In the absence of specific CFTC regulations regarding Bitcoin, the order helps clarify the CFTC’s positions on cryptocurrency derivatives.
On September 17, 2015, the US Commodity Futures Trading Commission (CFTC) issued an order filing (Derivabit Order), and simultaneously settling charges, against Coinflip, Inc. (Coinflip) and Francisco Riordan, its chief executive officer, with respect to Coinflip's operation of a Bitcoin options trading platform (Derivabit). 1 Specifically, the Derivabit Order finds that Coinflip and its principal violated the Commodity Exchange Act (CEA) by operating a facility for the trading or processing of commodity options without registering as a swap execution facility (SEF) or as a designated contract market (DCM).2 The order marks the CFTC’s first enforcement action involving Bitcoin derivatives and serves as a formal CFTC pronouncement that Bitcoin and other cryptocurrencies are properly classified as “commodities” under the CEA, providing a preview of the scope of future CFTC regulation of the cryptocurrency market.
The products listed on Derivabit were designated put and call options contracts (Bitcoin Options) for which (i) the underlying asset was Bitcoin, (ii) the strike and delivery prices were denominated in US Dollars and (iii) premiums and payments of settlement were to be paid using Bitcoin (at a spot rate determined by a designated third-party Bitcoin currency exchange). Derivabit users were able to post bids and offers on Derivabit for the Bitcoin Options. Such bids and offers were matched by Coinflip through the website. 3
Under the CEA, the term “swap” is defined very broadly to include, among other things, “[an] option of any kind that is for the purchase or sale, or based on the value, of 1 or more...commodities....” 4 Section 5(h)(a)(1) of the CEA, in turn, provides that any person operating a facility for the trading or processing of “swaps” is required to register with the CFTC as a SEF or as a DCM.5 In the Derivabit Order, the CFTC stated (albeit without any detailed analysis) that Bitcoin and other cryptocurrencies are encompassed in the definition of, and are properly classified as, “commodities.” The CFTC concluded, therefore, (i) that any options on Bitcoin or other cryptocurrencies are to be regulated as “swaps,” (ii) that Coinflip should have registered Derivabit as a SEF or as a DCM and (iii) that the failure of Coinflip to do so constituted a violation of the CEA and the CFTC regulations promulgated thereunder.6
The Derivabit Order mandated the immediate cease and desist of violations under the CEA, but did not impose any sanctions or penalties against Coinflip and Riordan.
Though Chairman Massad, Commissioner Wetjen and others have opined publicly on the CFTC's regulatory authority over Bitcoin and other cryptocurrencies,7 the CFTC had not previously formalized any regulatory position on such products. By issuing the Derivabit Order, the CFTC has clarified its position on Bitcoin and other cryptocurrency derivative products, namely:
- Bitcoin and other cryptocurrencies are “commodities” as defined in Section 1a(9) of the CEA8 ; accordingly, cryptocurrency derivatives, including futures, options, or swaps are subject to CFTC jurisdiction. 9
- Any platform for trading or executing cryptocurrency swaps must be registered as a SEF or as a DCM under Section 5h(a)(1) of the CEA. 10
Further, though Derivabit was advertised as also facilitating the execution of Bitcoin forward and futures contracts, the CFTC declined to address whether this aspect of Derivabit's business violated the CEA, given that Coinflip did not offer any forward or futures contracts during the time period at issue in the Derivabit Order. 11
Finally, while the Derivabit Order clarifies the CFTC’s position on Bitcoin and other cryptocurrency derivatives – i.e., Bitcoin and other cryptocurrencies are “commodities” – market participants should be mindful that numerous regulators, such as the US Securities and Exchange Commission, the Internal Revenue Service and New York State Department of Financial Services, have claimed enforcement jurisdiction over such cryptocurrencies.12 Importantly, the SEC won a ruling in 2013 that Bitcoin is “currency” and, consequently, Bitcoin-denominated investments are “securities” that can be regulated under the US securities laws. 13 Thus, market participants should continue to be aware that the regulatory landscape for cryptocurrencies is far from complete and will likely result in the attention of multiple regulators on the very same conduct for the foreseeable future.