On December 15, 2017, the Commodity Futures Trading Commission announced a proposed interpretation on what constitutes “actual delivery” of a virtual currency for purposes of Commodity Exchange Act (CEA) section 2(c)(2)(D)(ii)(III)(aa).

Pursuant to CEA Section 2(c)(2)(D), the CFTC has oversight authority over “retail commodity transactions,” including any agreement, contract or transaction in any commodity that is entered into with or offered to a person that is neither an eligible contract participant nor an eligible commercial entity on a leveraged or margined basis, or financed by the offeror, the counterparty or a person acting in concert with the offeror or counterparty on a similar basis. Any such agreement, contract or transaction covered under CEA Section 2(c)(2)(D) is also subject to CEA sections 4(a), 4(b) and 4b, which, respectively, (1) require that futures contracts be traded on a designated contract market, (2) require any foreign board of trade that permits direct electronic access from the US to be registered with the CFTC as a foreign board of trade, and (3) prohibit fraud in connection with the offer and sale of futures contracts. However, under CEA section 2(c)(2)(D)(ii)(III)(aa), a retail commodity transaction may be excepted from CEA section 2(c)(2)(D), and thus not subject to CEA sections 4(a), 4(b) and 4b, if actual delivery occurs within 28 days of the transaction.

The CFTC’s proposal establishes two primary factors necessary to demonstrate “actual delivery” of a virtual currency in a retail commodity transaction:

  • A customer must have the ability to: (1) take 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 (2) use it freely in commerce (both within and away from any particular platform) no later than 28 days from the date of the transaction; and
  • 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) must not retain any interest in 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.

The CFTC further clarifies that a cash settlement or offset mechanism, i.e., the purchase or sale is rolled, offset against, netted out, or settled in cash or a different virtual currency, will not satisfy the actual delivery exception.

The proposed interpretation is open for public comment until March 20.

CFTC’s proposed interpretation is available here.