CFTC Concludes That Bitcoin Is A Commodity
In the evolving effort of U.S. regulators to determine how Bitcoin fits within the existing set of financial services regulations, the U.S. Commodity Futures Trading Commission or "CFTC" has now taken a significant step. In an order and associated public release issued yesterday, the CFTC presented – for the first time – its conclusion that Bitcoin and other virtual currencies fall within the CFTC’s definition of "commodities."
In the order, the CFTC instituted and simultaneously settled charges against Coinflip, Inc., d/b/a Derivabit, and its founder and chief executive officer, arising from alleged violations of the Commodity Exchange Act and certain CFTC regulations applicable to swaps and option contracts. Through its online Derivabit facility, during the period from approximately March 2014 until at least August 2014, Coinflip offered to connect buyers and sellers of Bitcoin option contracts. During this period, approximately 400 people were registered to be buyers and/or sellers on the Derivabit facility.
The CFTC is brief in its analysis of why Bitcoin are commodities. The CFTC cites the catch-all at the end of Section 1a(9) of the CEA, which – after a lengthy litany that lists a host of traditional physical commodities such as wheat, cotton, rice, corn, butter, eggs, Irish potatoes, peanuts, soybeans, livestock, and frozen concentrated orange juice – winds up the definition of "commodity" by including "all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in." Having laid this foundation, the CFTC’s order states: "The definition of a ‘commodity’ is broad … Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities."
Consequently, because it offered an exchange on which options on Bitcoin were traded, the CFTC found that the San Francisco-based Coinflip conducted activities related to commodity options, and operated an online facility for the processing of swaps without being registered as a swap execution facility or designated contract market, in violation of Sections 4c(b) and 5h(a)(1) of the CEA and CFTC Regulations 32.2 and 37.3(a)(1). The Order requires Coinflip and its founder/CEO to cease and desist from further violations of the CEA and the CFTC’s regulations, and to comply with certain standard undertakings. No fines or other penalties were imposed.
Among the standard provisions of the order of settlement in this case is a waiver by Coinflip and its founder/CEO to judicial review by any court, so this enforcement action will not give the courts an opportunity to weigh in on whether they agree with the CFTC’s analysis, including the determination that Bitcoin is a commodity.
By finding that Bitcoin is a commodity, however, the CFTC now has clearly asserted its authority to oversee futures and options based on virtual currencies. Platforms offering these derivatives and futures must now register as a swap execution facility or designated contract market, and, more generally, these platforms and their users must be exceeding conscious of the CFTC’s regulations and potential for enforcement action.
