US Regulator CFTC Clueless on Definition of a Bitcoin 'Delivery' as per Applicable Law

The US Commodity Futures Trading Commission is working on a specification on what constitutes a "delivery" in trading and settlement of virtual currency contracts.

The US Commodity Futures Trading Commission is working on a specification on what constitutes a "delivery" in trading virtual and cryptocurrencies. The remarks were part of a public speech by the Newest CFTC Commissioner Brian Quintez. Since declaring virtual currencies as commodities under applicable law in 2014, the CFTC has charged 2 Bitcoin companies with running Unregistered Bitcoin Options Trading Platforms. The announcement comes at a time when traditional Hedge Funds and Investment banks have expressed interest in trading and investing in cryptocurrencies.

Brian Quintez was speaking at a Symphony Innovate 2017 conference on October 4. As part of the CFTC's Technology Advisory Committee, Mr. Quintez said he was eager to evaluate Bitcoin and its underlying technology through the TAC.

Lexology.com, an aggregator of legal updates, elaborated on the new Commissioner's opinion on the state of Bitcoin under CFTC applicable law

"although the meaning of "actual delivery" in the context of cryptocurrencies might be unclear, platforms selling Bitcoin to retail persons on a margined, leveraged or financed basis must be aware that, unless there is actual delivery within 28 days, the CFTC would expect such platforms to register with it as futures commission merchants."

The Commission's enforcement actions in the past highlight the lack of clear-cut rules.

In 2015, the CFTC filed charges against the founders of a Cryptocurrency Options Facility - Derivabit. Coinflip, Inc. and Francisco Riordan were accused of operating the platform without the appropriate registration as SEF (swap execution facility) or DCM (designated contract market). This case marked the unequivocal stance of the CFTC on digital commodities.

The following year, Bitfinex was fined $75,000. For over two years, Bitfinex users were able to borrow funds from and purchase Bitcoin from other customers on the platform. CFTC filed charges claimed the exchange was liable for not delivering Bitcoins to the retail clients within 28 days as per applicable laws. Instead, the Hong Kong-based exchange held the asset in hosted wallets, controlled and owned by BFXNA Inc.

The latter case was the crux of Mr. Quintez remarks. 

A CFTC press release following the $75,000 settlement clarified the precedent of a federal court on the case CFTC v. Hunter Wise Commodities LLC, 749 F.3d 967, 978-79 (11th Cir. 2014).

"actual delivery" requires a transfer of "possession and control" of the commodity and giving "real and immediate possession to the buyer or the buyer's agent."

In July, a New York-based startup was granted a clearinghouse license by the commodities regulator. LedgerX waited three years for permission to operate cryptocurrency backed financial instruments on behalf of institutional clients.

The Commodity Futures and Trading Commission indeed has sole oversight over market participants involved in the trading of commodity options, futures, and swaps. Any institutional investors into Bitcoin, like Goldman Sachs, will require fully compliant cryptocurrency contract clearinghouses.