Commodity Futures Trading Commission (CFTC)
The purpose of this blog post is to briefly review the purpose of the CFTC and to examine the guidance, rulemaking, statements and enforcement actions the CFTC has issued/taken related to cryptocurrencies.
NOTE: Regulatory guidance in this area is rapidly evolving. As such, this blog post may not be entirely up to date. Please DYOR.
INTRODUCTION
The CFTC is a U.S. federal agency that is responsible for regulating the U.S. derivatives markets (e.g, futures, commodity options, swaps). Specifically, these derivatives must be traded on exchanges regulated under the Commodity Exchange Act (CEA). In addition, the CFTC has anti-fraud/manipulation authority over “any . . . contract of sale of any commodity in interstate commerce.” “Commodity” is defined as “a wide variety of farm products” and “all other goods and articles, . . . and all services, rights, and interests . . . in which contracts for future delivery are presently or in the future dealt in.” 7 U.S.C. § 1a(9).
The CFTC took a regulatory oversight role over cryptocurrencies as commodities around 2014/2015. Specifically, in September 2015, the CFTC stated that “Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.” See In re Coinflip, Inc. d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-29, at 3 (September 17, 2015). However, the CFTC did not offer a specific analysis as to why it concluded this.
Since then, at least two federal courts have concluded that virtual currencies such as Bitcoin can be regulated by the CFTC as a commodity. See CFTC v. Patrick K. McDonnell & Cabbagetech, Corp. d/b/a Coin Drop Markets, 287 F. Supp. 3d 213, 228 (E.D.N.Y. March 6, 2018) (“Virtual currencies can be regulated by CFTC as a commodity. Virtual currencies are ‘goods’ exchanged in a market for a uniform quality and value.”); CFTC v. My Big Coin Pay, Inc., No. 18-cv-10077, at 5–8 (D. Mass. September 26, 2018).
The CFTC has since issued numerous statements, guidance, actions and testimony regarding the regulation of cryptocurrencies. For instance, in 2020, the CFTC stated “[w]hile its regulatory oversight authority over commodity cash markets is limited, the CFTC maintains general anti-fraud and manipulation enforcement authority over virtual currency cash markets as a commodity in interstate commerce.” See The CFTC’s Role in Monitoring Virtual Currencies.
As such, the CFTC’s work in this area has been through enforcement actions relating to failure to register, fraudulent schemes, KYC/AML failures and price manipulation.
GUIDANCE
The first piece of CFTC guidance was its “primer on virtual currencies”) in 2017. The 20 page document outlines the CFT’s position that cryptocurrencies are commodities and the CFTC has jurisdiction over them when used “in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce.” The guidance also explained that “the CFTC generally does not oversee ‘spot’ or cash market exchanges and transactions involving virtual currencies that do not utilize margin, leverage, or financing.”
The primer also outlined some examples of activities that would trigger an enforcement action, such as unregistered options/futures trading, pre-arranged/wash trading in an exchange-traded virtual currency swap or futures contract, price manipulation and off-exchange, financed transactions targeted to retail customers.
In 2018, the CFTC provided further guidance, asserting that it would regulate cryptocurrencies through: (1) consumer education; (2) asserting legal authority; (3) market intelligence; (4) robust enforcement; and (5) government-wide coordination. See CFTC Backgrounder on Oversight of and Approach to Virtual Currency Futures Markets. In this same guidance, the CFTC also indicated that it had engaged with exchanges that had “self-certified futures products” like Bitcoin (e.g, the Chicago Mercantile Exchange and the CBOE Futures Exchange) and that it had a devoted team to engage in a “heightened review” of these products. This review consists of CFTC employees checking for things like substantially high initial and maintenance margin for cash-settled Bitcoin futures and large trader reporting thresholds at five bitcoins or less (there are some others listed on page 3 in the above guidance).
Also in 2018, the CFTC issued separate guidance to exchanges and clearinghouses regarding certain “enhancements” when these entities list a derivative contract based on a cryptocurrency through "self-certification or voluntary submission for CFTC review and approval.” See Advisory with Respect to Virtual Currency Derivative Product Listings. In this guidance, the CFTC stated that exchanges launching new products should: (1) seek feedback on the potential product from “members and other relevant stakeholders,” and not just from those interested in trading it; and (2) have robust risk management programs in place that demonstrate margin requirements that are sufficient to “adequately cover potential future exposures to clearing members based on an appropriate historic time period.”
In 2020, the CFTC issued guidance to futures commission merchants regarding their acceptance of virtual currencies from their customers. See Accepting Virtual Currencies from Customers into Segregation. The purpose of this guidance was to ensure these merchants maintain adequate reserves to cover losses caused by defaulting customers and to recognize that there may be increased risks that the volatility of cryptocurrencies may pose to their ability to do so. The guidance applies only to futures contracts that provide for the “physical delivery” of the underlying virtual currency and the CFTC does not define what “physical delivery” means in this context.
RULEMAKING
In 2020, the CFTC issued binding interpretive guidance that addresses an exception to the CFTC’s jurisdiction as it applies to retail customers. Retail Commodity Transactions Involving Certain Digital Assets, 85 Fed. Reg. 37734 (June 24, 2020).
By way of background, the Commodity Exchange Act generally applies to retail (i.e., not commercial) commodities contracts entered “on a leveraged or margined basis, or financed by the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis,” but the CEA provides an exception when the contract for sale “results in actual delivery within 28 days or such other longer period as the Commission may determine by rule or regulation based upon the typical commercial practice in cash or spot markets for the commodity involved.”
The guidance addresses what “actual delivery” means with respect to digital assets and accordingly the situations where the CFTC views its limits to its regulatory power. The CFTC concludes that “actual delivery” with respect to cryptocurrencies occurs when:
“(1) A customer secures: (i) 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) the ability to use the entire quantity of the commodity freely in commerce (away from any particular execution venue) no later than 28 days from the date of the transaction and at all times thereafter; and
(2) 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) do not retain any interest in, legal right, 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 guidance gives some examples of what “actual delivery” includes:
(1) virtual currency being transferred from the seller’s blockchain address to the purchaser’s; or
(2) the seller delivers the virtual currency into the depository under the purchaser’s full control and free of liens relating to margin or leverage.
Conversely, some examples of what “actual delivery” does not include:
(1) the virtual currency is not transferred from the seller to a depository under the purchaser’s control, or the purchaser’s address on the blockchain;
(2) only a book entry showing delivery occurs, but the purchaser does not obtain full control through a depository or receive the virtual currency at its blockchain address and the purchase is “rolled, offset against, netted out, or settled in cash or virtual currency (other than the purchased virtual currency) between the customer and the offeror or counterparty seller (or persons acting in concert with the offeror or counterparty seller).”
STATEMENTS AND TESTIMONY
Rostin Behnam, Chairman of the CFTC, has stated that “a key role for the CFTC is to use its enforcement power to prevent fraud, deception, and manipulation perpetrated against consumers in virtual currency and digital asset markets.” Indeed, he remarked that since 2014, the CFTC has brought 50 enforcement actions relating to fraud and manipulation of cryptocurrencies. Keynote of Chairman Rostin Behnam at the FIA Boca 2022 International Futures Industry Conference, Boca Raton, Florida (March 16, 2022).
Behman has also stated that the CFTC plans to coordinate with other agencies (such as the SEC) to regulate cryptocurrencies. Examining Digital Assets: Risks, Regulation, and Innovation (February 9, 2022).
Indeed, in July 2022, Behman stated that digital assets operate in a “regulatory vacuum” and announced that the CFTC will organize an “Office of Technology Innovation” that will “incorporat[e] innovation and technology into [the CFTC's] regulatory oversight and mission critical functions." He also expressed that digital assets and DeFi technologies have “outgrown their sandboxes.” Keynote Address at the Brookings Institution Webcast on The Future of Crypto Regulation.
Other members of the CFTC have reiterated Behman’s calls for clearer regulation and enforcement of digital asset and DeFi markets that may be operating in violation of the CEA. See, e.g, Keynote Address Before FIA and SIFMA-AMG, Asset Management Derivatives Forum 2021, Written Testimony Before the Senate Banking Committee, Keynote Address at the Practising Law Institute’s White Collar Crime 2019 Program.
Finally, the SEC has issued joint statements with the SEC regarding cryptocurrency enforcement. These statements focus on ongoing efforts to combat evasion of AML/CFT regulations, fraud and manipulation. See Joint Statement on Activities Involving Digital Assets, Joint Statement from CFTC and SEC Enforcement Directors Regarding Virtual Currency Enforcement Actions.
ENFORCEMENT ACTIONS
As noted above, the CFTC has undertaken at least 50 enforcement actions related to cryptocurrencies. Most enforcement actions focus on combating fraud or market manipulation in cash or spot markets (which makes sense given that the CFTC clearly has anti-fraud and anti-manipulation authority over cryptocurrencies). Other areas of enforcement include failure to register, off-exchange transactions, price manipulation, and KYC/CIP/AML violations.
A listing of every enforcement action is beyond the scope of this blog, but they may be found on the CFTC press release page.
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