On October 17, 2017, the Commodity Futures Trading Commission (CFTC) issued a Primer on Virtual Currencies. The primer is part of the “LabCFTC” initiative to promote Fintech innovation in the markets the CFTC regulates. Included in the primer is an overview of virtual currencies and distributed ledger technology (DLT) along with a discussion of their potential use-cases, the CFTC’s role and oversight (including permitted and prohibited activity), and the potential risks involved (operational, cybersecurity, speculation and fraud and manipulation).
What Did We Learn?
In short, not a whole lot. The primer includes a reminder regarding the CFTC’s view of its jurisdiction to regulate virtual currencies. In this regard, in September 2015, the CFTC formally announced its view that virtual currencies are properly defined as commodities. With respect to virtual currencies, the primer noted that the CFTC’s jurisdiction is implicated when a virtual currency is used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce. Absent fraud or manipulation, the CFTC does not regulate the sale of commodities directly (i.e., in the spot or cash markets or in transactions involving virtual currencies that do not utilize margin, leverage, or financing).
The primer also addressed the oversight roles of the CFTC and of the Securities and Exchange Commission (SEC) as they relate to initial coin offerings (ICOs) and virtual tokens. In particular, the primer referenced the DAO Report issued by the SEC in July 2017, in which the SEC noted that, based on facts and circumstances, an ICO could be a securities offering. A securities offering via an ICO must be registered (absent an exemption) and the platforms or systems that facilitate secondary market trading of tokens that are deemed to be securities must register as a national securities exchange or alternative trading system (ATS). In the CFTC’s view, “[t]here is no inconsistency between the SEC’s analysis and the CFTC’s determination that virtual currencies are commodities and that virtual tokens may be commodities or derivatives contracts depending on the particular facts and circumstances.”
Where Does That Leave Us?
The CFTC did not elaborate on its views, other than to note that it takes a substance-over-form approach when applying the federal commodities laws and CFTC regulations (as does the SEC for the federal securities laws and regulations). The CFTC also noted certain permissible activities on registered markets/platforms (for example, on or through a designated contract market (DCM), a swap execution facility (SEF) or derivative clearing organization (DCO)), seemingly indicating, like the SEC did, that certain ICO activity may need to be conducted on or through a CFTC-registered market or platform.
Rather than jockeying for supremacy in this space, the CFTC is playing nice in the ICO sandbox (at least for the time being). Unfortunately, however, the CFTC primer has not given meaningful clarity to a space where many questions exist. The industry may soon benefit from additional guidance from the SEC or CFTC. Future enforcement activity from these regulators may provide added insight. In the meantime, the industry must grapple with sustaining the tremendous momentum in the ICO market while also being mindful of the potential regulatory implications.
 The CFTC notes that it launched LabCFTC in May of this year to facilitate Fintech innovation, fair market competition, and proactive regulatory excellence and an understanding of emerging technologies. The CFTC views LabCFTC as an avenue to make the regulator more accessible to Fintech innovators and as a platform to inform the regulator’s understanding of emerging technologies, including to position it to be proactive and forward-thinking as Fintech develops, and to help identify related regulatory opportunities, challenges and risks.
 As the CFTC noted, the term “commodity” is broadly defined in the Commodity Exchange Act (CEA), and can mean a physical commodity, or a currency or interest rate, as well as “all services, rights, and interests…in which contracts for future delivery are presently or in the future dealt in.”
Nicholas J. LosurdoPartner
Grant P. FondoPartnerCo-Chair, Digital Currency & Blockchain
Mitzi ChangPartnerCo-Chair, Digital Currency & Blockchain, Fintech