Statement of Chairman Heath P. Tarbert in Support of Interpretive Guidance on Actual Delivery for Digital Assets

March 24, 2020

I am pleased to support the CFTC’s final interpretive guidance on actual delivery for digital assets used as a medium of exchange. These digital assets are colloquially known as “virtual currencies” or “cryptocurrencies.” Our action provides long-awaited guidance to trading platforms, custodians, and other key market infrastructures and participants regarding those digital assets that are both “commodities” under U.S. law and traded via leverage provided by the counterparty or trading platform. This action also reflects the CFTC’s growing expertise in this space as well as my commitment to continued U.S. fintech leadership and providing our market participants with clarity. 

Legislative Background

It is important to put this guidance in the larger context of the CFTC’s jurisdiction over leveraged spot “retail commodity transactions,” a subject that is both arcane and technical. As part of the Dodd-Frank Act, Congress added a new section to our governing statute, the Commodity Exchange Act (“CEA”), addressing leveraged spot retail commodity transactions. This section—codified as section 2(c)(2)(D) of the CEA—makes these transactions subject to certain enumerated provisions of the CEA “as if they were” futures contracts. Those enumerated CEA provisions include on-exchange trading and broker registration requirements, among others. So what is this all about? In short, it is about sealing a loophole.

Since the creation of the CFTC, the agency has had exclusive jurisdiction over commodity futures. Simply put, a futures contract is a standardized agreement that allows the long (short) side to buy (sell) a given commodity at a specified price at a later date. Under the CEA, these contracts must be traded on organized exchanges that the CFTC regulates. Some percentage of the contract value is deposited as margin with the exchange’s clearinghouse during the duration of the futures contract.

Futures contracts are different from bills of sale, which represent a transaction consummated in the present, as opposed to a later date. (We call these cash or “spot” transactions.) They are also different from forward contracts, which are less standardized, i.e., more bespoke to the parties to the agreement, and nearly always contemplate delivery of the relevant commodity.

But let us suppose that someone decides to purchase a given commodity with some money down, with both delivery and final payment to be made at some future date. Suppose also that the individual could decide to trade out of the position at any time to lock in whatever gains or losses he or she has incurred. Then guess what? That starts to look an awful lot like a futures contract—with identical economics yet without any regulation.

The CFTC necessarily began to treat these arrangements as futures contracts. But some courts disagreed, holding these schemes were wholly outside the CEA. So Congress took action.[1] While making clear that look-alike products would be regulated as futures contracts, Congress also prescribed a number of exceptions to ensure that section 2(c)(2)(D) would cover only those transactions that closely resemble futures and other CFTC-regulated derivatives, and not ordinary financed commercial sales.

One key exception carves out transactions that “result[ ] in actual delivery within 28 days.”[2] The guidance we are issuing today interprets this “actual delivery” exception as it applies to any digital asset that is a “commodity” under the CEA—such as Bitcoin and Ether, for example[3]—and is used as a medium of exchange (so-called “virtual currencies”).

Prior Interpretive Actions

This is not the CFTC’s first action interpreting the actual delivery exception. In 2013, we issued guidance taking a functional, facts-and-circumstances approach to determining when actual delivery has occurred.[4] Federal appellate courts have since interpreted this exception consistent with our 2013 guidance, focusing on the need for the purchaser to obtain “possession and control” of the commodity following the 28-day delivery period.[5] The CFTC itself has also previously interpreted the actual delivery exception in the context of digital assets, concluding that the exception was not met where Bitcoin was transferred to a virtual wallet under the control of the trading platform rather than the customer.[6]

Since 2017, when we first proposed the guidance we are finalizing today, we have also benefited from specific comments received, as well as from considerable experience and public input in the area of digital assets generally. Our understanding of the issues has been enhanced through (i) regular engagement with digital asset firms and users via each of our policymaking Divisions, as well as LabCFTC and the Technology Advisory Committee; (ii) responses to our 2018 request for information on the evolution of digital asset markets;[7] and (iii) the listing of digital asset derivatives on many CFTC-registered futures exchanges and swap execution facilities.

The digital assets community has waited patiently for more than two years for answers to their legitimate questions. Today I am pleased that we will provide the clarity they are seeking and deserve. Our guidance synthesizes relevant judicial precedent and CFTC positions, particularly appellate case law focusing on the elements of “possession and control,” including a purchaser’s ability to use a digital asset freely in commerce. It then applies this synthesized view in a series of non-exclusive, illustrative examples to provide additional clarity and certainty to the market.

Process Considerations

I have previously said that the CFTC “is most transparent when we regulate through public notice-and-comment rulemakings that require a majority vote of presidentially-nominated, Senate-confirmed officials. We should do so whenever possible.”[8] But I have also acknowledged that rulemaking is not appropriate for every circumstance. Areas involving fast-evolving technology and market structure—such as the digital asset space—may be better-suited to flexible guidance that can be more quickly adapted to fit the rapid pace of change.

I believe this guidance strikes the right balance. The CFTC voluntarily issued a proposed version of the guidance for public comment, and the final version addressing those comments is now subject to a vote of the Commission. In that sense, the process for issuing this guidance has in many ways tracked a traditional notice-and-comment rulemaking.

But by taking the form of guidance rather than a regulation, this release efficiently and flexibly communicates the CFTC’s current views on how the actual delivery requirement may apply in various situations. Given the complex and dynamic nature of digital asset markets, I believe it is appropriate to take an adaptable approach while the agency continues to follow developments in this area.

To prevent any potential market disruptions associated with efforts to assimilate this guidance, I anticipate that for a period of 90 days the CFTC will forbear from initiating enforcement actions addressing aspects of this guidance that were not plainly evident from prior CFTC guidance, enforcement actions, and case law.[9] I hope this use of prosecutorial discretion will help to maintain orderly, liquid digital asset markets.

Conclusion

To function well, markets and their participants need regulatory certainty. At the same time, rapid evolution in the fintech space often necessitates an adaptable regulatory framework. I believe this interpretive guidance provides the right blend of certainty and flexibility. As U.S. digital asset markets evolve, so too may our regulatory approach. While it remains to be seen whether so-called “virtual currencies” will gain traction on par with traditional currencies or even other commodity classes, it is critically important that the United States continue to be a leader in blockchain technology.[10] Under my leadership, the CFTC will continue to do its part to encourage innovation through sound regulation.  

-CFTC-
 

[1] See 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).

[2] Section 2(c)(2)(D) contains additional carve-outs specifically addressed to commercial financed transactions. One excludes from the scope of section 2(c)(2)(D) transactions involving “eligible commercial entities” and certain other agricultural entities acting within their line of business. Another excepts from section 2(c)(2)(D) any retail commodity transaction that “creates an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver and accept delivery, respectively, in connection with the line of business of the seller and buyer.”

[3] E.g., In re Coinflip, Inc., d/b/a Derivabit, CFTC Docket No. 15-29, 2015 WL 5535736, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 33,538 (CFTC Sept. 17, 2015) (consent order) (concluding that Bitcoin is a commodity under the CEA); 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) (same); In re BFXNA Inc., CFTC No. 16-19, 2016 WL 3137612, at *5 (June 2, 2016) (consent order) (same); see also CFTC v. McDonnell, 287 F. Supp. 3d 213, 217 (E.D.N.Y. 2018) (same); CFTC v. My Big Coin Pay, Inc., 334 F. Supp. 3d 492, 495–98 (D. Mass. 2018) (concluding that virtual currency similar to Bitcoin is a commodity); Heath P. Tarbert, Chairman, CFTC, Interview at Yahoo! Finance All Markets Summit (Oct. 10, 2019) (“Yahoo! Interview”) (stating belief that current version of Ether is a commodity).

[4] Retail Commodity Transactions Under Commodity Exchange Act, 78 Fed. Reg. 52,426 (Aug. 23, 2013) (“2013 Guidance”).

[5] CFTC v. Hunter Wise Commodities, LLC, 749 F.3d 967, 980 (11th Cir. 2014) (“While we need not defer to the agency’s interpretation because the statutory text is unambiguous . . . we note also that the interpretation the court adopts today harmonizes with the Commission’s own informal interpretation.”) (internal citations omitted); CFTC v. Monex Credit Company, 931 F.3d 966, 972-75 (9th Cir. 2019).

[6] In re BFXNA INC. d/b/a BITFINEX, CFTC Docket No. 16-19 (June 2, 2016) (consent order).

[7] See, e.g., Commission Request for Input on Crypto-Asset Mechanics and Markets, 83 Fed. Reg. 64,563 (Dec. 17, 2018); CFTC, Technology Advisory Committee (Mar. 14, 2020), https://www.cftc.gov/About/CFTCCommittees/TechnologyAdvisory/tac_meetings.html.

[8] Heath P. Tarbert, Chairman, CFTC, Statement: “Tripling Down on Transparency” (Dec. 10, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement121019.

[9] For example, I do not anticipate that the CFTC’s Division of Enforcement (“DOE”) would bring an enforcement action alleging a failure of actual delivery based on an affiliation between a trading platform and a depository during this 90-day time period that is inconsistent with the guidelines set forth in this guidance. By contrast, in my view it would be acceptable for DOE to initiate an enforcement action based on transactions during this time period that are merely “rolled” or “offset,” without further indicia of delivery, as the Commission has previously identified such transactions as inconsistent with actual delivery under section 2(c)(2)(D). See, e.g., 2013 Guidance at 52,429 (stating that actual delivery would not be satisfied where a transaction is “rolled, offset, or otherwise netted with another transaction or settled in cash between the buyer and the seller,” but the seller does not otherwise deliver the commodity into the possession of the buyer or a depository acting for the buyer that meets certain criteria). 

[10] See, e.g., Yahoo! Interview, supra note 3 (stating that the United States must be a leader in blockchain technology, creating an environment conducive to responsible financial innovation); Heath P. Tarbert, Chairman, CFTC, Fintech Regulation Needs More Principles, Not More Rules, Fortune (Nov. 19, 2019), https://fortune.com/2019/11/19/bitcoin-blockchain-fintech-regulation-ctfc/ (“Ensuring that America remains a global fintech leader will be essential to our future prosperity.”); Heath P. Tarbert, Chairman, CFTC, Interview on CNBC (Nov. 19, 2019) (“I want the United States to lead, particularly in the blockchain technology that underlies digital assets.”).