What has happened

The CFTC has issued guidance clarifying its views regarding the “actual delivery” exception to Section 2(c)(2)(D) of the Commodity Exchange Act (CEA) in the context of digital assets that serve as a medium of exchange, colloquially known as “virtual currencies.”

What does this mean

The section renders certain “retail commodity transactions” subject to enumerated provisions of the CEA, including on-exchange trading and broker registration requirements, “as if” the transactions are futures contracts.

The CFTC said that the statute contains an exception for contracts of sale that result in “actual delivery” within 28 days from the date of the transaction. This guidance is not meant to inhibit any particular activity. Rather, it provides the agency's views regarding when certain activity is subject to the regulatory provisions made applicable by CEA section 2(c)(2)(D).

The final interpretive guidance discusses two primary factors demonstrating “actual delivery” of retail commodity transactions in virtual currency:

"(1) a customer securing: (i) possession and control of the entire quantity of the commodity, whether it was purchased on margin, or using leverage, or any other financing arrangement, and (ii) the ability to use the entire quantity of the commodity freely in commerce (away from any particular execution venue) no later than 28 days from the date of the transaction and at all times thereafter; and

(2) the offeror and counterparty seller (including any of their respective affiliates or other persons acting in concert with the offeror or counterparty seller on a similar basis) do not retain any interest in, legal right, or control over any of the commodity purchased on margin, leverage, or other financing arrangement at the expiration of 28 days from the date of the transaction."

According to CFTC Chairman Heath P. Tarbet, the guidance reflects his agency's growing expertise in this space, and will be welcome by trading platforms, custodians, and other key market infrastructures and participants.

He also believes that the guidance strikes "the right balance", and is testament to the agency's "adaptable approach" in this area.

He added that he does not anticipate the CFTC initiating any enforcement actions addressing aspects of this guidance for a period of 90 days to "prevent any potential market disruptions associated with efforts to assimilate" the guidance.

"I believe this interpretive guidance provides the right blend of certainty and flexibility. As U.S. digital asset markets evolve, so too may our regulatory approach. While it remains to be seen whether so-called 'virtual currencies' will gain traction on par with traditional currencies or even other commodity classes, it is critically important that the United States continue to be a leader in blockchain technology," he said.

Next steps

To keep on top of the fast-moving legal developments affecting blockchain and virtual assets, please visit our Blockchain Tool.

[View source.]