The Commodity Futures Trading Commission received over 95 responses to its December 20, 2017 request for comment to a proposed interpretation requiring actual delivery of a virtual currency to a retail client within 28 days to avoid Commission registration requirements by persons selling and either financing or arranging financing of the virtual currency. (Click here for background on the CFTC’s proposed interpretation in the article “CFTC Proposes Interpretation to Make Clear: Retail Client + Virtual Currency Transaction + Financing + No Actual Delivery by 28 Days + No Registration = Trouble” in the December 17, 2017 edition of Bridging the Week.)

In response to a CFTC query as to whether 28 days or a shorter period should be the applicable time period, FIA recommended that the Commission “allow the virtual currency markets to continue to develop” before assessing whether a shorter period is appropriate. Alternatively, the National Futures Association indicated that a shorter period is likely prudent because virtual currencies “are offered primarily for speculative investment purposes, are extremely volatile and have attracted a large number of retail participants.” Gemini Trust Company, which operates a virtual commodity exchange, likewise argued that a 28-day delivery window is “unnecessarily long, does not reflect market practices, and may give rise to fraudulent activity.”

Coinbase, which also operates a virtual currency exchange, challenged CFTC suggestions that only virtual currency transactions consummated on a public blockchain should constitute actual delivery. Coinbase observed that such a view “fails to recognize limitations on the capacity of the public ledger.” The firm also indicated that the CFTC suggestion that wallet holders have “unfettered access to digital assets in those wallets” may compromise anti-money laundering and economic sanctions controls, and “unnecessarily” would expose digital assets to cybertheft. The Chamber of Digital Commerce took a different view however, saying that a purchaser should only be deemed to have full control when a seller or offeror exchange delivers the entire quantity of virtual currency to a purchaser’s wallet or its depository/warehouse wallet “away from” the offeror or offeror’s platform. However, the Chamber argued that the Commission “should not require that [a] purchaser hold the private key for a depository wallet so long as the purchaser has access and the ability to move the virtual currency from the depository without restriction by the seller or offeror.”

FIA challenged the CFTC’s assessment that for actual delivery to occur, there must be no liens by an offeror, counterparty seller, or other person acting in concert with the offeror or seller resulting from the use of margin, leverage or financing. FIA argued that the issue of liens “is not relevant” and that the granting of liens is a common practice in the cash commodity and retail markets (e.g., auto loans). Coinbase, however, said that for actual delivery to occur, “[t]he finance or margin provider should not hold any lien on the digital assets or be able to otherwise restrict transfer resulting from the provision of financing or leverage.”

My View: In my own fielding of questions in response to my frequent public speaking on cryptocurrencies, it has become obvious to me that there may not be a uniform appreciation regarding the varied ways transactions in digital assets may be consummated. Today, there are numerous ways for persons to gain access to cryptocurrencies – through peer to peer transactions directly on relevant blockchains; on crypto-exchanges that, in the United States, likely have to be regulated as a money service business by the Financial Enforcement Crimes Network of the US Department of Treasury and money transmitters by most states and that operate mostly off a blockchain; on decentralized exchanges that may combine elements of both peer to peer transactions and off blockchain messages and information flows; and on or through federally regulated facilities such as exchanges and futures commission merchants regulated by the CFTC, and alternative trading systems operated by broker-dealers under the oversight of the SEC. For the CFTC to more meaningfully evaluate important issues related to actual delivery of virtual currencies, it is important to consider each of the different ways to transact in such digital tokens (as well as varied ways persons protect themselves from cyberhacks), as well as what characteristics make a virtual currency not a security under the oversight of the SEC.