On July 24, LedgerX was approved by the Commodity Futures Trading Commission as a derivatives clearing organization to clear fully collateralized digital currency swaps. The firm was recently approved as a swap execution facility. (Click here for background in the article “LedgerX Approved as SEF by CFTC; Intends to List Bitcoin Options for Trading” in the July 9, 2017 edition of Bridging the Week.) To gain registration as a SEF and DCO, LedgerX had to demonstrate how it proposed to comply with core principles applicable to such entities as required by law. (Click here for a summary of core principles applicable to SEFs and here for core principles applicable to DCOs.) However, in connection with its DCO approval, LedgerX was granted exemption from complying with a few specific CFTC requirements because of its fully collateralized model (click here to access the CFTC's exemption letter addressing these requirements). Only institutional clients that qualify as eligible contract participants under applicable law will be eligible to trade through LedgerX and each participant must provide LedgerX with sufficient collateral to cover the maximum potential loss or delivery obligation of a contract prior to a trade being executed. (Click here to access the definition of an eligible contract participant at 7 U.S.C. § 1a(18).) LedgerX anticipates listing options on Bitcoin (click here for specifications) and day ahead swaps (click here for specifications) beginning in September 2017. (Click here for an introduction to LedgerX by Paul Chou, Chief Executive Officer.)

Legal Weeds: The CFTC has broad jurisdiction over commodities and, in particular, derivatives based on commodities. Under applicable law, commodities are defined to include all “goods and articles” (except onions and motion picture box office receipts) and “all services, rights and interests” on which contracts for future delivery might be based. (Click here to access the definition of an eligible contract participant at 7 U.S.C. § 1a(9).) In response, the Commission formally proclaimed its authority over derivatives based on virtual currencies in December 2014 when then Chairman Timothy Massad testified before the US Senate Committee on Agriculture, Nutrition and Forestry. There, Mr. Massad said, “Derivative contracts based on a virtual currency represent one area within our responsibility.” (Click here to access a copy of Mr. Massad’s testimony.) Previously, in September 2014, TeraExchange self-certified a US dollar-settled Bitcoin swap contract for trading on its SEF and the CFTC did not object. In September 2015, the Commission brought and settled charges against Coinflip, Inc. and its chief executive office for purportedly operating a trading facility for Bitcoin options without being registered as a SEF or a designated contract market. (Click here for details in the article “CFTC Says Virtual Currencies Are a 'Commodity' Under Federal Law, Files Charges Against Coinflip for Operating an Unregistered Bitcoin Options Trading Platform” in the September 20, 2015 edition of Bridging the Week.) More recently, in June 2016, the CFTC brought and settled charges against BFXNA Inc., doing business as Bitfinex, for allegedly engaging in prohibited, off-exchange commodity transactions with retail clients and failing to register as a futures commission merchant, as required. (Click here for details in the article “Bitcoin Exchange Sanctioned by CFTC for Not Being Registered” in the June 5, 2016 edition of Bridging the Week.)