Nine years after Satoshi Nakamoto circulated his whitepaper and introduced the world to bitcoin, regulated bitcoin derivatives are about to be introduced in the United States. CME Group recently announced that it will begin to offer bitcoin futures based on the CME CF Bitcoin Reference Rate later this year and the Chicago Board Options Exchange has announced it will begin listing bitcoin futures contracts in Q1 2018. Ahead of any futures contract launch, U.S. Commodity Futures Trading Commission (“CFTC”) Chairman J. Christopher Giancarlo revealed that he does not feel that any new laws or regulations are necessary to accommodate the new bitcoin futures products or digital assets generally.
In a November 6 interview, Chairman Giancarlo stated that both the CFTC and the U.S. Securities and Exchange Commission (“SEC”) “have fairly broad jurisdiction in this area, so we’re not calling for any legislative changes.” Under Chairman Giancarlo’s leadership, the CFTC will look to existing statutory authority and “apply the law to the changing technological landscape.” Thus far, the CFTC has sought to encourage the growth of nascent financial technologies while educating market participants about the risks related to purchasing bitcoin and other digital assets. LabCFTC, the CFTC’s FinTech initiative, recently released a primer on virtual currencies that provides an overview of the regulatory landscape and highlights related risk factors.
SEC Chairman Jay Clayton also opined on digital assets and initial coin offerings (“ICOs”) in a November 8 speech. Chairman Clayton expressed concern that persons can buy and sell tokens on spot exchanges “but often do not appreciate that ICO insiders and management have access to immediate liquidity, as do larger investors, who may purchase tokens at favorable prices.” He warned that “[t]rading of tokens on these platforms is susceptible to price manipulation and other fraudulent trading practices.”
Chairman Clayton shares Chairman Giancarlo’s view that the SEC has statutory authority to incorporate digital assets into its regulatory regime. He explained that offerors of tokens that qualify as securities must conduct their ICO in compliance with the federal securities laws and exchanges that offer these products must register as national securities exchanges or seek an exemption from registration. He noted in his November 8 speech that the SEC “will continue to seek clarity for investors on how tokens are listed on these exchanges and the standards for listing; how tokens are valued; and what protections are in place for market integrity and investor protection.”
While many U.S. regulatory agencies, including the CFTC, SEC, Internal Revenue Service, and Financial Crimes Enforcement Network, are incorporating digital assets into their regulatory frameworks, some foreign regulators are considering and proposing drafting new digital asset rules to establish more bespoke guidelines. For example, Malaysia’s securities regulator recently announced that it hopes to release new digital asset regulations “in a few months.” Similarly, Gibraltar’s Financial Services Commission recently published draft regulations on distributed ledger technology (“DLT”) and stated that it is “considering a complementary regulatory framework covering the promotion and sale of tokens, aligned with the DLT framework.” As new token offerings continue to proliferate, market participants should remain cognizant of existing laws and regulations that might be applicable to their activities and be aware that new laws and regulations are being drafted in many jurisdictions that could apply to their activities.