2017-27421
[Federal Register Volume 82, Number 243 (Wednesday, December 20, 2017)]
[Proposed Rules]
[Pages 60335-60341]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27421]
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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.
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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\
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\1\ 5 U.S.C. 552.
\2\ 17 CFR 145.9. Commission regulations referred to herein are
found at 17 CFR chapter I.
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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.
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\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).
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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\
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\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).
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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\
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\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).
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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\
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\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).
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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.
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\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).
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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
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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.
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\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.
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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'').
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\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.
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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.
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\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.
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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.''
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\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).
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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\
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\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'').
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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.
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\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.
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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.
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\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).
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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\
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\64\ 78 FR at 52428.
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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:
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\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.
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(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\
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\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.
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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\
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\68\ 78 FR at 52427.
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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.
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\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.
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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.
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\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.
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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.
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\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).
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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?
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\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'').
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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?
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\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.
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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?
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\79\ See 78 FR at 52428.
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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?
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\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
Last Updated: December 20, 2017