On October 17, 2017, the Commodity Futures Trading Commission (CFTC) published a “Primer on Virtual Currencies,” the first in a series of primers on fintech innovation, via its “LabCFTC” initiative. LabCFTC is a self-proclaimed platform by which the CFTC will proactively engage with fintech innovators, in order to “better understand how new innovations interact with the regulatory and supervisory framework…”
Prior to issuing the Primer, in a 2015 enforcement action, the CFTC declared virtual currencies to be “commodities.” In the Primer, the agency confirmed this designation, and confirmed its authority with respect to fraud and manipulation in virtual currency markets. Correspondingly, the CFTC also asserted jurisdiction over all derivatives products with an underlying virtual currency (including, for example, the recently launched bitcoin futures contracts).
The CFTC Primer on Virtual Currencies is divided into three sections: (i) an overview of virtual currencies, (ii) the role of the CFTC, and (iii) risks of virtual currencies. Importantly, the CFTC provided examples of prohibited activities in the virtual currency markets:
- Price manipulation of virtual currencies
- Pre-arranged or wash trading in exchange-traded virtual currency futures or swap contracts
- Trading a virtual currency derivative product on a platform that failed to register as a swap execution facility (SEF) or derivatives clearing organization (DCO)
- Marketing virtual currencies to retail customers without the appropriate CFTC registrations
These virtual currency-related prohibitions comport with the prohibitions in other CFTC-regulated markets.
Another highlight in the Primer was the discussion of the Securities and Exchange Commission’s recent report on Initial Coin Offerings (“ICOs”). In that report, the SEC determined that certain tokens issued under an ICO are “securities,” subject to regulation under federal securities laws. The CFTC noted in the Primer that there is “no inconsistency” between the SEC’s analysis and the CFTC’s determination that virtual currencies are commodities and that virtual tokens may be commodities or derivatives, based on each individual fact pattern.
We expect to hear significantly more from the CFTC in the coming months and years regarding virtual currencies and blockchain. The agency has had its eye on the technology for some time now, and with bitcoin and potentially other virtual currency derivatives products taking off, the CFTC will likely have quite a bit more to say (and regulate).