Since They Are Considered Commodities, the CTFC Has Oversight Over Virtual Currencies Under the Commodity Exchange Act
The Securities and Exchange Commission (SEC) isn’t the only federal agency flexing its regulatory muscle in response to the explosive growth of virtual currencies, such as bitcoin. Because virtual currencies are considered commodities, the Commodity Futures Trading Commission’s (CFTC) also has oversight under the Commodity Exchange Act (CEA).
The definition of “commodity” in the CEA is broad. It encompasses a physical commodity, such as an agricultural product (e.g., wheat, cotton) or natural resource (e.g., gold, oil), as well as a currency or interest rate. The CEA definition of “commodity” also includes “all services, rights, and interests . . . in which contracts for future delivery are presently or in the future dealt in.”
In 2015, the CFTC first found that Bitcoin and other virtual currencies are properly defined as commodities. Accordingly, the CFTC has oversight over futures, options, and swaps. It also regulates commodity derivatives contracts that are based on underlying commodities. While 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.
In October, the CFTC’s new financial technology (fintech) innovation group, LabCFTC, published “A CFTC Primer on Virtual Currencies.” It outlines the agency’s role and oversight of virtual currencies and also cautions investors and users of the potential risks involved with virtual currencies.
In the primer, the CFTC confirmed that it agrees with the SEC’s position that initial coin offerings (ICOs) may qualify as securities and will apply similar analysis with regard to commodities. “There is no inconsistency between the SEC’s analysis and the CFTC’s determination that virtual currencies are commodities and that virtual tokens may be commodities or derivatives contracts depending on the particular facts and circumstances,” the agency stated. “The CFTC looks beyond form and considers the actual substance and purpose of an activity when applying the federal commodities laws and CFTC regulations.”
CFTC Regulation of Virtual Currency Market
While it is keeping a watchful eye on the industry, the CFTC has given the green light to several entities seeking to capitalize on the growing virtual currency market. They include:
TeraExchange, LLC, a Swap Execution Facility (“SEF”) registered with the CFTC, entered into the virtual currency market in 2014 by listing a Bitcoin swap for trading. Trading on a SEF platform is limited to “eligible contract participants,” a type of sophisticated trader, which includes various financial institutions and persons, with assets above specified statutory minimums.
North American Derivatives Exchange Inc. (“NADEX”), a designated contract market (“DCM”), listed binary options based on the Tera Bitcoin Price Index from November 2014 to December 2016. Retail customers may trade on NADEX.
LedgerX, LLC (“LedgerX”) registered with the CFTC as a SEF and Derivative Clearing Organization (“DCO”) in July 2017. It plans to list digital currency options.
Nonetheless, the CFTC has also advised that certain activities are expressly precluded. They include:
Price manipulation of a virtual currency traded in interstate commerce.
Pre-arranged or wash trading in an exchange-traded virtual currency swap or futures contract.
A virtual currency futures or options contract or swap traded on a domestic platform or facility that has not registered with the CFTC as a SEF or DCM.
Certain schemes involving virtual currency marketed to retail customers, such as off-exchange financed commodity transactions with persons who fail to register with the CFTC.
Like the SEC, the CFTC strongly advises investors to conduct due diligence when considering opportunities involving virtual currency. The specific risks highlighted by the CFTC include substantial market volatility and price swings, cybersecurity concerns, and the lack of supervision over exchanges.
Latest CFTC Virtual Currency Guidance
Last month, the CFTC launched a virtual currency resource Web page, cftc.gov/bitcoin, which is intended to be a central repository for the CFTC’s resources about virtual currency. The agency also announced a Proposed Interpretation concerning its authority over retail commodity transactions involving virtual currency, such as Bitcoin. It specifically establishes the CFTC’s view regarding the “actual delivery” exception that may apply to virtual currency transactions.
Section 2(c)(2)(D) of the CEA provides the CFTC with direct oversight authority over “retail commodity transactions,” which are defined as agreements, contracts or transactions in any commodity that are entered into with, or offered to, retail market participants 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. These transactions fall under the purview of the CEA “as if” they were a commodity future. However, the CEA includes an exception for contracts of sale that result in “actual delivery” within 28 days from the date of the transaction.
The CFTC’s Proposed Interpretation establishes two primary factors necessary to demonstrate “actual delivery” of retail commodity transactions in virtual currency:
(1) a customer having 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
(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) not retaining 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 is open for public comment for 90 days from publication in the Federal Register.
Does Your Homeowners Insurance Provide Adequate Coverage?
Your home is likely your greatest asset, which is why it is so important to adequately protect it. Homeowners insurance protects you from the financial costs of unforeseen losses, such as theft, fire, and natural disasters, by helping you rebuild and replace possessions that were lost While the definition of “adequate” coverage depends upon a […]
Understanding the Importance of a Non-Contingent Offer
Making a non-contingent offer can dramatically increase your chances of securing a real estate transaction, particularly in competitive markets like New York City. However, buyers should understand that waiving contingencies, including those related to financing, or appraisals, also comes with significant risks. Determining your best strategy requires careful analysis of the property, the market, and […]
Fred D. Zemel Appointed Chair of Strategic Planning at Scarinci & Hollenbeck, LLC
Business Transactional Attorney Zemel to Spearhead Strategic Initiatives for Continued Growth and Innovation Little Falls, NJ – February 21, 2025 – Scarinci & Hollenbeck, LLC is pleased to announce that Partner Fred D. Zemel has been named Chair of the firm’s Strategic Planning Committee. In this role, Mr. Zemel will lead the committee in identifying, […]
Novation Agreement Process: Step-by-Step Guide for Businesses
Big changes sometimes occur during the life cycle of a contract. Cancelling a contract outright can be bad for your reputation and your bottom line. Businesses need to know how to best address a change in circumstances, while also protecting their legal rights. One option is to transfer the “benefits and the burdens” of a […]
What Is a Trade Secret? Key Elements and Legal Protections Explained
What is a trade secret and why you you protect them? Technology has made trade secret theft even easier and more prevalent. In fact, businesses lose billions of dollars every year due to trade secret theft committed by employees, competitors, and even foreign governments. But what is a trade secret? And how do you protect […]
What Is Title Insurance? Safeguarding Against Title Defects
If you are considering the purchase of a property, you may wonder — what is title insurance, do I need it, and why do I need it? Even seasoned property owners may question if the added expense and extra paperwork is really necessary, especially considering that people and entities insured by title insurance make fewer […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Understanding the CFTC Oversight Over Virtual Currency
Author: Dan Brecher
Since They Are Considered Commodities, the CTFC Has Oversight Over Virtual Currencies Under the Commodity Exchange Act
The Securities and Exchange Commission (SEC) isn’t the only federal agency flexing its regulatory muscle in response to the explosive growth of virtual currencies, such as bitcoin. Because virtual currencies are considered commodities, the Commodity Futures Trading Commission’s (CFTC) also has oversight under the Commodity Exchange Act (CEA).
The definition of “commodity” in the CEA is broad. It encompasses a physical commodity, such as an agricultural product (e.g., wheat, cotton) or natural resource (e.g., gold, oil), as well as a currency or interest rate. The CEA definition of “commodity” also includes “all services, rights, and interests . . . in which contracts for future delivery are presently or in the future dealt in.”
In 2015, the CFTC first found that Bitcoin and other virtual currencies are properly defined as commodities. Accordingly, the CFTC has oversight over futures, options, and swaps. It also regulates commodity derivatives contracts that are based on underlying commodities. While 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.
In October, the CFTC’s new financial technology (fintech) innovation group, LabCFTC, published “A CFTC Primer on Virtual Currencies.” It outlines the agency’s role and oversight of virtual currencies and also cautions investors and users of the potential risks involved with virtual currencies.
In the primer, the CFTC confirmed that it agrees with the SEC’s position that initial coin offerings (ICOs) may qualify as securities and will apply similar analysis with regard to commodities. “There is no inconsistency between the SEC’s analysis and the CFTC’s determination that virtual currencies are commodities and that virtual tokens may be commodities or derivatives contracts depending on the particular facts and circumstances,” the agency stated. “The CFTC looks beyond form and considers the actual substance and purpose of an activity when applying the federal commodities laws and CFTC regulations.”
CFTC Regulation of Virtual Currency Market
While it is keeping a watchful eye on the industry, the CFTC has given the green light to several entities seeking to capitalize on the growing virtual currency market. They include:
TeraExchange, LLC, a Swap Execution Facility (“SEF”) registered with the CFTC, entered into the virtual currency market in 2014 by listing a Bitcoin swap for trading. Trading on a SEF platform is limited to “eligible contract participants,” a type of sophisticated trader, which includes various financial institutions and persons, with assets above specified statutory minimums.
North American Derivatives Exchange Inc. (“NADEX”), a designated contract market (“DCM”), listed binary options based on the Tera Bitcoin Price Index from November 2014 to December 2016. Retail customers may trade on NADEX.
LedgerX, LLC (“LedgerX”) registered with the CFTC as a SEF and Derivative Clearing Organization (“DCO”) in July 2017. It plans to list digital currency options.
Nonetheless, the CFTC has also advised that certain activities are expressly precluded. They include:
Price manipulation of a virtual currency traded in interstate commerce.
Pre-arranged or wash trading in an exchange-traded virtual currency swap or futures contract.
A virtual currency futures or options contract or swap traded on a domestic platform or facility that has not registered with the CFTC as a SEF or DCM.
Certain schemes involving virtual currency marketed to retail customers, such as off-exchange financed commodity transactions with persons who fail to register with the CFTC.
Like the SEC, the CFTC strongly advises investors to conduct due diligence when considering opportunities involving virtual currency. The specific risks highlighted by the CFTC include substantial market volatility and price swings, cybersecurity concerns, and the lack of supervision over exchanges.
Latest CFTC Virtual Currency Guidance
Last month, the CFTC launched a virtual currency resource Web page, cftc.gov/bitcoin, which is intended to be a central repository for the CFTC’s resources about virtual currency. The agency also announced a Proposed Interpretation concerning its authority over retail commodity transactions involving virtual currency, such as Bitcoin. It specifically establishes the CFTC’s view regarding the “actual delivery” exception that may apply to virtual currency transactions.
Section 2(c)(2)(D) of the CEA provides the CFTC with direct oversight authority over “retail commodity transactions,” which are defined as agreements, contracts or transactions in any commodity that are entered into with, or offered to, retail market participants 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. These transactions fall under the purview of the CEA “as if” they were a commodity future. However, the CEA includes an exception for contracts of sale that result in “actual delivery” within 28 days from the date of the transaction.
The CFTC’s Proposed Interpretation establishes two primary factors necessary to demonstrate “actual delivery” of retail commodity transactions in virtual currency:
(1) a customer having 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
(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) not retaining 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 is open for public comment for 90 days from publication in the Federal Register.
