The comment period for the CFTC’s proposed interpretation focusing on the actual delivery exception for retail virtual currency transactions came to an end on March 20, 2018. The CFTC received a total of 96 comments according to its website. Five comment letters came from industry and trade associations, seven from industry participants, two from public interest groups, one from a self-regulatory organization, while the overwhelming majority, 81 comments, were submitted by members of the general public.
Proposed interpretation. The proposed interpretation, titled Retail Commodity Transactions Involving Virtual Currency, would formally require the actual delivery of a virtual currency to a retail client within 28 days of a purchase transaction in order to avoid CFTC registration requirements by persons selling and either financing or arranging financing of the virtual currency, as well as related regulatory oversight by the Commission. According to the proposed regulation, the CFTC will consider “actual delivery” of a virtual currency to have occurred when a customer can take “possession and control” of all of the cryptocurrency and use it freely no later than 28 days from the date of the initial transaction, and can do so without any encumbrance.
The proposed interpretation also provided four non-exclusive examples to further clarify the meaning of “actual delivery” in the virtual currency context. Moreover, the Commission tendered nine specific questions for comment which covered the some of the following areas: shortening the 28 day time period; conflicts of interest between a trading platform and its customers; exempting parties from registration; clarifying the meaning of a “depository” in the context of accepting virtual currency delivery for a customer; factors in determining a customer’s “full control” of a virtual currency; and issues surrounding the status of title for a virtual currency. The comments summarized below represent a variety of the recommendations and advice submitted by the diverse group of commentators.
Industry associations. In its comment letter, the FIA recommended against shortening the 28-day period for spot delivery of virtual currency, noting that this nascent market may change over time and that the Commission should allow developing practices and conventions in the virtual currency markets to set the parameters of the spot market so as not to unintentionally stifle innovation.
Meanwhile, the Chamber of Digital Commerce took on the conflicts of interest issue when an offeror takes the other side of a customer trade. As noted, in the proposed interpretation, these arrangements, in certain circumstances, may resemble bucket shops. The Chamber asserted that that the CFTC should confirm that actual delivery does not occur when an offeror is also the counterparty-seller, and that party should not be able to rely on the actual delivery exception from the oversight of retail commodity transactions.
An industry player—Gemini Trust Company. Gemini, the operator of one of the largest virtual currency exchanges, which was founded and is managed by Cameron and Tyler Wilkelvoss, recommended that financial institutions (as that term is defined in the CEA) should remain the exclusive entities eligible to serve as depositories for retail virtual currency transactions. Gemini, which itself is a trust company and a fiduciary under New York Banking Law holding customer assets and funds, asserted that depositories should attain “financial institution” status to further customer protection regulatory objectives.
A self-regulatory organization—National Futures Association. In its comment letter, the NFA encouraged the CFTC to review the applicability of the 28-day actual delivery requirement with an eye towards reducing the time period. The NFA argued that, while this change may require Congressional action, shortening the timeframe is appropriate because virtual currency products are offered primarily for speculative investment purposes, are extremely volatile, and have attracted a large number of retail participants. The association concluded that shortening the time frame would also promote prudent risk management and customer protection ends.
A public interest group—Coin Center. In its comment letter, Coin Center, an independent nonprofit research and advocacy center focused on public policy issues facing digital currency technologies, urged the Commission to clarify and modify many of the definitional terms and vocabulary in the proposed interpretation “so that relevant aspects of the technology and [virtual currency] ecosystem can be mapped, carefully and without confusion to requirements under U.S. commodities law.” In particular, Coin Center sought further clarification or definition with respect to the usage of the terms “counterparty sellers”, “offerors”, “financers”, “depositories, and “customers” in the virtual currency context.
Members of the public. Eighty-one comments were submitted by members of the general public. Many of the them arrived soon after Chairman Giancarlo testified on virtual currencies before the Senate Banking Committee February 6, 2018. For the most part, these comments praised the chairman and offered words of encouragement. They were mostly submitted as text inputted directly onto the comment section of the Commission’s website rather than by letter. The commenters, who appeared to be mostly younger people, represented a cross-section of the population, including students, military personnel, as well as a number of people who identified themselves being from Europe. A typical comment read as follows:
“I sincerely appreciated the Chairman's thoughtful, reasonable, and informed responses today on the topic of cryptocurrencies. His respect for the enthusiasm and innovation of younger generations is a breath of fresh air. Using his experience and authority to regulate against bad actors, while simultaneously fostering innovation and technological advancement, represents the epitome of constructive oversight. He set the stage for further intelligent discussion as he educated the public and lawmakers alike.”Time will tell.