CFTC on Bitcoin Retail Transactions After Bitfinex “Actual Delivery” Exception Enforcement Action

The CFTC defines its authority over retail commodity transactions involving virtual currency and Bitcoin after it brought enforcement actions against Bitfinex for not meeting “actual delivery” exemption.

On Friday 15th 2017 the CFTC released a Proposed Interpretation of its view of the term “actual delivery” exception that may apply to virtual currency transactions under the Commodity Exchange Act (CEA) pursuant to the Dodd-Frank Act. Section 2(c)(2)(D) of the Act gives the CFTC authority over retail commodity transactions, defined as “agreements, contracts or transactions in any commodity that are entered into with, or offered to retail market participants on a leveraged or margined basis, or financed by the offeror, the counterparty or a person acting in concert with the offeror or counterparty on a similar basis.”

This CEA clause contains an exception for contracts of sales that result in “actual delivery” within 28th days from the day of transaction. The CFTC issued a Proposed Interpretation defining the requirements for “actual delivery” of retail transactions in virtual currency or Bitcoin:

(1) a customer having the ability to: (i) take possession and control of the entire quantity of the commodity, whether it was purchased on margin, or using leverage, or any other financing arrangement, and (ii) use it freely in commerce (both within and away from any particular platform) no later than 28 days from the date of the transaction; and

(2) the offeror and counterparty seller (including any of their respective affiliates or other persons acting in concert with the offeror or counterparty seller on a similar basis) not retaining any interest in or control over any of the commodity purchased on margin, leverage, or other financing arrangement at the expiration of 28 days from the date of the transaction.

The Proposed Interpretation is a request for comments and must be submitter within 90 days from publication in the Federal Register.

The CFTC has established that virtual currency such as Bitcoin is a commodity as defined by CEA section 1a(9), and used its authority to bring an enforcement action against Bitfinex for not registering with the Commission. Bitfinex offered Bitcoin transactions to retail customers on its platform, but the CFTC found that it didn’t actually deliver bitcoins purchase from them but rather, “held the purchased bitcoins in bitcoin deposit wallets that it owned and controlled.” The Bitfinex settlement order stated that the platform did not meet the delivery exception and violated sections 4(a) and 4d of the CEA statute. Since then the Commission has received request for clarification on how the delivery exception applies to virtual currency such as Bitcoin. In a letter the CFTC gave a deeper definition on how the delivery exception applies to virtual currency.

“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. The longstanding Model State Commodity Code also contains an exception from its “commodity contract” regulation when physical settlement occurs within 28 days. 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.

Therefore, absent Congressional action, the Commission is unable to reduce the actual delivery exception period for speculative, leverage-based retail commodity transaction 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. 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.”

The original press release can be found here, and the full letter providing sample scenarios and answers can be found here.

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