82 FR 60335 - Retail Commodity Transactions Involving Virtual Currency
COMMODITY FUTURES TRADING COMMISSION Federal Register Volume 82, Issue 243 (December 20, 2017)
Federal Register Volume 82, Issue 243 (December 20, 2017)
| Page Range | 60335-60341 | |
| FR Document | 2017-27421 |
[Federal Register Volume 82, Number 243 (Wednesday, December 20, 2017)] [Proposed Rules] [Pages 60335-60341] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-27421] ======================================================================= ----------------------------------------------------------------------- COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 1 RIN 3038-AE62 Retail Commodity Transactions Involving Virtual Currency AGENCY: Commodity Futures Trading Commission. ACTION: Proposed interpretation; request for comment. ----------------------------------------------------------------------- SUMMARY: The Commodity Futures Trading Commission (the ``Commission'' or ``CFTC'') is issuing this proposed interpretation of the term ``actual delivery'' as set forth in a certain provision of the Commodity Exchange Act (``CEA'') pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the ``Dodd-Frank Act''). Specifically, this proposed interpretation is being issued to inform the public of the Commission's views as to the meaning of actual delivery within the specific context of retail commodity transactions in virtual currency. The Commission requests comment on this proposed interpretation and further invites comment on specific questions related to the Commission's treatment of virtual currency transactions. DATES: Comments must be received on or before March 20, 2018. ADDRESSES: You may submit comments, identified by RIN 3038-AE62, by any of the following methods:CFTC website: http://comments.cftc.gov. Follow the instructions for submitting comments through the Comments Online process on the website. Mail: Christopher Kirkpatrick, Secretary of the Commission, [[Page 60336]] Commodity Futures Trading Commission, Three Lafayette Center, 1155 21st Street NW, Washington, DC 20581. Hand Delivery/Courier: Same as Mail, above. Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments. Please submit your comments using only one method. All comments must be submitted in English or, if not, accompanied by an English translation. Comments will be posted as received to http://www.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act (``FOIA''),\1\ a petition for confidential treatment of the exempt information may be submitted according to the procedures established in Commission Regulation 145.9.\2\ --------------------------------------------------------------------------- \1\ 5 U.S.C. 552. \2\ 17 CFR 145.9. Commission regulations referred to herein are found at 17 CFR chapter I. --------------------------------------------------------------------------- The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from http://www.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the interpretation will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under FOIA. FOR FURTHER INFORMATION CONTACT: Philip W. Raimondi, Special Counsel, (202) 418-5717, [email protected]; or David P. Van Wagner, Chief Counsel, (202) 418-5481, [email protected]; Office of the Chief Counsel, Division of Market Oversight, Commodity Futures Trading Commission, 1155 21st Street NW, Washington, DC 20581. SUPPLEMENTARY INFORMATION: I. Background With certain exceptions, the CFTC has been granted exclusive jurisdiction over commodity futures, options, and all other derivatives that fall within the definition of a swap.\3\ Further, the Commission has been granted general anti-fraud and anti-manipulation authority over ``any swap, or a contract of sale of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity.'' \4\ The Commission's mission is to foster open, transparent, competitive and financially sound markets; and protect the American public from fraudulent schemes and abusive practices in those markets and products over which it has been granted jurisdiction. --------------------------------------------------------------------------- \3\ 7 U.S.C. 2(a)(1)(A). The CFTC shares its swap jurisdiction in certain aspects with the Securities and Exchange Commission (``SEC''). See 7 U.S.C. 2(a)(1)(C). \4\ 7 U.S.C. 9(1). --------------------------------------------------------------------------- Pursuant to CEA section 2(c)(2)(D),\5\ the marketplace for ``retail commodity transactions'' is one such area over which the Commission has been granted explicit oversight authority.\6\ CEA section 2(c)(2)(D) applies to any agreement, contract or transaction in any commodity that is entered into with, or offered to (even if not entered into with), a person that is neither an eligible contract participant \7\ nor an eligible commercial entity \8\ (``retail'') 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.\9\ CEA section 2(c)(2)(D) further provides that such an agreement, contract or transaction is subject to CEA sections 4(a),\10\ 4(b),\11\ and 4b \12\ ``as if the agreement, contract or transaction was a contract of sale of a commodity for future delivery.'' \13\ The statute, however, excepts certain transactions from its application. In particular, CEA section 2(c)(2)(D)(ii)(III)(aa) \14\ excepts a contract of sale that ``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.'' \15\ If no exception is applicable, these retail transactions are ``commodity interests'' subject to Commission regulations together with futures, options, and swaps.\16\ Under this authority, the Commission regulates retail commodity transactions, with the exception of contracts of sale that result in actual delivery within 28 days.\17\ --------------------------------------------------------------------------- \5\ 7 U.S.C. 2(c)(2)(D). \6\ The authority provided to the Commission by CEA section 2(c)(2)(D) is in addition to, and independent from, the jurisdiction over contracts of sale of a commodity for future delivery and transactions subject to regulation pursuant to CEA section 19 that the CEA has historically granted to the Commission. It is also in addition to, and independent from, the jurisdiction over swaps granted to the Commission by the Dodd-Frank Act. Further, the authority granted under CEA section 2(c)(2)(D) is in addition to, and independent of, the Commission's ability to bring enforcement actions for fraud or manipulation in connection with swaps, contracts of sale of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity. 7 U.S.C. 9(1), 9(3), 13(a)(2); 17 CFR 180.1, 180.2. \7\ 7 U.S.C. 1a(18). \8\ 7 U.S.C. 1a(17); see also 7 U.S.C. 2(c)(2)(D)(iv). \9\ 7 U.S.C. 2(c)(2)(D)(i). \10\ 7 U.S.C. 6(a) (prohibiting the off-exchange trading of futures transactions by U.S. persons unless the transaction is conducted on or subject to the rules of a designated contract market). \11\ 7 U.S.C. 6(b) (permitting foreign boards of trade registered with the Commission with the ability to provide direct access to U.S. persons). \12\ 7 U.S.C. 6b (prohibiting fraudulent conduct in connection with any contract of sale of any commodity in interstate commerce, among other things). \13\ 7 U.S.C. 2(c)(2)(D)(iii). \14\ 7 U.S.C. 2(c)(2)(D)(ii)(III)(aa). \15\ The Commission has not adopted any regulations permitting a longer actual delivery period for any commodity pursuant to this statute. Accordingly, the 28-day actual delivery period remains applicable to all commodities, while retail foreign currency transactions remain subject to a 2-day actual delivery period pursuant to CEA section 2(c)(2)(C). \16\ 17 CFR 1.3(yy). \17\ In addition, certain commercial transactions and securities are excepted pursuant to CEA section 2(c)(2)(D)(ii). --------------------------------------------------------------------------- The Dodd-Frank Act added CEA section 2(c)(2)(D) to address certain judicial uncertainty involving the Commission's regulatory oversight capabilities. The Commission has long held that certain speculative commodity transactions involving leverage or margin may have indicia of futures contracts, subjecting them to Commission oversight.\18\ However, judicial decisions emerged that called into question the Commission's oversight over certain leveraged retail transactions in currencies and other commodities.\19\ In 2008, Congress addressed this judicial uncertainty by providing the Commission with more explicit authority over retail foreign currency transactions in CEA section 2(c)(2)(C).\20\ These new statutory provisions established a two-day actual delivery exception for such transactions.\21\ Two years later, Congress provided the Commission with explicit oversight authority over all other ``retail commodity transactions'' in CEA section 2(c)(2)(D).\22\ As noted, [[Page 60337]] these new statutory provisions established an exception for instances when actual delivery of the commodity occurs within 28 days.\23\ --------------------------------------------------------------------------- \18\ See In re Stovall, CFTC Docket No. 75-7 [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 20,941, at 23,777 (CFTC Dec. 6, 1979) (applying traditional elements of a futures contract to a purported cash transaction). \19\ See, e.g., CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004); CFTC v. Erskine, 512 F.3d 309 (6th Cir. 2008). \20\ See Food, Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat. 1651 (2008). \21\ 7 U.S.C. 2(c)(2)(C)(i)(II)(bb)(AA). \22\ See Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Public Law 111-203, 124 Stat. 1376 (2010); see also Hearing to Review Implications of the CFTC v. Zelener Case Before the Subcomm. on General Farm Commodities and Risk Management of the H. Comm. on Agriculture, 111th Cong. 52-664 (2009) (statement of Rep. Marshall, Member, H. Comm. on Agriculture) (``If in substance it is a futures contract, it is going to be regulated. It doesn't matter how clever your draftsmanship is.''); 156 Cong. Rec. S5,924 (daily ed. July 15, 2010) (statement of Sen. Lincoln) (``Section 742 corrects [any regulatory uncertainty] by extending the Farm Bill's ``Zelener fraud fix'' to retail off-exchange transactions in all commodities.'') (emphasis added). \23\ 7 U.S.C. 2(c)(2)(D)(ii)(III)(aa). --------------------------------------------------------------------------- In connection with its retail commodity transaction oversight, the Commission previously issued a proposed interpretation of the term ``actual delivery'' in the context of CEA section 2(c)(2)(D), accompanied by a request for comment.\24\ In that interpretation, the Commission provided several examples of what may and may not satisfy the actual delivery exception. After reviewing public comments, the Commission issued a final interpretation in 2013 (the ``2013 Guidance'').\25\ --------------------------------------------------------------------------- \24\ Retail Commodity Transactions Under Commodity Exchange Act, 76 FR 77670 (Dec. 14, 2011). \25\ Retail Commodity Transactions Under Commodity Exchange Act, 78 FR 52426 (Aug. 23, 2013). --------------------------------------------------------------------------- The 2013 Guidance explained that the Commission will consider evidence ``beyond the four corners of contract documents'' to assess whether actual delivery of the commodity occurred.\26\ The Commission further noted that it will ``employ a functional approach and examine how the agreement, contract, or transaction is marketed, managed, and performed, instead of relying solely on language used by the parties in the agreement, contract, or transaction.'' \27\ The 2013 Guidance also included a list of relevant factors the Commission will consider in an actual delivery determination \28\ and again provided examples \29\ of what may and may not constitute actual delivery. As per the 2013 Guidance, the only satisfactory examples of actual delivery involve transfer of title and possession of the commodity to the purchaser or a depository acting on the purchaser's behalf.\30\ Among other things, mere book entries and certain instances where a purchase is ``rolled, offset, or otherwise netted with another transaction'' do not constitute actual delivery.\31\ --------------------------------------------------------------------------- \26\ Id. at 52,428. \27\ Id. \28\ ``Relevant factors in this determination include the following: Ownership, possession, title, and physical location of the commodity purchased or sold, both before and after execution of the agreement, contract, or transaction, including all related documentation; the nature of the relationship between the buyer, seller, and possessor of the commodity purchased or sold; and the manner in which the purchase or sale is recorded and completed.'' 78 FR at 52428. \29\ In the 2013 Guidance, Examples 1 and 2 illustrate circumstances where actual delivery is made, while Examples 3, 4 and 5 illustrate circumstances where actual delivery is not made. In setting forth the examples, the Commission made clear that they are non-exclusive and were intended to provide the public with guidance on how the Commission would apply the interpretation. 78 FR at 52427-28. \30\ Id. \31\ Id. --------------------------------------------------------------------------- Within a year after the 2013 Guidance was released, the Eleventh Circuit issued an opinion affirming a preliminary injunction obtained by the Commission in CFTC v. Hunter Wise Commodities, LLC.\32\ Hunter Wise further reinforced the Commission's interpretation of actual delivery in the 2013 Guidance. Specifically, the Eleventh Circuit recognized that delivery ``denotes a transfer of possession and control.'' \33\ Indeed, ``[i]f `actual delivery' means anything, it means something other than simply `delivery,' for we must attach meaning to Congress's use of the modifier `actual.' '' \34\ Accordingly, the Court stated that actual delivery ``denotes `[t]he act of giving real and immediate possession to the buyer or the buyer's agent'' and constructive delivery does not suffice.\35\ Notably, the Eleventh Circuit found that its own holding harmonized with the 2013 Guidance and recognized that the legislative history behind CEA section 2(c)(2)(D) also ``complements'' its decision.\36\ --------------------------------------------------------------------------- \32\ CFTC v. Hunter Wise Commodities, LLC, et al., 749 F.3d 967 (11th Cir. 2014) (hereinafter, Hunter Wise). \33\ 749 F.3d at 978-79, (citing Black's Law Dictionary 494 (9th ed. 2009)). \34\ 749 F.3d at 979. \35\ Id. \36\ 749 F.3d at 977. --------------------------------------------------------------------------- Soon after the Hunter Wise decision, the Commission established that virtual currency is a commodity as that term is defined by CEA section 1a(9).\37\ Subsequently, the Commission brought its first enforcement action against a platform that offered virtual currency transactions to retail customers on a leveraged, margined, or financed basis without registering with the Commission.\38\ In the Bitfinex settlement order, the Commission found that the virtual currency platform violated CEA sections 4(a) and 4d because the unregistered entity ``did not actually deliver bitcoins purchased from them'' as prescribed within the actual delivery exception.\39\ Rather, the entity ``held the purchased bitcoins in bitcoin deposit wallets that it owned and controlled.'' \40\ --------------------------------------------------------------------------- \37\ In re Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-29, 2015 WL 5535736, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 33,538 (CFTC Sept. 17, 2015) (consent order); In re TeraExchange LLC, CFTC Docket No. 15-33, 2015 WL 5658082, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 33,546 (CFTC Sept. 24, 2015) (consent order). \38\ In re BFXNA INC. d/b/a BITFINEX, CFTC Docket No. 16-19 (June 2, 2016) (consent order) (hereinafter, Bitfinex). \39\ Id. \40\ Id. --------------------------------------------------------------------------- After Bitfinex, the Commission received requests for guidance with regard to the meaning of the actual delivery exception in the specific context of virtual currency transactions. Accordingly, the Commission has decided to issue this proposed interpretation and seek public comment. The Commission is issuing this proposed interpretation to inform the public of the Commission's views as to the meaning of the term ``actual delivery'' in the context of virtual currency and to provide the public with guidance on how the Commission intends to assess whether any given retail commodity transaction in virtual currency (whereby an entity or platform offers margin trading or otherwise facilitates \41\ the use of margin, leverage, or financing arrangements for their retail market participants) results in actual delivery, as the term is used in CEA section 2(c)(2)(D)(ii)(III)(aa).\42\ The Commission requests comment generally on this proposed interpretation and further invites comment on specific questions, as outlined within this release. --------------------------------------------------------------------------- \41\ Specifically, CEA section 2(c)(2)(D)(i) captures any such retail commodity transaction ``entered into, or offered . . . 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.'' \42\ 7 U.S.C. 2(c)(2)(D)(ii)(III)(aa). --------------------------------------------------------------------------- II. Commission Interpretation of Actual Delivery for Virtual Currency A. Virtual Currency as a Commodity As noted previously, the Commission considers virtual currency to be a commodity,\43\ like many other intangible commodities that the Commission has recognized over the course of its existence (e.g., renewable energy credits and emission allowances, certain indices, and certain debt instruments, among others).\44\ Indeed, since their inception, virtual currency [[Page 60338]] structures were proposed as digital alternatives to gold and other precious metals.\45\ As a commodity, virtual currency is subject to applicable provisions of the CEA and Commission regulations. --------------------------------------------------------------------------- \43\ In re Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-29, 2015 WL 5535736, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 33,538 (CFTC Sept. 17, 2015) (consent order); In re TeraExchange LLC, CFTC Docket No. 15-33, 2015 WL 5658082, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 33,546 (CFTC Sept. 24, 2015) (consent order). \44\ See generally Further Definition of ``Swap,'' ``Security- Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48208 at 48233 (Aug. 13, 2012) (discussing application of the swap forward exclusion to intangible commodities). \45\ Nick Szabo, Bit gold, Unenumerated (Dec. 27, 2008), http://unenumerated.blogspot.com/2005/12/bit-gold.html. --------------------------------------------------------------------------- The Commission interprets the term virtual currency broadly. In the context of this interpretation, virtual or digital currency: \46\ 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.\47\ However, the Commission notes that it does not intend to create a bright line definition at this time given the evolving nature of the commodity and, in some instances, its underlying public distributed ledger technology (``DLT'' or ``blockchain''). --------------------------------------------------------------------------- \46\ The Commission uses the term ``virtual currency'' and ``digital currency'' interchangeably for purposes of this proposed interpretation. However, the Commission acknowledges that the two terms may have certain practical differences in other contexts. For example, one view is that ``digital currency'' includes fiat currencies, while ``virtual currency'' does not. See The Financial Action Task Force [FATF], Virtual Currencies: Key Definitions and Potential AML/CFT Risks, at 4 (June 27, 2014), http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf. Further, this interpretation is not intended to encompass transactions otherwise covered by CEA section 2(c)(2)(C) and related Commission regulations. \47\ One prominent type of virtual currency is cryptocurrency. Cryptocurrency is described as ``an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.'' Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (Oct. 31, 2008), https://bitcoin.org/bitcoin.pdf. Transactions are represented by a hash or ``chain of digital signatures,'' which takes into account the previous owner and the next owner. Given the lack of a centralized authority, transaction verification is ``publicly announced'' in a transparent ledger ``system for participants to agree on a single history'' of transactions. Id. Each transaction moves from one digital wallet to another, recognized as ``nodes'' on a distributed ledger network. This structure represents one form of DLT or blockchain technology, which underlies bitcoin--a widely traded virtual currency. --------------------------------------------------------------------------- B. The Commission's Interest in Virtual Currency The Commission recognizes that certain virtual currencies and their underlying blockchain technologies have the potential to yield notable advancements in applications of financial technology (``FinTech''). Indeed, as part of its efforts to facilitate beneficial FinTech innovation and help ensure market integrity, the Commission launched the LabCFTC initiative.\48\ This initiative provides the Commission with a platform to engage the FinTech community and promote market- enhancing innovation in furtherance of improving the quality, resiliency, and competitiveness of the markets overseen by the Commission. As such, the Commission is closely following the development and continuing evolution of blockchain technologies and virtual currencies. --------------------------------------------------------------------------- \48\ See Press Release, Commodity Futures Trading Commission, CFTC Launches LabCFTC as Major FinTech Initiative (May 17, 2017), http://www.cftc.gov/PressRoom/PressReleases/pr7558-17. --------------------------------------------------------------------------- Moreover, since virtual currency can serve as an underlying component of derivatives transactions, the Commission maintains a close interest in the development of the virtual currency marketplace generally. As a practical matter, virtual currency, by virtue of its name, represents a digital medium of exchange for goods and services, similar to fiat currency.\49\ Over time, numerous centralized platforms have emerged as markets to convert virtual currency into fiat currency or other virtual currencies. These platforms provide a place to immediately exchange one commodity for another ``on the spot.'' --------------------------------------------------------------------------- \49\ Michael J. Casey and Paul Vigna, Bitcoin and the Digital- Currency Revolution, The Wall Street Journal (Jan. 23, 2015), https://www.wsj.com/articles/the-revolutionary-power-of-digital-currency-1422035061 (``Once inside the coffee shop, you will open your wallet's smartphone app and hold its QR code reader up to the coffee shop's device'' to buy a cup of coffee). --------------------------------------------------------------------------- Some of these centralized platforms also attempt to cater to those that wish to speculate on the price movements of a virtual currency against other currencies. For example, a speculator may purchase virtual currency using borrowed money in the hopes of covering any outstanding balance owed through profits from favorable price movements in the future. This interpretation is specifically focused on such ``retail commodity transactions,'' whereby an entity or platform: (i) Offers margin trading or otherwise facilitates \50\ the use of margin, leverage, or financing arrangements for their retail market participants; (ii) typically to enable such participants to speculate or capitalize on price movements of the commodity--two hallmarks of a regulated futures marketplace.\51\ --------------------------------------------------------------------------- \50\ As noted earlier, CEA section 2(c)(2)(D)(i) captures any such retail transaction ``entered into, or offered . . . 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.'' The Commission views any financing arrangements facilitated, arranged, or otherwise endorsed by the offeror or counterparty to satisfy this statutory definition for purposes of this interpretation. \51\ See, e.g., CFTC v. Int'l Foreign Currency, Inc., 334 F. Supp. 2d 305, 310 (E.D.N.Y. 2004) (listing elements typically found in a futures contract); In re Stovall, CFTC Docket No. 75-7 [1977- 1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 20,941, at 23,777 (CFTC Dec. 6, 1979) (describing how futures contracts, being traded on margin, ``are entered into primarily for the purpose of assuming or shifting the risk of change in value of commodities, rather than for transferring ownership of the actual commodities.''); David J. Gilberg, Regulation of New Financial Instruments Under the Federal Securities and Commodities Laws, 39 Vand. L. Rev. 1599, 1603-04, n.14 (1986) (typically, futures ``traders are interested only in obtaining cash payments of price differentials, not actual commodities''). --------------------------------------------------------------------------- Beyond their practical and speculative functions, the emergence of these nascent markets has also been negatively marked by a variety of retail customer harm that warrants the Commission's attention, including, among other things, flash crashes and other market disruptions,\52\ delayed settlements,\53\ alleged spoofing,\54\ hacks,\55\ alleged internal theft,\56\ alleged manipulation,\57\ smart contract coding vulnerabilities,\58\ bucket shop [[Page 60339]] arrangements and other conflicts of interest.\59\ These types of activities perpetrated by bad actors can inhibit market-enhancing innovation, undermine market integrity, and stunt further market development. --------------------------------------------------------------------------- \52\ See, e.g., Paul Vigna, Virtual Currencies Bitcoin and Ether Wrap Up a Wild Quarter, The Wall Street Journal, Jul. 3, 2017, at B6 (describing a recent flash crash affecting the price of virtual currency Ether, caused by ``a multimillion-dollar sell order'' that subsequently ``sparked a cascade of stop-loss orders''); Paul Vigna, BitBeat: Bitcoin Price Drops on Block-Size Debate, `Flash Crash,' The Wall Street Journal (Aug. 20, 2015), http://blogs.wsj.com/moneybeat/2015/08/20/bitbeat-bitcoin-price-drops-on-block-size-debate-flash-crash/ (``bitcoin's speculative traders love this kind of stuff [margin trading]; these guys could easily give Wall Street's casino hotshots a run for their money''). \53\ Paul Vigna, Virtual Currencies Bitcoin and Ether Wrap Up a Wild Quarter, The Wall Street Journal, Jul. 3, 2017, at B6 (``[t]here were delays of hours and even days.''). \54\ Lionel Laurent, Bitcoin Wrestles With Spoofy the Trader, Bloomberg Gadfly (Aug. 7, 2017), https://www.bloomberg.com/gadfly/articles/2017-08-07/bitcoin-has-a-spoofy-problem. \55\ See, e.g., Paul Vigna and Gregor Stuart Hunter, Bitcoin Sinks After Exchange Reports Hack, The Wall Street Journal (Aug. 3, 2016), http://www.wsj.com/articles/bitcoin-sinks-after-exchange-reports-hack-1470195727; Nathaniel Popper and Rachel Abrams, Apparent Theft Rattles the Bitcoin World, N.Y. Times, Feb. 25, 2014, at B1; Alex Hern, A History of Bitcoin Hacks, The Guardian (Mar. 18, 2014), http://www.theguardian.com/technology/2014/mar/18/history-of-bitcoin-hacks-alternative-currency. \56\ Jessica Lipscomb, Cryptsy Founder Paul Vernon Disappeared, Along With Millions of His Customers' Cash, Miami New Times (Jun. 28, 2016), http://www.miaminewtimes.com/news/cryptsy-founder-paul-vernon-disappeared-along-with-millions-of-his-customers-cash-8557571. \57\ Izabella Kaminska, When OTC markets backfire, bitcoin edition, Financial Times--Alphaville (Mar. 8, 2017), https://ftalphaville.ft.com/2017/03/08/2185731/when-otc-markets-backfire-bitcoin-edition. \58\ Matthew Leising, The Ether Thief, Bloomberg Markets Magazine (Jun. 13, 2017), https://www.bloomberg.com/features/2017-the-ether-thief/ (while not technically an event specific to any one platform, this hack illustrates an event that dramatically affected the price and status of a virtual currency traded on such platforms). \59\ See, e.g., Vitalik Buterin, Bitfinex: Bitcoinica Rises From The Grave, Bitcoin Magazine (Nov. 22, 2012), http://bitcoinmagazine.com/articles/bitfinex-bitcoinica-rises-from-the-grave-1353644122; Matt Levine, How A Bank Should Be?, Bloomberg View (Mar. 11, 2015), https://www.bloomberg.com/view/articles/2015-03-11/how-should-a-bank-be- (``Just because you mumble the word `blockchain' doesn't make otherwise illegal things legal''); Matt Levine, Bitcoin Bucket Shop Kicks Bucket, Bloomberg View (Jun. 19, 2015), https://www.bloomberg.com/view/articles/2015-06-19/bitcoin-bucket-shop-kicks-bucket. --------------------------------------------------------------------------- C. Actual Delivery of Virtual Currency As underscored by its efforts to engage the FinTech community, the Commission emphasizes that it does not intend to impede market- enhancing innovation or otherwise harm the evolving virtual currency marketplace with this interpretation. To the contrary, the Commission believes this interpretation can help advance a healthy ecosystem and support further market-enhancing innovation. Additionally, the Commission takes seriously its goal of protecting U.S. retail market participants engaged in the virtual currency marketplace that falls within the Commission's jurisdiction--as it would with respect to retail market participants trading in any other retail commodity marketplace that falls within its jurisdiction. The Commission drafted this interpretation with such a balance in mind. As discussed above, a retail commodity transaction may be excepted from CEA section 2(c)(2)(D) (and thus not subject to CEA sections 4(a), 4(b), and 4b) if actual delivery of the commodity occurs within 28 days of the transaction.\60\ The longstanding Model State Commodity Code also contains an exception from its ``commodity contract'' regulation when physical settlement occurs within 28 days.\61\ However, the Model State Commodity Code provides for the ability to lengthen or shorten its 28-day physical delivery exception time period, while CEA section 2(c)(2)(D) only provides the Commission with the ability to lengthen its actual delivery exception time period.\62\ Therefore, absent Congressional action, the Commission is unable to reduce the actual delivery exception period for speculative, leverage-based retail commodity transactions in virtual currency. The one-size-fits-all 28 day delivery period in CEA section 2(c)(2)(D) may not properly account for innovation or customary practice in certain cash markets, such as virtual currency transactions that would presumably take much less than 28 days to deliver to a purchaser in a typical spot transaction.\63\ Without the application of CEA section 2(c)(2)(D), retail market participants that transact on platforms offering speculative transactions in virtual currency (involving margin, leverage, or other financing) will not be afforded many of the protections that flow from registration under the CEA. Despite the statutory limitations, the Commission will utilize its current statutory authority as best it can to prevent fraud in retail commodity transactions involving virtual currency. --------------------------------------------------------------------------- \60\ 7 U.S.C. 2(c)(2)(D)(ii)(III)(aa). \61\ See Model State Commodity Code section 1.01(e), [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 22,568 (Apr. 5, 1985). \62\ To date, the Commission has not chosen to extend the 28-day actual delivery period in any instance. \63\ Notably, Congress provided a 2-day actual delivery exception for retail foreign currency transactions. See 7 U.S.C. 2(c)(2)(C)(i)(II)(bb)(AA). --------------------------------------------------------------------------- The Commission, in interpreting the term actual delivery for the purposes of CEA section 2(c)(2)(D)(ii)(III)(aa), will continue to follow the 2013 Guidance and ``employ a functional approach and examine how the agreement, contract, or transaction is marketed, managed, and performed, instead of relying solely on language used by the parties in the agreement, contract, or transaction.'' \64\ --------------------------------------------------------------------------- \64\ 78 FR at 52428. --------------------------------------------------------------------------- Further, the Commission will continue to assess all relevant factors \65\ to aid in such an actual delivery determination. More specifically, the Commission's view of when ``actual delivery'' has occurred within the context of virtual currency requires: --------------------------------------------------------------------------- \65\ This list includes, but is not limited to ``[o]wnership, possession, title, and physical location of the commodity purchased or sold, both before and after execution of the agreement, contract, or transaction, including all related documentation; the nature of the relationship between the buyer, seller, and possessor of the commodity purchased or sold; and the manner in which the purchase or sale is recorded and completed.'' Id. --------------------------------------------------------------------------- (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) \66\ 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.\67\ --------------------------------------------------------------------------- \66\ The Commission recognizes that the offeror of the transaction and the ultimate counterparty may be two separate entities or may be the same. For example, the Commission would consider as the offeror of the transaction a virtual currency platform that makes the transaction available to the retail customer or otherwise facilitates the transaction. That virtual currency platform could also be considered a counterparty to the transaction if, for example, the platform itself took the opposite side of the transaction or the purchaser of the virtual currency enjoyed privity of contract solely with the platform rather than the seller. Additionally, the Commission recognizes that some virtual currency platforms may provide a purchaser with the ability to source financing or leverage from other users or third parties. The Commission would consider such third parties or other users to be acting in concert with the offeror or counterparty seller on a similar basis. \67\ Among other things, the Commission may look at whether the offeror or seller retain any ability to access or withdraw any quantity of the commodity purchased from the purchaser's account or wallet. --------------------------------------------------------------------------- Consistent with the 2013 Guidance, a sham delivery does not constitute actual delivery for purposes of this interpretation. The offeror and counterparty seller, including their agents, must retain no interest or control whatsoever in the virtual currency acquired by the purchaser at the expiration of 28 days from the date of entering into the transaction. Indeed, in its simplest form, actual delivery of virtual currency connotes the ability of a purchaser to utilize the virtual currency purchased ``on the spot'' to immediately purchase goods or services with the currency elsewhere. In the context of an ``actual delivery'' determination in virtual currency, physical settlement of the commodity must occur. A cash settlement or offset mechanism, as described in Example 4 below, will not satisfy the actual delivery exception of CEA section 2(c)(2)(D). The distinction between physical settlement and cash settlement in this context is akin to settlement of a spot foreign currency transaction at a commercial bank or hotel in a foreign nation--the customer receives physical foreign currency, not U.S. dollars. As mentioned, such physical settlement must occur within 28 days from the date on which the ``agreement, contract, or transaction is entered into'' to constitute ``actual delivery.'' \68\ --------------------------------------------------------------------------- \68\ 78 FR at 52427. --------------------------------------------------------------------------- Consistent with the interpretation above, the Commission provides the following non-exclusive examples to further clarify the meaning of actual delivery in the virtual currency context: [[Page 60340]] Example 1: Actual delivery of virtual currency will have occurred if, within 28 days of entering into an agreement, contract, or transaction, there is a record on the relevant public distributed ledger network or blockchain of the transfer of virtual currency, whereby the entire quantity of the purchased virtual currency, including any portion of the purchase made using leverage, margin, or other financing, is transferred from the counterparty seller's blockchain wallet \69\ to the purchaser's blockchain wallet, the counterparty seller retains no interest in or control over the transferred commodity, and the counterparty seller has transferred title \70\ of the commodity to the purchaser. When a matching platform or other third party offeror acts as an intermediary, the virtual currency's public distributed ledger must reflect the purchased virtual currency transferring from the counterparty seller's blockchain wallet to the third party offeror's blockchain wallet and, separately, from the third party offeror's blockchain wallet to the purchaser's blockchain wallet, provided that the purchaser's wallet is not affiliated with or controlled by the counterparty seller or third party offeror in any manner. --------------------------------------------------------------------------- \69\ The source of the virtual currency is provided for purposes of this example. However, the focus of this analysis remains on the actions that would constitute actual delivery of the virtual currency to the purchaser. \70\ For purposes of this interpretation, title may be reflected by linking an individual purchaser with proof of ownership of the particular wallet or wallets that contain the purchased virtual currency. --------------------------------------------------------------------------- Example 2: Actual delivery will have occurred if, within 28 days of entering into a transaction: (1) The counterparty seller has delivered the entire quantity of the virtual currency purchased, including any portion of the purchase made using leverage, margin, or financing, into the possession of a depository (i.e., wallet or other relevant storage system) other than one owned, controlled, or operated by the counterparty seller (including any parent companies, partners, agents, affiliates, and others acting in concert with the counterparty seller) \71\ that has entered into an agreement with the purchaser to hold virtual currency as agent for the purchaser without regard to any asserted interest of the offeror, the counterparty seller, or persons acting in concert with the offeror or counterparty seller on a similar basis; (2) the counterparty seller has transferred title of the commodity to the purchaser; (3) the purchaser has secured full control over the virtual currency (i.e., the ability to immediately remove the full amount of purchased commodity from the depository); and (4) no liens (or other interests of the offeror, counterparty seller, or persons acting in concert with the offeror or counterparty seller on a similar basis) resulting from the use of margin, leverage, or financing used to obtain the entire quantity of the commodity purchased will continue forward at the expiration of 28 days from the date of the transaction. --------------------------------------------------------------------------- \71\ The Commission recognizes that an offeror could act in concert with both the purchaser and the counterparty seller in the ordinary course of business if it intermediates a transaction. It is not intended that such activity would prevent an offeror from associating with a depository, as otherwise allowed by this example. --------------------------------------------------------------------------- Example 3: Actual delivery will not have occurred if, within 28 days of entering into a transaction, a book entry is made by the offeror or counterparty seller purporting to show that delivery of the virtual currency has been made to the purchaser, but the counterparty seller or offeror has not, in accordance with the methods described in Example 1 or Example 2, actually delivered the entire quantity of the virtual currency purchased, including any portion of the purchase made using leverage, margin, or financing, and transferred title to that quantity of the virtual currency to the purchaser, regardless of whether the agreement, contract, or transaction between the purchaser and offeror or counterparty seller purports to create an enforceable obligation \72\ to deliver the commodity to the purchaser. --------------------------------------------------------------------------- \72\ This ``enforceable obligation'' language is provided in reference to an exception to CEA section 2(c)(2)(D) that is limited by its terms to a commercial transaction involving two commercial entities with a pre-existing line of business in the commodity at issue that is separate and distinct from the business of engaging in a retail commodity transaction. See 7 U.S.C. 2(c)(2)(D)(ii)(III)(bb). --------------------------------------------------------------------------- Example 4: Actual delivery will not have occurred if, within 28 days of entering into a transaction, the agreement, contract, or transaction for the purchase or sale of virtual currency is rolled, offset against, netted out, or settled in cash or virtual currency (other than the purchased virtual currency) between the purchaser and the offeror or counterparty seller (or persons acting in concert with the offeror or counterparty seller). III. Request for Comment The Commission requests comment from the public regarding the Commission's proposed interpretation of ``actual delivery'' in the context of virtual currency and further invites comments on specific questions related to the Commission's treatment of virtual currency transactions. The Commission encourages all comments including background information, actual market examples, best practice principles, expectations for the possible impact on further innovation, and estimates of any asserted costs and expenses. Specifically, the Commission requests comment on the following questions: Question 1: As noted in this proposed interpretation, the Commission is limited in its ability to shorten the length of the actual delivery exception period for retail commodity transactions in virtual currency--which presumably take much less than 28 days to deliver to a purchaser. Would a 2-day actual delivery period, such as the actual delivery exception in CEA section 2(c)(2)(C), more accurately apply to such transactions in virtual currency? Would another actual delivery period be more appropriate? What additional information should the Commission consider in determining an appropriate actual delivery exception period for retail commodity transactions in virtual currency? If the Commission were to decide that a shorter actual delivery exception period would be more appropriate in the context of virtual currency, should the Commission engage Congress to consider an adjustment to CEA section 2(c)(2)(D)'s the actual delivery exception? For example, should the Commission seek that Congress amend CEA section 2(c)(2)(D)'s actual delivery exception to be more aligned with the broader delivery period adjustment language in the Model State Commodity Code? Question 2: With respect to the Commission's proposed interpretation, are there additional examples the Commission should consider in satisfaction of the ``actual delivery'' exception to CEA section 2(c)(2)(D)? Question 3: The Commission is concerned about offerors of virtual currency retail commodity transactions that may be subject to conflicts of interest, including situations such as an offeror or its principals taking the opposite side of a customer transaction, either directly or through an affiliated liquidity provider or market maker. These arrangements may, in certain circumstances, resemble bucket shops.\73\ How should the Commission evaluate such circumstances if a platform seeks to avail itself of the actual delivery exception? Are there any additional factors that the Commission should consider in its determination of whether [[Page 60341]] the ``actual delivery'' exception is available? --------------------------------------------------------------------------- \73\ Vitalik Buterin, Bitfinex: Bitcoinica Rises From The Grave, Bitcoin Magazine (Nov. 22, 2012), http://bitcoinmagazine.com/articles/bitfinex-bitcoinica-rises-from-the-grave-1353644122 (describing a bucket shop arrangement whereby a platform ``steps in and acts as the counterparty to some of its users,'' creating ``perverse incentives''). --------------------------------------------------------------------------- Question 4: As noted above, CEA sections 4(a), 4(b), and 4b apply to retail commodity transactions ``as if'' the transaction was a futures contract.\74\ Therefore, absent an exception, a retail commodity transaction must be offered on or subject to the rules of a designated contract market (``DCM'').\75\ Separately, an entity soliciting or accepting orders for retail commodity transactions and accepting money, securities, or property (or extending credit in lieu thereof) to margin, guarantee, or secure such transactions must register with the Commission as a futures commission merchant (``FCM'').\76\ As a result of these requirements, the Commission recognizes that certain entities or platforms will choose not to offer virtual currency retail commodity transactions. This business decision is not unique to any particular commodity. However, as noted earlier, the Commission does not intend to stifle innovation. Rather, it is acting to protect U.S. retail customers regarding transactions that fall within its jurisdiction. Therefore, the Commission requests comments as to what factors may be relevant to consider regarding the Commission's potential use of its exemptive authority under CEA section 4(c) \77\ in this regard. For example, please note any advantages and disadvantages regarding the potential to establish a distinct registration and compliance regime for entities that seek to offer retail commodity transactions in virtual currency. Why would such treatment be uniquely warranted \78\ in the context of virtual currency? Please also note any other issues that the Commission should consider regarding such an analysis. What other alternatives should the Commission consider instead of establishing a distinct registration and compliance regime? --------------------------------------------------------------------------- \74\ 7 U.S.C. 2(c)(2)(D)(iii). \75\ 7 U.S.C. 6(a). \76\ 7 U.S.C. 1a(28); 7 U.S.C. 6d(a). \77\ 7 U.S.C. 6(c). \78\ Arguably, beyond the distributed ledger technologies, entities offering virtual currency retail commodity transactions operate in a similar manner to any other entity offering retail commodity transactions online. --------------------------------------------------------------------------- Question 5: In Example 2, the Commission sets forth a proposed set of facts that permits actual delivery to a depository instead of the purchaser. What should the Commission consider in further clarifying the meaning of ``depository'' for purposes of this interpretation? For example, could the depository maintain certain licenses or registrations in order to qualify for this example? In addition, should the Commission further prohibit the depository from being owned or operated by the offeror (including any offeror parent company, partner, agent, and other affiliates)? Please note any factors the Commission should consider in making this determination (such as the effect of contractual agreements between the depository and the offeror). Question 6: Example 2 also requires the purchaser to secure full control over the virtual currency once it is deposited in a depository in order for the fact pattern to constitute actual delivery. The Commission requests comment regarding what types of circumstances would ensure a purchaser has obtained ``full control'' of the commodity. For example, is possession of a unique key or other credentials that allow full access and ability to transfer virtual currency sufficient to provide full control? Similarly, how should the Commission view full control by a user in light of commonly used cybersecurity techniques and money transmitter procedures otherwise required by law? Question 7: Example 2 also requires that no liens resulting from the use of margin, leverage, or financing used to obtain the entire quantity of the commodity purchased by the buyer continue forward at the expiration of 28 days from the date of the transaction. The Commission requests comment regarding circumstances under which a lien would be considered terminated for purposes of this interpretation. For example, are there circumstances where the Commission should consider allowing ``forced sale'' scenarios, whereby the purchased virtual currency is used to satisfy any resulting liens from the retail commodity transaction, while still interpreting the transaction as having resulted in actual delivery to the purchaser? Should the Commission consider other types of lien scenarios or interests, such as those liens that would not provide a right to repossession of the commodity? Question 8: As noted above, the status of ``title'' is one of the factors the Commission considers in an actual delivery determination for retail commodity transactions.\79\ In Examples 1 and 2, this interpretation notes that ``title'' may be reflected by linking an individual purchaser with proof of ownership of the particular wallet or wallets that contain the purchased virtual currency. What additional examples, if any, should the Commission consider to address the status of ``title'' for the purposes of an actual delivery determination? --------------------------------------------------------------------------- \79\ See 78 FR at 52428. --------------------------------------------------------------------------- Question 9: While this interpretation is solely focused on the actual delivery exception to CEA section 2(c)(2)(D), the Commission recognizes other exceptions may be available.\80\ Specifically, the Commission recognizes that the SEC recently issued a statement regarding the application of federal securities laws to certain initial coin offerings (``ICOs'').\81\ Depending on their use, the tokens or units issued in an ICO may be commodities, commodity options, derivatives, or otherwise fall within the Commission's virtual currency definition described in this interpretation. However, any such tokens that are deemed securities (and trade in a manner that qualifies as a retail commodity transaction) would be excepted from the retail commodity transaction definition pursuant to section 2(c)(2)(D)(ii)(II) of the Act. Are there concerns with the scope of this exception with regard to retail commodity transactions? What factors should the Commission consider if it were to issue further guidance regarding this exception? --------------------------------------------------------------------------- \80\ See generally 7 U.S.C. 2(c)(2)(D)(ii). \81\ Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Exchange Act Release No. 81207 (Jul. 25, 2017). Issued in Washington, DC, on December 15, 2017 by the Commission. Christopher J. Kirkpatrick, Secretary of the Commission. Appendix to Retail Commodity Transactions Involving Virtual Currency-- Commission Voting Summary On this matter, Chairman Giancarlo and Commissioners Quintenz and Behnam voted in the affirmative. No Commissioner voted in the negative. [FR Doc. 2017-27421 Filed 12-19-17; 8:45 am] BILLING CODE 6351-01-P
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technology or economic conditions? Office of the Secretary, 600 Visit the FTC website to read this
How would these modifications affect Pennsylvania Avenue NW, Suite CC– Notice and the news release describing
the costs and benefits of the Rule for 5610 (Annex A), Washington, DC 20580, it. The FTC Act and other laws that the
consumers and businesses, particularly or deliver your comment to the Commission administers permit the
small businesses? following address: Federal Trade collection of public comments to
(9) Conflicts With Other Commission, Office of the Secretary, consider and use in this proceeding, as
Requirements: Does the Rule overlap or Constitution Center, 400 7th Street SW, appropriate. The Commission will
conflict with other federal, state, or local 5th Floor, Suite 5610 (Annex A), consider all timely and responsive
laws or regulations? If so, how? Provide Washington, DC 20024. If possible, public comments that it receives on or
any evidence that supports your submit your paper comment to the before February 12, 2018. For
position. With reference to the asserted Commission by courier or overnight information on the Commission’s
conflicts, should the Rule be modified? service. privacy policy, including routine uses
If so, why, and how? If not, why not? Because your comment will be placed permitted by the Privacy Act, see
Are there any Rule changes necessary to on the publicly accessible FTC website https://www.ftc.gov/site-information/
help state law enforcement agencies at https://www.ftc.gov, you are solely privacy-policy.
combat deceptive practices in the responsible for making sure that your
By direction of the Commission.
recycled engine oil market? Provide any comment does not include any sensitive
or confidential information. In Donald S. Clark,
evidence concerning whether the Rule
has assisted in promoting national particular, your comment should not Secretary.
consistency with respect to the include any sensitive personal [FR Doc. 2017–27374 Filed 12–19–17; 8:45 am]
advertising of recycled engine oil. information, such as your or anyone BILLING CODE 6750–01–P
(10) Update Rule Reference to API else’s Social Security number; date of
Document: Should the Commission birth; driver’s license number or other
update the Rule to incorporate by state identification number, or foreign COMMODITY FUTURES TRADING
reference the current version (i.e., the country equivalent; passport number; COMMISSION
Seventeenth Edition) of the API financial account number; or credit or
Publication 1509? 5 If so, should the debit card number. You are also solely 17 CFR Part 1
incorporation include a specific date or responsible for making sure that your RIN 3038–AE62
other information to identify the comment does not include any sensitive
seventeenth edition of API Publication health information, such as medical Retail Commodity Transactions
1509? records or other individually Involving Virtual Currency
identifiable health information. In
IV. Comment Submissions addition, your comment should not AGENCY: Commodity Futures Trading
You can file a comment online or on include any ‘‘trade secret or any Commission.
paper. For the Commission to consider commercial or financial information ACTION: Proposed interpretation; request
your comment, we must receive it on or which . . . is privileged or for comment.
before February 12, 2018. Write ‘‘16 CFR confidential’’—as provided by Section
part 311—Recycled Oil, Matter No. 6(f) of the FTC Act, 15 U.S.C. 46(f), and SUMMARY: The Commodity Futures
R811006’’ on your comment. Your FTC Rule 4.10(a)(2), 16 CFR 4.10(a)(2)— Trading Commission (the
comment—including your name and including, in particular, competitively ‘‘Commission’’ or ‘‘CFTC’’) is issuing
your state—will be placed on the public sensitive information such as costs, this proposed interpretation of the term
record of this proceeding, including, to sales statistics, inventories, formulas, ‘‘actual delivery’’ as set forth in a certain
the extent practicable, on the public patterns, devices, manufacturing provision of the Commodity Exchange
Commission website, at http:// processes, or customer names. Act (‘‘CEA’’) pursuant to the Dodd-
www.ftc.gov/os/publiccomments.shtm. Comments containing material for Frank Wall Street Reform and Consumer
Postal mail addressed to the which confidential treatment is Protection Act (the ‘‘Dodd-Frank Act’’).
Commission is subject to delay due to requested must be filed in paper form, Specifically, this proposed
heightened security screening. As a must be clearly labeled ‘‘Confidential,’’ interpretation is being issued to inform
result, we encourage you to submit your and must comply with FTC Rule 4.9(c), the public of the Commission’s views as
comments online, or to send them to the 16 CFR 4.9(c). In particular, the written to the meaning of actual delivery within
Commission by courier or overnight request for confidential treatment that the specific context of retail commodity
service. To make sure that the accompanies the comment must include transactions in virtual currency. The
Commission considers your online the factual and legal basis for the Commission requests comment on this
comment, you must file it at https:// request, and must identify the specific proposed interpretation and further
ftcpublic.commentworks.com/ftc/ portions of the comment to be withheld invites comment on specific questions
RecycledOilReview, by following the from the public record. See FTC Rule related to the Commission’s treatment of
instructions on the web-based form. 4.9(c). Your comment will be kept virtual currency transactions.
When this Notice appears at https:// confidential only if the General Counsel DATES: Comments must be received on
www.regulations.gov, you also may file grants your request in accordance with or before March 20, 2018.
a comment through that website. the law and the public interest. Once ADDRESSES: You may submit comments,
If you prefer to file your comment on your comment has been posted on the identified by RIN 3038–AE62, by any of
ethrower on DSK3G9T082PROD with PROPOSALS
paper, write ‘‘16 CFR part 311— public FTC website—as legally required the following methods:
Recycled Oil, Matter No. R811006’’ on by FTC Rule 4.9(b)—we cannot redact or • CFTC website: http://
your comment and on the envelope, and remove your comment from the FTC comments.cftc.gov. Follow the
mail your comment to the following website, unless you submit a instructions for submitting comments
address: Federal Trade Commission, confidentiality request that meets the through the Comments Online process
requirements for such treatment under on the website.
5 The current Rule (Section 311.4) references the FTC Rule 4.9(c), and the General • Mail: Christopher Kirkpatrick,
Fifteenth Edition of API Publication 1509. Counsel grants that request. Secretary of the Commission,
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![60336 Federal Register / Vol. 82, No. 243 / Wednesday, December 20, 2017 / Proposed Rules
Commodity Futures Trading of sale of any commodity in interstate longer period as the Commission may
Commission, Three Lafayette Center, commerce, or for future delivery on or determine by rule or regulation based
1155 21st Street NW, Washington, DC subject to the rules of any registered upon the typical commercial practice in
20581. entity.’’ 4 The Commission’s mission is cash or spot markets for the commodity
• Hand Delivery/Courier: Same as to foster open, transparent, competitive involved.’’ 15 If no exception is
Mail, above. and financially sound markets; and applicable, these retail transactions are
• Federal eRulemaking Portal: http:// protect the American public from ‘‘commodity interests’’ subject to
www.regulations.gov. Follow the fraudulent schemes and abusive Commission regulations together with
instructions for submitting comments. practices in those markets and products futures, options, and swaps.16 Under
Please submit your comments using over which it has been granted this authority, the Commission regulates
only one method. jurisdiction. retail commodity transactions, with the
All comments must be submitted in Pursuant to CEA section 2(c)(2)(D),5 exception of contracts of sale that result
English or, if not, accompanied by an the marketplace for ‘‘retail commodity in actual delivery within 28 days.17
English translation. Comments will be transactions’’ is one such area over The Dodd-Frank Act added CEA
posted as received to http:// which the Commission has been granted section 2(c)(2)(D) to address certain
www.cftc.gov. You should submit only explicit oversight authority.6 CEA judicial uncertainty involving the
information that you wish to make section 2(c)(2)(D) applies to any Commission’s regulatory oversight
available publicly. If you wish the agreement, contract or transaction in capabilities. The Commission has long
Commission to consider information any commodity that is entered into held that certain speculative commodity
that you believe is exempt from with, or offered to (even if not entered transactions involving leverage or
disclosure under the Freedom of into with), a person that is neither an margin may have indicia of futures
Information Act (‘‘FOIA’’),1 a petition eligible contract participant 7 nor an contracts, subjecting them to
for confidential treatment of the exempt eligible commercial entity 8 (‘‘retail’’) on Commission oversight.18 However,
information may be submitted according a leveraged or margined basis, or judicial decisions emerged that called
to the procedures established in financed by the offeror, the counterparty into question the Commission’s
Commission Regulation 145.9.2 or a person acting in concert with the oversight over certain leveraged retail
The Commission reserves the right, offeror or counterparty on a similar transactions in currencies and other
but shall have no obligation, to review, basis.9 CEA section 2(c)(2)(D) further commodities.19 In 2008, Congress
pre-screen, filter, redact, refuse or provides that such an agreement, addressed this judicial uncertainty by
remove any or all of your submission contract or transaction is subject to CEA providing the Commission with more
from http://www.cftc.gov that it may sections 4(a),10 4(b),11 and 4b 12 ‘‘as if explicit authority over retail foreign
deem to be inappropriate for the agreement, contract or transaction currency transactions in CEA section
publication, such as obscene language. was a contract of sale of a commodity 2(c)(2)(C).20 These new statutory
All submissions that have been redacted for future delivery.’’ 13 The statute, provisions established a two-day actual
or removed that contain comments on however, excepts certain transactions delivery exception for such
from its application. In particular, CEA transactions.21 Two years later,
the merits of the interpretation will be
section 2(c)(2)(D)(ii)(III)(aa) 14 excepts a Congress provided the Commission with
retained in the public comment file and
contract of sale that ‘‘results in actual explicit oversight authority over all
will be considered as required under the
delivery within 28 days or such other other ‘‘retail commodity transactions’’
Administrative Procedure Act and other
applicable laws, and may be accessible 47
in CEA section 2(c)(2)(D).22 As noted,
U.S.C. 9(1).
under FOIA. 57 U.S.C. 2(c)(2)(D). 15 The Commission has not adopted any
FOR FURTHER INFORMATION CONTACT: 6 The authority provided to the Commission by
CEA section 2(c)(2)(D) is in addition to, and regulations permitting a longer actual delivery
Philip W. Raimondi, Special Counsel, period for any commodity pursuant to this statute.
independent from, the jurisdiction over contracts of
(202) 418–5717, praimondi@cftc.gov; or sale of a commodity for future delivery and Accordingly, the 28-day actual delivery period
David P. Van Wagner, Chief Counsel, transactions subject to regulation pursuant to CEA remains applicable to all commodities, while retail
(202) 418–5481, dvanwagner@cftc.gov; section 19 that the CEA has historically granted to foreign currency transactions remain subject to a 2-
the Commission. It is also in addition to, and day actual delivery period pursuant to CEA section
Office of the Chief Counsel, Division of 2(c)(2)(C).
independent from, the jurisdiction over swaps
Market Oversight, Commodity Futures granted to the Commission by the Dodd-Frank Act. 16 17 CFR 1.3(yy).
Trading Commission, 1155 21st Street Further, the authority granted under CEA section 17 In addition, certain commercial transactions
NW, Washington, DC 20581. 2(c)(2)(D) is in addition to, and independent of, the and securities are excepted pursuant to CEA section
Commission’s ability to bring enforcement actions 2(c)(2)(D)(ii).
SUPPLEMENTARY INFORMATION: for fraud or manipulation in connection with 18 See In re Stovall, CFTC Docket No. 75–7 [1977–
swaps, contracts of sale of any commodity in 1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶
I. Background interstate commerce, or for future delivery on or 20,941, at 23,777 (CFTC Dec. 6, 1979) (applying
With certain exceptions, the CFTC has subject to the rules of any registered entity. 7 U.S.C. traditional elements of a futures contract to a
9(1), 9(3), 13(a)(2); 17 CFR 180.1, 180.2. purported cash transaction).
been granted exclusive jurisdiction over 7 7 U.S.C. 1a(18).
19 See, e.g., CFTC v. Zelener, 373 F.3d 861 (7th
commodity futures, options, and all 8 7 U.S.C. 1a(17); see also 7 U.S.C. 2(c)(2)(D)(iv).
Cir. 2004); CFTC v. Erskine, 512 F.3d 309 (6th Cir.
other derivatives that fall within the 9 7 U.S.C. 2(c)(2)(D)(i).
2008).
definition of a swap.3 Further, the 10 7 U.S.C. 6(a) (prohibiting the off-exchange 20 See Food, Conservation and Energy Act of
Commission has been granted general trading of futures transactions by U.S. persons 2008, Public Law 110–246, 122 Stat. 1651 (2008).
unless the transaction is conducted on or subject to 21 7 U.S.C. 2(c)(2)(C)(i)(II)(bb)(AA).
anti-fraud and anti-manipulation
ethrower on DSK3G9T082PROD with PROPOSALS
the rules of a designated contract market). 22 See Dodd-Frank Wall Street Reform and
authority over ‘‘any swap, or a contract 11 7 U.S.C. 6(b) (permitting foreign boards of trade
Consumer Protection Act of 2010, Public Law 111–
registered with the Commission with the ability to 203, 124 Stat. 1376 (2010); see also Hearing to
15 U.S.C. 552. provide direct access to U.S. persons). Review Implications of the CFTC v. Zelener Case
2 17 12 7 U.S.C. 6b (prohibiting fraudulent conduct in
CFR 145.9. Commission regulations referred Before the Subcomm. on General Farm
to herein are found at 17 CFR chapter I. connection with any contract of sale of any Commodities and Risk Management of the H.
3 7 U.S.C. 2(a)(1)(A). The CFTC shares its swap commodity in interstate commerce, among other Comm. on Agriculture, 111th Cong. 52–664 (2009)
jurisdiction in certain aspects with the Securities things). (statement of Rep. Marshall, Member, H. Comm. on
13 7 U.S.C. 2(c)(2)(D)(iii).
and Exchange Commission (‘‘SEC’’). See 7 U.S.C. Agriculture) (‘‘If in substance it is a futures contract,
2(a)(1)(C). 14 7 U.S.C. 2(c)(2)(D)(ii)(III)(aa). it is going to be regulated. It doesn’t matter how
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these new statutory provisions depository acting on the purchaser’s them’’ as prescribed within the actual
established an exception for instances behalf.30 Among other things, mere delivery exception.39 Rather, the entity
when actual delivery of the commodity book entries and certain instances ‘‘held the purchased bitcoins in bitcoin
occurs within 28 days.23 where a purchase is ‘‘rolled, offset, or deposit wallets that it owned and
In connection with its retail otherwise netted with another controlled.’’ 40
commodity transaction oversight, the transaction’’ do not constitute actual After Bitfinex, the Commission
Commission previously issued a delivery.31 received requests for guidance with
proposed interpretation of the term Within a year after the 2013 Guidance regard to the meaning of the actual
‘‘actual delivery’’ in the context of CEA was released, the Eleventh Circuit delivery exception in the specific
section 2(c)(2)(D), accompanied by a issued an opinion affirming a context of virtual currency transactions.
request for comment.24 In that preliminary injunction obtained by the Accordingly, the Commission has
interpretation, the Commission Commission in CFTC v. Hunter Wise decided to issue this proposed
provided several examples of what may Commodities, LLC.32 Hunter Wise interpretation and seek public comment.
and may not satisfy the actual delivery further reinforced the Commission’s The Commission is issuing this
exception. After reviewing public interpretation of actual delivery in the proposed interpretation to inform the
comments, the Commission issued a 2013 Guidance. Specifically, the public of the Commission’s views as to
final interpretation in 2013 (the ‘‘2013 Eleventh Circuit recognized that the meaning of the term ‘‘actual
Guidance’’).25 delivery ‘‘denotes a transfer of delivery’’ in the context of virtual
The 2013 Guidance explained that the possession and control.’’ 33 Indeed, ‘‘[i]f currency and to provide the public with
Commission will consider evidence ‘actual delivery’ means anything, it guidance on how the Commission
‘‘beyond the four corners of contract means something other than simply intends to assess whether any given
documents’’ to assess whether actual ‘delivery,’ for we must attach meaning retail commodity transaction in virtual
delivery of the commodity occurred.26 to Congress’s use of the modifier currency (whereby an entity or platform
The Commission further noted that it ‘actual.’ ’’ 34 Accordingly, the Court offers margin trading or otherwise
will ‘‘employ a functional approach and stated that actual delivery ‘‘denotes facilitates 41 the use of margin, leverage,
examine how the agreement, contract, or ‘[t]he act of giving real and immediate or financing arrangements for their retail
transaction is marketed, managed, and possession to the buyer or the buyer’s market participants) results in actual
performed, instead of relying solely on agent’’ and constructive delivery does delivery, as the term is used in CEA
language used by the parties in the not suffice.35 Notably, the Eleventh section 2(c)(2)(D)(ii)(III)(aa).42 The
agreement, contract, or transaction.’’ 27 Circuit found that its own holding Commission requests comment
The 2013 Guidance also included a list harmonized with the 2013 Guidance generally on this proposed
of relevant factors the Commission will and recognized that the legislative interpretation and further invites
consider in an actual delivery history behind CEA section 2(c)(2)(D) comment on specific questions, as
determination 28 and again provided also ‘‘complements’’ its decision.36 outlined within this release.
examples 29 of what may and may not Soon after the Hunter Wise decision,
constitute actual delivery. As per the the Commission established that virtual II. Commission Interpretation of Actual
2013 Guidance, the only satisfactory currency is a commodity as that term is Delivery for Virtual Currency
examples of actual delivery involve defined by CEA section 1a(9).37 A. Virtual Currency as a Commodity
transfer of title and possession of the Subsequently, the Commission brought
commodity to the purchaser or a its first enforcement action against a As noted previously, the Commission
platform that offered virtual currency considers virtual currency to be a
clever your draftsmanship is.’’); 156 Cong. Rec. transactions to retail customers on a commodity,43 like many other
S5,924 (daily ed. July 15, 2010) (statement of Sen. leveraged, margined, or financed basis intangible commodities that the
Lincoln) (‘‘Section 742 corrects [any regulatory Commission has recognized over the
uncertainty] by extending the Farm Bill’s ‘‘Zelener without registering with the
fraud fix’’ to retail off-exchange transactions in all Commission.38 In the Bitfinex course of its existence (e.g., renewable
commodities.’’) (emphasis added). settlement order, the Commission found energy credits and emission allowances,
23 7 U.S.C. 2(c)(2)(D)(ii)(III)(aa).
that the virtual currency platform certain indices, and certain debt
24 Retail Commodity Transactions Under
violated CEA sections 4(a) and 4d instruments, among others).44 Indeed,
Commodity Exchange Act, 76 FR 77670 (Dec. 14, since their inception, virtual currency
2011). because the unregistered entity ‘‘did not
25 Retail Commodity Transactions Under actually deliver bitcoins purchased from
39 Id.
Commodity Exchange Act, 78 FR 52426 (Aug. 23,
40 Id.
2013). 30 Id.
26 Id. at 52,428. 41 Specifically, CEA section 2(c)(2)(D)(i) captures
31 Id.
27 Id. 32 CFTC
any such retail commodity transaction ‘‘entered
v. Hunter Wise Commodities, LLC, et al., into, or offered . . . on a leveraged or margined
28 ‘‘Relevant factors in this determination include
749 F.3d 967 (11th Cir. 2014) (hereinafter, Hunter basis, or financed by the offeror, the counterparty,
the following: Ownership, possession, title, and Wise). or a person acting in concert with the offeror or
physical location of the commodity purchased or 33 749 F.3d at 978–79, (citing Black’s Law
sold, both before and after execution of the counterparty on a similar basis.’’
Dictionary 494 (9th ed. 2009)). 42 7 U.S.C. 2(c)(2)(D)(ii)(III)(aa).
agreement, contract, or transaction, including all 34 749 F.3d at 979.
43 In re Coinflip, Inc., d/b/a Derivabit, and
related documentation; the nature of the 35 Id.
relationship between the buyer, seller, and Francisco Riordan, CFTC Docket No. 15–29, 2015
36 749 F.3d at 977.
possessor of the commodity purchased or sold; and WL 5535736, [Current Transfer Binder] Comm. Fut.
37 In re Coinflip, Inc., d/b/a Derivabit, and L. Rep. (CCH) ¶ 33,538 (CFTC Sept. 17, 2015)
the manner in which the purchase or sale is
ethrower on DSK3G9T082PROD with PROPOSALS
recorded and completed.’’ 78 FR at 52428. Francisco Riordan, CFTC Docket No. 15–29, 2015 (consent order); In re TeraExchange LLC, CFTC
29 In the 2013 Guidance, Examples 1 and 2 WL 5535736, [Current Transfer Binder] Comm. Fut. Docket No. 15–33, 2015 WL 5658082, [Current
illustrate circumstances where actual delivery is L. Rep. (CCH) ¶ 33,538 (CFTC Sept. 17, 2015) Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 33,546
made, while Examples 3, 4 and 5 illustrate (consent order); In re TeraExchange LLC, CFTC (CFTC Sept. 24, 2015) (consent order).
circumstances where actual delivery is not made. In Docket No. 15–33, 2015 WL 5658082, [Current 44 See generally Further Definition of ‘‘Swap,’’
setting forth the examples, the Commission made Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 33,546 ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap
clear that they are non-exclusive and were intended (CFTC Sept. 24, 2015) (consent order). Agreement’’; Mixed Swaps; Security-Based Swap
to provide the public with guidance on how the 38 In re BFXNA INC. d/b/a BITFINEX, CFTC Agreement Recordkeeping, 77 FR 48208 at 48233
Commission would apply the interpretation. 78 FR Docket No. 16–19 (June 2, 2016) (consent order) (Aug. 13, 2012) (discussing application of the swap
at 52427–28. (hereinafter, Bitfinex). forward exclusion to intangible commodities).
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![60338 Federal Register / Vol. 82, No. 243 / Wednesday, December 20, 2017 / Proposed Rules
structures were proposed as digital Indeed, as part of its efforts to facilitate price movements of the commodity—
alternatives to gold and other precious beneficial FinTech innovation and help two hallmarks of a regulated futures
metals.45 As a commodity, virtual ensure market integrity, the Commission marketplace.51
currency is subject to applicable launched the LabCFTC initiative.48 This Beyond their practical and
provisions of the CEA and Commission initiative provides the Commission with speculative functions, the emergence of
regulations. a platform to engage the FinTech these nascent markets has also been
The Commission interprets the term community and promote market- negatively marked by a variety of retail
virtual currency broadly. In the context enhancing innovation in furtherance of customer harm that warrants the
of this interpretation, virtual or digital improving the quality, resiliency, and Commission’s attention, including,
currency: 46 Encompasses any digital competitiveness of the markets overseen among other things, flash crashes and
representation of value (a ‘‘digital by the Commission. As such, the other market disruptions,52 delayed
asset’’) that functions as a medium of Commission is closely following the settlements,53 alleged spoofing,54
exchange, and any other digital unit of development and continuing evolution hacks,55 alleged internal theft,56 alleged
account that is used as a form of a of blockchain technologies and virtual manipulation,57 smart contract coding
currency (i.e., transferred from one party currencies. vulnerabilities,58 bucket shop
to another as a medium of exchange); Moreover, since virtual currency can
may be manifested through units, serve as an underlying component of 51 See, e.g., CFTC v. Int’l Foreign Currency, Inc.,
tokens, or coins, among other things; derivatives transactions, the 334 F. Supp. 2d 305, 310 (E.D.N.Y. 2004) (listing
elements typically found in a futures contract); In
and may be distributed by way of digital Commission maintains a close interest re Stovall, CFTC Docket No. 75–7 [1977–1980
‘‘smart contracts,’’ among other in the development of the virtual Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶
structures.47 However, the Commission currency marketplace generally. As a 20,941, at 23,777 (CFTC Dec. 6, 1979) (describing
practical matter, virtual currency, by how futures contracts, being traded on margin, ‘‘are
notes that it does not intend to create a entered into primarily for the purpose of assuming
bright line definition at this time given virtue of its name, represents a digital or shifting the risk of change in value of
the evolving nature of the commodity medium of exchange for goods and commodities, rather than for transferring ownership
and, in some instances, its underlying services, similar to fiat currency.49 Over of the actual commodities.’’); David J. Gilberg,
time, numerous centralized platforms Regulation of New Financial Instruments Under the
public distributed ledger technology Federal Securities and Commodities Laws, 39 Vand.
(‘‘DLT’’ or ‘‘blockchain’’). have emerged as markets to convert L. Rev. 1599, 1603–04, n.14 (1986) (typically,
virtual currency into fiat currency or futures ‘‘traders are interested only in obtaining
B. The Commission’s Interest in Virtual other virtual currencies. These cash payments of price differentials, not actual
Currency platforms provide a place to commodities’’).
52 See, e.g., Paul Vigna, Virtual Currencies Bitcoin
The Commission recognizes that immediately exchange one commodity and Ether Wrap Up a Wild Quarter, The Wall Street
certain virtual currencies and their for another ‘‘on the spot.’’ Journal, Jul. 3, 2017, at B6 (describing a recent flash
underlying blockchain technologies Some of these centralized platforms crash affecting the price of virtual currency Ether,
have the potential to yield notable also attempt to cater to those that wish caused by ‘‘a multimillion-dollar sell order’’ that
to speculate on the price movements of subsequently ‘‘sparked a cascade of stop-loss
advancements in applications of orders’’); Paul Vigna, BitBeat: Bitcoin Price Drops
financial technology (‘‘FinTech’’). a virtual currency against other on Block-Size Debate, ‘Flash Crash,’ The Wall Street
currencies. For example, a speculator Journal (Aug. 20, 2015), http://blogs.wsj.com/
45 Nick Szabo, Bit gold, Unenumerated (Dec. 27, may purchase virtual currency using moneybeat/2015/08/20/bitbeat-bitcoin-price-drops-
2008), http://unenumerated.blogspot.com/2005/12/ borrowed money in the hopes of on-block-size-debate-flash-crash/ (‘‘bitcoin’s
bit-gold.html. speculative traders love this kind of stuff [margin
46 The Commission uses the term ‘‘virtual
covering any outstanding balance owed trading]; these guys could easily give Wall Street’s
currency’’ and ‘‘digital currency’’ interchangeably
through profits from favorable price casino hotshots a run for their money’’).
for purposes of this proposed interpretation. movements in the future. This 53 Paul Vigna, Virtual Currencies Bitcoin and
However, the Commission acknowledges that the interpretation is specifically focused on Ether Wrap Up a Wild Quarter, The Wall Street
Journal, Jul. 3, 2017, at B6 (‘‘[t]here were delays of
two terms may have certain practical differences in such ‘‘retail commodity transactions,’’ hours and even days.’’).
other contexts. For example, one view is that whereby an entity or platform: (i) Offers 54 Lionel Laurent, Bitcoin Wrestles With Spoofy
‘‘digital currency’’ includes fiat currencies, while
‘‘virtual currency’’ does not. See The Financial margin trading or otherwise facilitates 50 the Trader, Bloomberg Gadfly (Aug. 7, 2017),
Action Task Force [FATF], Virtual Currencies: Key the use of margin, leverage, or financing https://www.bloomberg.com/gadfly/articles/2017-
Definitions and Potential AML/CFT Risks, at 4 (June arrangements for their retail market 08-07/bitcoin-has-a-spoofy-problem.
55 See, e.g., Paul Vigna and Gregor Stuart Hunter,
27, 2014), http://www.fatf-gafi.org/media/fatf/ participants; (ii) typically to enable such
documents/reports/Virtual-currency-key- Bitcoin Sinks After Exchange Reports Hack, The
definitions-and-potential-aml-cft-risks.pdf. Further, participants to speculate or capitalize on Wall Street Journal (Aug. 3, 2016), http://
this interpretation is not intended to encompass www.wsj.com/articles/bitcoin-sinks-after-exchange-
transactions otherwise covered by CEA section 48 See Press Release, Commodity Futures Trading reports-hack-1470195727; Nathaniel Popper and
2(c)(2)(C) and related Commission regulations. Commission, CFTC Launches LabCFTC as Major Rachel Abrams, Apparent Theft Rattles the Bitcoin
47 One prominent type of virtual currency is FinTech Initiative (May 17, 2017), http:// World, N.Y. Times, Feb. 25, 2014, at B1; Alex Hern,
cryptocurrency. Cryptocurrency is described as ‘‘an www.cftc.gov/PressRoom/PressReleases/pr7558-17. A History of Bitcoin Hacks, The Guardian (Mar. 18,
electronic payment system based on cryptographic 49 Michael J. Casey and Paul Vigna, Bitcoin and 2014), http://www.theguardian.com/technology/
proof instead of trust, allowing any two willing the Digital-Currency Revolution, The Wall Street 2014/mar/18/history-of-bitcoin-hacks-alternative-
parties to transact directly with each other without Journal (Jan. 23, 2015), https://www.wsj.com/ currency.
56 Jessica Lipscomb, Cryptsy Founder Paul
the need for a trusted third party.’’ Satoshi articles/the-revolutionary-power-of-digital-
Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash currency-1422035061 (‘‘Once inside the coffee Vernon Disappeared, Along With Millions of His
System (Oct. 31, 2008), https://bitcoin.org/ shop, you will open your wallet’s smartphone app Customers’ Cash, Miami New Times (Jun. 28, 2016),
bitcoin.pdf. Transactions are represented by a hash and hold its QR code reader up to the coffee shop’s http://www.miaminewtimes.com/news/cryptsy-
or ‘‘chain of digital signatures,’’ which takes into device’’ to buy a cup of coffee). founder-paul-vernon-disappeared-along-with-
ethrower on DSK3G9T082PROD with PROPOSALS
account the previous owner and the next owner. 50 As noted earlier, CEA section 2(c)(2)(D)(i) millions-of-his-customers-cash-8557571.
57 Izabella Kaminska, When OTC markets
Given the lack of a centralized authority, captures any such retail transaction ‘‘entered into,
transaction verification is ‘‘publicly announced’’ in or offered . . . on a leveraged or margined basis, or backfire, bitcoin edition, Financial Times—
a transparent ledger ‘‘system for participants to financed by the offeror, the counterparty, or a Alphaville (Mar. 8, 2017), https://
agree on a single history’’ of transactions. Id. Each person acting in concert with the offeror or ftalphaville.ft.com/2017/03/08/2185731/when-otc-
transaction moves from one digital wallet to counterparty on a similar basis.’’ The Commission markets-backfire-bitcoin-edition.
another, recognized as ‘‘nodes’’ on a distributed views any financing arrangements facilitated, 58 Matthew Leising, The Ether Thief, Bloomberg
ledger network. This structure represents one form arranged, or otherwise endorsed by the offeror or Markets Magazine (Jun. 13, 2017), https://
of DLT or blockchain technology, which underlies counterparty to satisfy this statutory definition for www.bloomberg.com/features/2017-the-ether-thief/
bitcoin—a widely traded virtual currency. purposes of this interpretation. (while not technically an event specific to any one
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arrangements and other conflicts of Congressional action, the Commission is concert with the offeror or counterparty
interest.59 These types of activities unable to reduce the actual delivery seller on a similar basis) 66 not retaining
perpetrated by bad actors can inhibit exception period for speculative, any interest in or control over any of the
market-enhancing innovation, leverage-based retail commodity commodity purchased on margin,
undermine market integrity, and stunt transactions in virtual currency. The leverage, or other financing arrangement
further market development. one-size-fits-all 28 day delivery period at the expiration of 28 days from the
in CEA section 2(c)(2)(D) may not date of the transaction.67
C. Actual Delivery of Virtual Currency
properly account for innovation or Consistent with the 2013 Guidance, a
As underscored by its efforts to customary practice in certain cash sham delivery does not constitute actual
engage the FinTech community, the markets, such as virtual currency delivery for purposes of this
Commission emphasizes that it does not transactions that would presumably take interpretation. The offeror and
intend to impede market-enhancing much less than 28 days to deliver to a counterparty seller, including their
innovation or otherwise harm the purchaser in a typical spot agents, must retain no interest or control
evolving virtual currency marketplace transaction.63 Without the application whatsoever in the virtual currency
with this interpretation. To the contrary, of CEA section 2(c)(2)(D), retail market acquired by the purchaser at the
the Commission believes this participants that transact on platforms expiration of 28 days from the date of
interpretation can help advance a offering speculative transactions in entering into the transaction. Indeed, in
healthy ecosystem and support further virtual currency (involving margin, its simplest form, actual delivery of
market-enhancing innovation. leverage, or other financing) will not be virtual currency connotes the ability of
Additionally, the Commission takes afforded many of the protections that a purchaser to utilize the virtual
seriously its goal of protecting U.S. flow from registration under the CEA. currency purchased ‘‘on the spot’’ to
retail market participants engaged in the Despite the statutory limitations, the immediately purchase goods or services
virtual currency marketplace that falls Commission will utilize its current with the currency elsewhere.
within the Commission’s jurisdiction— statutory authority as best it can to In the context of an ‘‘actual delivery’’
as it would with respect to retail market prevent fraud in retail commodity determination in virtual currency,
participants trading in any other retail transactions involving virtual currency. physical settlement of the commodity
commodity marketplace that falls The Commission, in interpreting the must occur. A cash settlement or offset
within its jurisdiction. The Commission term actual delivery for the purposes of mechanism, as described in Example 4
drafted this interpretation with such a CEA section 2(c)(2)(D)(ii)(III)(aa), will below, will not satisfy the actual
balance in mind. continue to follow the 2013 Guidance delivery exception of CEA section
As discussed above, a retail and ‘‘employ a functional approach and 2(c)(2)(D). The distinction between
commodity transaction may be excepted examine how the agreement, contract, or physical settlement and cash settlement
from CEA section 2(c)(2)(D) (and thus transaction is marketed, managed, and in this context is akin to settlement of
not subject to CEA sections 4(a), 4(b),
performed, instead of relying solely on a spot foreign currency transaction at a
and 4b) if actual delivery of the
language used by the parties in the commercial bank or hotel in a foreign
commodity occurs within 28 days of the
agreement, contract, or transaction.’’ 64 nation—the customer receives physical
transaction.60 The longstanding Model Further, the Commission will foreign currency, not U.S. dollars. As
State Commodity Code also contains an continue to assess all relevant factors 65 mentioned, such physical settlement
exception from its ‘‘commodity to aid in such an actual delivery must occur within 28 days from the date
contract’’ regulation when physical determination. More specifically, the on which the ‘‘agreement, contract, or
settlement occurs within 28 days.61 Commission’s view of when ‘‘actual transaction is entered into’’ to constitute
However, the Model State Commodity
delivery’’ has occurred within the ‘‘actual delivery.’’ 68
Code provides for the ability to lengthen
context of virtual currency requires: Consistent with the interpretation
or shorten its 28-day physical delivery (1) A customer having the ability to: above, the Commission provides the
exception time period, while CEA (i) Take possession and control of the following non-exclusive examples to
section 2(c)(2)(D) only provides the entire quantity of the commodity,
Commission with the ability to lengthen further clarify the meaning of actual
whether it was purchased on margin, or delivery in the virtual currency context:
its actual delivery exception time using leverage, or any other financing
period.62 Therefore, absent arrangement, and (ii) use it freely in 66 The Commission recognizes that the offeror of
commerce (both within and away from the transaction and the ultimate counterparty may
platform, this hack illustrates an event that be two separate entities or may be the same. For
dramatically affected the price and status of a any particular platform) no later than 28
example, the Commission would consider as the
virtual currency traded on such platforms). days from the date of the transaction; offeror of the transaction a virtual currency platform
59 See, e.g., Vitalik Buterin, Bitfinex: Bitcoinica and that makes the transaction available to the retail
Rises From The Grave, Bitcoin Magazine (Nov. 22, (2) The offeror and counterparty seller customer or otherwise facilitates the transaction.
2012), http://bitcoinmagazine.com/articles/bitfinex- That virtual currency platform could also be
bitcoinica-rises-from-the-grave-1353644122; Matt
(including any of their respective
considered a counterparty to the transaction if, for
Levine, How A Bank Should Be?, Bloomberg View affiliates or other persons acting in example, the platform itself took the opposite side
(Mar. 11, 2015), https://www.bloomberg.com/view/ of the transaction or the purchaser of the virtual
articles/2015-03-11/how-should-a-bank-be- (‘‘Just 63 Notably, Congress provided a 2-day actual currency enjoyed privity of contract solely with the
because you mumble the word ‘blockchain’ doesn’t delivery exception for retail foreign currency platform rather than the seller. Additionally, the
make otherwise illegal things legal’’); Matt Levine, transactions. See 7 U.S.C. 2(c)(2)(C)(i)(II)(bb)(AA). Commission recognizes that some virtual currency
Bitcoin Bucket Shop Kicks Bucket, Bloomberg View 64 78 FR at 52428. platforms may provide a purchaser with the ability
ethrower on DSK3G9T082PROD with PROPOSALS
(Jun. 19, 2015), https://www.bloomberg.com/view/ 65 This list includes, but is not limited to to source financing or leverage from other users or
articles/2015-06-19/bitcoin-bucket-shop-kicks- ‘‘[o]wnership, possession, title, and physical third parties. The Commission would consider such
bucket. location of the commodity purchased or sold, both third parties or other users to be acting in concert
60 7 U.S.C. 2(c)(2)(D)(ii)(III)(aa). with the offeror or counterparty seller on a similar
before and after execution of the agreement,
61 See Model State Commodity Code section
contract, or transaction, including all related basis.
1.01(e), [1984–1986 Transfer Binder] Comm. Fut. L. documentation; the nature of the relationship 67 Among other things, the Commission may look
Rep. (CCH) ¶ 22,568 (Apr. 5, 1985). between the buyer, seller, and possessor of the at whether the offeror or seller retain any ability to
62 To date, the Commission has not chosen to commodity purchased or sold; and the manner in access or withdraw any quantity of the commodity
extend the 28-day actual delivery period in any which the purchase or sale is recorded and purchased from the purchaser’s account or wallet.
instance. completed.’’ Id. 68 78 FR at 52427.
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![Federal Register / Vol. 82, No. 243 / Wednesday, December 20, 2017 / Proposed Rules 60341
the ‘‘actual delivery’’ exception is Commission further prohibit the Question 9: While this interpretation
available? depository from being owned or is solely focused on the actual delivery
Question 4: As noted above, CEA operated by the offeror (including any exception to CEA section 2(c)(2)(D), the
sections 4(a), 4(b), and 4b apply to retail offeror parent company, partner, agent, Commission recognizes other
commodity transactions ‘‘as if’’ the and other affiliates)? Please note any exceptions may be available.80
transaction was a futures contract.74 factors the Commission should consider Specifically, the Commission recognizes
Therefore, absent an exception, a retail in making this determination (such as that the SEC recently issued a statement
commodity transaction must be offered the effect of contractual agreements regarding the application of federal
on or subject to the rules of a designated between the depository and the offeror). securities laws to certain initial coin
contract market (‘‘DCM’’).75 Separately, Question 6: Example 2 also requires offerings (‘‘ICOs’’).81 Depending on their
an entity soliciting or accepting orders the purchaser to secure full control over use, the tokens or units issued in an ICO
for retail commodity transactions and the virtual currency once it is deposited may be commodities, commodity
accepting money, securities, or property in a depository in order for the fact options, derivatives, or otherwise fall
(or extending credit in lieu thereof) to pattern to constitute actual delivery. within the Commission’s virtual
margin, guarantee, or secure such The Commission requests comment currency definition described in this
transactions must register with the regarding what types of circumstances interpretation. However, any such
Commission as a futures commission would ensure a purchaser has obtained tokens that are deemed securities (and
merchant (‘‘FCM’’).76 As a result of ‘‘full control’’ of the commodity. For trade in a manner that qualifies as a
these requirements, the Commission example, is possession of a unique key retail commodity transaction) would be
recognizes that certain entities or or other credentials that allow full excepted from the retail commodity
platforms will choose not to offer virtual access and ability to transfer virtual transaction definition pursuant to
currency retail commodity transactions. currency sufficient to provide full section 2(c)(2)(D)(ii)(II) of the Act. Are
This business decision is not unique to control? Similarly, how should the there concerns with the scope of this
any particular commodity. However, as Commission view full control by a user exception with regard to retail
noted earlier, the Commission does not in light of commonly used cybersecurity commodity transactions? What factors
intend to stifle innovation. Rather, it is techniques and money transmitter should the Commission consider if it
acting to protect U.S. retail customers procedures otherwise required by law? were to issue further guidance regarding
regarding transactions that fall within Question 7: Example 2 also requires this exception?
its jurisdiction. Therefore, the that no liens resulting from the use of
Commission requests comments as to Issued in Washington, DC, on December
margin, leverage, or financing used to 15, 2017 by the Commission.
what factors may be relevant to consider obtain the entire quantity of the
regarding the Commission’s potential Christopher J. Kirkpatrick,
commodity purchased by the buyer Secretary of the Commission.
use of its exemptive authority under
continue forward at the expiration of 28
CEA section 4(c) 77 in this regard. For Appendix to Retail Commodity
days from the date of the transaction.
example, please note any advantages Transactions Involving Virtual
The Commission requests comment
and disadvantages regarding the Currency—Commission Voting
regarding circumstances under which a
potential to establish a distinct Summary
lien would be considered terminated for
registration and compliance regime for
purposes of this interpretation. For On this matter, Chairman Giancarlo and
entities that seek to offer retail
example, are there circumstances where Commissioners Quintenz and Behnam voted
commodity transactions in virtual
the Commission should consider in the affirmative. No Commissioner voted in
currency. Why would such treatment be
allowing ‘‘forced sale’’ scenarios, the negative.
uniquely warranted 78 in the context of
whereby the purchased virtual currency [FR Doc. 2017–27421 Filed 12–19–17; 8:45 am]
virtual currency? Please also note any
is used to satisfy any resulting liens
other issues that the Commission should BILLING CODE 6351–01–P
from the retail commodity transaction,
consider regarding such an analysis.
while still interpreting the transaction
What other alternatives should the
as having resulted in actual delivery to
Commission consider instead of DEPARTMENT OF HOMELAND
the purchaser? Should the Commission
establishing a distinct registration and SECURITY
consider other types of lien scenarios or
compliance regime?
Question 5: In Example 2, the interests, such as those liens that would Coast Guard
Commission sets forth a proposed set of not provide a right to repossession of
facts that permits actual delivery to a the commodity? 33 CFR Part 165
depository instead of the purchaser. Question 8: As noted above, the status
What should the Commission consider of ‘‘title’’ is one of the factors the [Docket Number USCG–2017–0234]
in further clarifying the meaning of Commission considers in an actual
RIN 1625–AA00
‘‘depository’’ for purposes of this delivery determination for retail
interpretation? For example, could the commodity transactions.79 In Examples Safety Zone; Pacific Ocean, Kilauea
depository maintain certain licenses or 1 and 2, this interpretation notes that Lava Flow Ocean Entry on Southeast
registrations in order to qualify for this ‘‘title’’ may be reflected by linking an Side of Island of Hawaii, HI
example? In addition, should the individual purchaser with proof of
ownership of the particular wallet or AGENCY: Coast Guard, DHS.
ethrower on DSK3G9T082PROD with PROPOSALS
74 7 U.S.C. 2(c)(2)(D)(iii). wallets that contain the purchased ACTION:Supplemental notice of
75 7 U.S.C. 6(a). virtual currency. What additional proposed rulemaking.
76 7 U.S.C. 1a(28); 7 U.S.C. 6d(a). examples, if any, should the
77 7 U.S.C. 6(c). Commission consider to address the
80 See generally 7 U.S.C. 2(c)(2)(D)(ii).
78 Arguably, beyond the distributed ledger
status of ‘‘title’’ for the purposes of an
technologies, entities offering virtual currency retail actual delivery determination?
81 Report of Investigation Pursuant to Section
commodity transactions operate in a similar manner 21(a) of the Securities Exchange Act of 1934: The
to any other entity offering retail commodity DAO, Exchange Act Release No. 81207 (Jul. 25,
transactions online. 79 See 78 FR at 52428. 2017).
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Document Created: 2018-10-25 10:55:01
Document Modified: 2018-10-25 10:55:01
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Proposed Rules | |
| Action | Proposed interpretation; request for comment. | |
| Dates | Comments must be received on or before March 20, 2018. | |
| Contact | Philip W. Raimondi, Special Counsel, (202) 418-5717, [email protected]; or David P. Van Wagner, Chief Counsel, (202) 418-5481, [email protected]; Office of the Chief Counsel, Division of Market Oversight, Commodity Futures Trading Commission, 1155 21st Street NW, Washington, DC 20581. | |
| FR Citation | 82 FR 60335 | |
| RIN Number | 3038-AE62 |
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