As previously discussed, there are quite a few regulatory schemes surrounding Digital Assets and Cryptocurrencies. In addition to the FinCen Rulings, each State has its own regulations. The Internal Revenue Service (“IRS”) has its stance on taxation of Digital Assets and Cryptocurrencies, and the Securities and Exchange Commission (“SEC”) is also further developing its stance on the industry. Another federal agency with some regulatory oversight of Cryptocurrencies is the Commodity Futures Trading Commission (“CFTC”). This article will provide a brief introduction to the CFTC, its stance on Cryptocurrencies and why it is important to be aware whether you or your business is subject to CFTC regulations.
Overview of the CFTC
The CFTC is an independent United States government agency that regulates the United States derivatives market which includes commodity futures and over the counter markets. The CFTC also regulates trading organizations and intermediary entities that act as agents for other people when dealing with derivatives. The trading organizations largely fall into one of two groups, a Designated Contract Market (“DCM”) or a Swap Execution Facility (“SEF”). A DCM is an exchange that hosts future trading (the Chicago Mercantile Exchange is the best example of a DCM). A SEF is a platform that matches counterparties in swap transactions (SEF’s are also subject to SEC regulation). The intermediaries include the below categories as well as Major Swap Participants. However, as of July 2021 per the NFA website, there are no registered Major Swap Participants. If your business will place you in one of the below five buckets, you will need to register with the CFTC.
|CFTC Regulated Intermediaries|
|Commodity Pool Operator||A fund that combines investor contributions to trade on the futures and commodity markets.|
|Commodity Trading Advisor||An individual or entity that gives investment advice for commodity and futures markets.|
|Futures Commission Merchants||An individual or entity that accepts orders to buy or sell any commodity for future delivery.|
|Introducing Brokers||An individual or entity that solicits or accepts orders to buy or sell derivatives but does not accept money or other assets from customers to support the orders.|
|Swap Dealers||An individual or entity that serves as a swap broker, makes markets, or enters into swap contracts with counterparties.|
The CFTC on Digital Assets and Cryptocurrencies
Regarding Digital Assets, the CFTC has said that depending on the structure and use of the Digital Asset, the asset itself can be encompassed within the definition of a commodity. If the asset falls under the definition of a commodity, depending on the activities you are pursuing, you are subject to the purview of the CFTC. The Commodity Exchange Act broadly defines a commodity to include all goods, articles, rights, and interests in which contracts for future delivery are presently or in the future dealt in.
Cryptocurrencies, including bitcoin, are properly defined as commodities because there can be a contract for future delivery of the specific Cryptocurrency. The CFTC considers “virtual currency” to be any digital representation of value that functions as a medium of exchange and any other digital unit of account used as a form of currency. This does not mean that by buying or selling bitcoin or other Cryptocurrencies you need to register with the CFTC. It means that if you are pursuing activities involving Cryptocurrencies which fall under one of the five intermediaries listed above, or serving as a DCM or SEF, you are subject to CFTC regulations and need to register with the CFTC.
As of this writing, it is not yet determined whether Non-Fungible-Tokens (“NFT”) are considered a commodity. It stands to reason that if futures, options, or swap contracts are developed based on NFT’s, there will be future rulings bringing NFT’s under the purview of the CFTC.
The CFTC has also stated that actual delivery of retail commodity transactions in virtual currencies occurs when two criteria are met. The first is that a customer has the ability to take possession and control of the entire commodity and use it freely in commerce within 28 days from the transaction date. The second is that neither of the offeror or counterparty seller has any right, interest 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.
An example of the first condition being met is that within 28 days of entering into the contract, the purchased Cryptocurrency has been transferred to a blockchain address in the sole possession and control of the purchaser. An example of the second condition being met is that within 28 days of entering into the contract, the seller delivers the purchased Cryptocurrency to an unaffiliated depository at which point the purchaser has full control over the Cryptocurrency and there are no continuing liens on the Cryptocurrency relating to the use of margin, leverage or financing used to obtain it.
The CFTC was created in 1974 and has had its jurisdiction expanded several times since then. As Digital Assets and Cryptocurrencies increase in popularity, you can be sure that there will be more regulations created around these assets. In fact, just last week, CFTC Commissioner Brian Quintenz stated that “the SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil…or crypto assets.” Clearly, the regulations around Digital Assets and Cryptocurrency are evolving. Therefore, it is important to be aware and stay updated as to the various stances the CFTC has on participants within the Cryptocurrency industry, because falling under the purview of the CFTC requires compliance with enhanced reporting requirements. Particularly, the entity, its principals and associated persons must register with the NFA, various individuals will have to obtain certain licenses and there are different annual required filings to comply with. If you have any questions as to whether an opportunity you are pursuing in the Digital Asset or Cryptocurrency space will bring you under the regulations of the CFTC, do not hesitate to reach out.
The information provided herein is general in nature and is purely for informational purposes and does not constitute legal advice, nor does it create an attorney-client relationship. You should accept legal advice only from a licensed legal professional with whom you have an attorney-client relationship.
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.