On October 17, 2017, the Commodity Futures Trading Commision’s (the “CFTC”) LabCFTC, the CFTC’s division launched this year to look at financial technology (“FinTech”), issued a press release and its first primer (in the form of an outline on slides) called “A CFTC Primer on Virtual Currencies” (the “Primer”). Perhaps the most important statement in the primer is that virtual currencies can be commodities for Commodities Exchange Act (“CEA”) purposes and that there is no inconsistency with the Securities Exchange Commission analysis under the securities laws that virtual tokens are securities under certain circumstances. See SEC Report on Virtual Token Offerings and ICOs. Virtual currencies are commodities for purposes of the CEA, and the CFTC regulates (i) the use of vitual currencies in derivative contracts and (ii) fraud or manipulation when traded in international commerce, but not “spot” trading. The CFTC warns investors that many platforms are unregulated, fees can be little understood or unclear and systems may be manipulated. According to the Primer, virtual currency and virtual currency offering and trading risks include: (i) operational, (ii) cybersecurity, (iii) speculation and (iv) fraud and manipulation. Public distributed ledgers may in fact not be as “immutable” as believed.
The Primer defines a “virtual currency” as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value”, but which does not have legal tender status, unlike fiat (“real”) currencies. “Convertible virtual currency” is defined as virtual currency that has “an equivalent value in real currency, or that acts as a substitute for real currency”. The Primer says that certain virtual currencies “operate on public distributed ledger systems that capture ‘blocks’ of transactions”. “Public” networks, such as that which operates Bitcoin, the first and perhaps most well-known virtual currency, run on “a decentralized peer-to-peer network of computers and ‘miners’ that operate on an open-source software and do ‘work’ to validate and irrevocably log transactions on a permanent public distributed ledger visible to the entire network”; such ledgers can transfer ownership digitally without a trusted intermediary. “Permissioned” or private distributed ledger networks also exist, and “typically have some degree of trust between the participants”. TeraExchange, LLC is a Swap Execution Facility registered with the CFTC and lists a Bitcoin swap for trading among sophisticated investors; there are other exchanges and entities involved in virtual currencies listed or to be listed with the CFTC as well.