnson LLP urged the CFTC to provide clearer guidance. In submitting the petition, Steptoe stated, "The Commission lacks a clear statement to determine the basic elements. Participants must try to identify which are legal and which are problematic through an evaluation of law enforcement orders. It may or may not be useful for just one entity. "

According to a statement from the CFTC on Tuesday, this final version of the guide "is derived from public opinion and advisory board meetings on digital asset development, regulation of exchanges that provide digital asset derivatives, multiple exchanges between LabCFTC and the market, and the market for CFTC enforcement. Oversight duties ".

CFTC Chairman Heath Tarbert said in a statement:

"This move provides long-awaited guidance to trading platforms, custodians, other key market infrastructures and participants. These digital assets are both 'commodities' as required by US law, and can be carried out through leverage provided by counterparties or trading platforms. transaction."

The following is the full statement from Heath Tarbert:

I am pleased to support the CFTC's final interpretation guidelines for the actual delivery of digital assets used as a medium of exchange. These digital assets are often referred to as "virtual currencies" or "cryptocurrencies." The move provides long-awaited guidance to trading platforms, custodians, other key market infrastructures, and participants. These digital assets are both “commodities” required by US law and can be traded through leverage provided by counterparties or trading platforms. . This action also reflects the CFTC's deepening understanding of this area, my commitment to continue to maintain US fintech leadership, and provide clear information to our market participants.

Legislative background

It is important to categorize this guide in the context of leveraged spot retail commodity trading, a topic that is both mysterious and professional. As part of the Dodd-Frank Act, Congress has added a new chapter to our regulatory code, the Commodity Exchange Act (CEA), which deals with leveraged spot retail merchandise transactions. This section has been codified as section 2 (c) (2) (D) of the CEA, making these transactions subject to specific provisions of the CEA, as well as futures contracts. These listed CEA provisions include exchange trading and broker registration requirements. Why do you do this? In short, it is to close a loophole.

Since the establishment of the CFTC, the agency has had exclusive jurisdiction over commodity futures. Simply put, a futures contract is a standardized protocol that allows a long (short) party to buy (sell) a commodity at a specific price in the future. According to CEA regulations, these contracts must be traded on an organized exchange regulated by the CFTC. During the operation of a futures contract, a portion of the contract value is deposited into the clearing house of the exchange as margin.

Futures contracts are different from promissory notes. Promissory notes represent transactions that are completed now, not future transactions. (We call them cash or "spot" transactions.) They are also different from forward contracts, which are less standardized. In the United States, it is more custom-made for the parties to the agreement, and delivery of related goods is almost always considered.

But suppose someone decides to use some money to buy a given product, delivery and final payment will be completed sometime in the future. Assume again that this person can decide to trade out at any time, locking in any gains or losses suffered by him or her. What happens then? This looks a lot like a futures contract-it is economically the same, but without any regulation.

The CFTC sees these deployments as futures contracts. However, some courts did not agree that these plans were completely outside the scope of the CEA. So Congress took action. While clearly stating that similar products will be regulated as futures contracts, the U.S. Congress has also made some exceptions to ensure that Article 2 (c) (2) (D) only covers those derivatives that are subject to futures and other CFTC regulations Very similar transactions, not ordinary financing commercial sales.

A key exception is products with a lead time of 28 days. The guide we published today explains this exception as it applies to any digital assets under CEA regulations, such as Bitcoin and Ethereum, and assets used as a medium of exchange (virtual currency).

Previous case

This is not the first time that the CFTC has explained actual delivery exceptions. In 2013, we issued a guideline to determine actual delivery time based on features, facts, and circumstances. Since then, the Federal Court of Appeal's interpretation of this exception has been consistent with our 2013 guidance, focusing on the need for the buyer to acquire ownership and control of the item after a 28-day delivery period. CFTC has previously explained actual delivery exceptions in the context of digital assets, and concluded that there is no such exception when Bitcoin is transferred to a virtual wallet controlled by a trading platform (rather than a customer). .

Since we first proposed the guidance that was finalized today in 2017, we have also benefited from the specific comments we received, as well as a lot of experience and public input in the field of digital assets. Through (i) each of our decision-making departments and LabCFTC and technical advisory committees in regular contact with digital asset companies and users; (ii) responding to our 2018 request for information on the evolution of the digital asset market; and (iii) digital asset derivatives Our understanding of these issues has improved on the listing of many CFTC registered futures exchanges and swap execution instruments.

The digital asset community has been patiently waiting for more than two years, waiting for the answer to this reasonable question. Today, I am glad we will provide the certainty they seek and deserve. Our guide combines relevant judicial case law and the CFTC's position, particularly appeal case law focusing on the “own and control” element, including the ability of buyers to freely use digital assets in a business setting. It then applied this comprehensive view to a series of non-exclusive illustrative examples to provide the market with additional clarity and certainty.

Process considerations

I once said that the CFTC "regulates through public notice and comment rules, which are the most transparent. These rules require a majority vote of officials nominated by the president and confirmed by the Senate." We should do this whenever possible. But I also acknowledge that rulemaking does not apply in all situations. Areas involving fast-moving technologies and market structures (such as the field of digital assets) may be more suitable for flexible guidance in order to adapt faster to the pace of rapid development.

I think this guide has found the right balance. The CFTC has voluntarily released a recommended version of the public comment guidelines, and the final version of these comments will now be decided by a committee vote. In this sense, the process of publishing this guideline has, in many respects, followed traditional notification and comment rulemaking.

However, because it is a form of guidance rather than supervision, this release effectively and flexibly conveys the current view of the CFTC, which situation the actual delivery requirements apply to. Given the complexity and dynamics of the digital asset market, I think it is appropriate to take a flexible approach while institutions continue to focus on developments in this area.

To prevent any potential market disruption related to this guide, I expect that within 90 days, the CFTC will ban enforcement actions against certain aspects of this guide, which were incorporated in previous CFTC guidelines, enforcement actions, and case law. Not obvious. I hope that the use of such prosecutorial discretion will help maintain an orderly and liquid digital asset market.

in conclusion

To be effective, the market and its participants need regulatory certainty. At the same time, the rapid development of the fintech sector often requires an adaptive regulatory framework. I think this explanatory guide is the right combination of certainty and flexibility. With the development of the US digital asset market, our regulatory approach will also change. Although it remains to be seen whether virtual currencies will be as attractive as traditional currencies or even other commodity categories, it is crucial that the United States will remain a leader in blockchain technology. Under my leadership, the CFTC will continue to encourage innovation through sound regulation.

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