Back in 2018, four different courts in the U.S. held that cryptocurrencies were commodities. This did not cause a huge ripple in the cryptocurrency community because the Commodity Exchange Act does not apply to retail commodity sales if the “actual delivery” of the commodity occurs within 28 days after the execution of the transaction, and generally cryptocurrencies are delivered in merely a few days or less.

But what constitutes “actual delivery” remains a question. In a recent case CFTC v Monex Credit, No. 18-55815 (9th Cir. July 25, 2019), the Ninth Circuit Court of Appeals shed some light on this question. While this decision was given in the context of precious metals, it could be relevant to the cryptocurrency industry as well. See https://bit.ly/31oYvPQ

The court clarified that actual delivery requires at least “some meaningful degree of possession or control by the customer.” If the commodity sits in a third-party depository, there could still be adequate customer control, but not when the commodity never changes hands, and is subject to the broker’s exclusive control. Although the level of customer control does not have to be significant, there must be some degree of it, such as contractual rights.

Based on the court’s interpretation of actual delivery, in order to enjoy the 28-day actual delivery exception, the cryptocurrency exchange should make sure that the customers can actually exert some degree of control over their purchased bitcoins, tokens or other digital assets. If the exchange holds the private keys and requires customers to submit a request in order to complete the transfer, arguably customers still have some degree of control because they have clear contractual rights to move the cryptocurrency upon request. However, if the purchased cryptocurrency were to move directly to a cold-storage facility controlled by the exchange for staking purposes, for example, and if customers are prohibited from moving the cryptocurrency for more than 28 days, then whether “actual delivery” has occurred is questionable. To be safe, we would recommend that an exchange first deliver the cryptocurrency to the customer, have the customer receive and hold it in his or her wallet, before staking the cryptocurrency in a cold storage facility.