On October 17, 2017, the Commodity Futures Trading Commission issued guidance for virtual currencies via LabCFTC in the form of a document titled, "A CFTC Primer on Virtual Currencies."
In broad terms, the primer identifies itself as "an educational tool regarding emerging FinTech Innovations." The primer goes on to say that "it is not intended to describe the official policy or position of the CFTC, or to limit the CFTC’s current or future positions or actions," and, indeed, “the CFTC does not endorse the use or effectiveness of any of the financial products” listed in the document. Furthermore, a piece of fine print on the face of the report imparts to the reader that “LabCFTC has no independent authority or decision-making power, and cannot independently provide, or create an expectation for, legal or regulatory relief."
LabCFTC draws from a general idea of cryptocurrencies as provided by the IRS:
"Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.
In some environments, it operates like ‘real’ currency … but it does not have legal tender status [in the U.S.].
Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as ‘convertible’ virtual currency. Bitcoin is one example of a convertible virtual currency.
Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies."
The document differentiates between public and permissioned blockchain platforms, noting that those systems operating with permissioned protocols "do not necessarily involve a virtual currency that may serve as the economic incentive for miner or validator participation in public networks." Also identified in the document are potential use cases for cryptocurrencies, such as a more portable, fungible, divisible store of value; trading that can result in capital gains or loss; payments for goods and services; and an alternative route to circumvent high transaction fees to transfer money for domestic or international purposes.
As per the primer, the CFTC has a broad definition of commodities that includes cryptocurrencies. It reads, "The CFTC first found that Bitcoin and other virtual currencies are properly defined as commodities in 2015." It goes on to state:
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. Beyond instances of fraud or manipulation, the CFTC generally does not oversee ‘spot’ or cash market exchanges and transactions involving virtual currencies that do not utilize margin, leverage, or financing."
Listed in the document are permitted activities that LabCFTC has gathered information about. These include TeraExchange LLC, a Swap Execution Facility (SEF) that registered with the CFTC to list a bitcoin-based swap, and has been trading to "eligible contract participants" based on the tenets of SEF platforms since 2014. In addition, The North American Derivatives Exchange Inc., (NADEX) has listed binary options on the Tera Bitcoin Price Index during a period lasting from November of 2014 to December 2016. LedgerX LCC was also mentioned, which has been registered with the CFTC as a SEF and derivative clearing organization since July 2017; LedgerX plans to list digital currency options on its forthcoming platform.
The document also outlines prohibited activities, noting that the list is not exhaustive and may, in time, encompass more activities. The following included activities would be out of bounds:
"Price manipulation of a virtual currency traded in interstate commerce.
Pre-arranged or wash trading in an exchange-traded virtual currency swap or futures contract.
A virtual currency futures or option contract or swap traded on a domestic platform or facility that has not registered with the CFTC as a SEF or DCM.
Certain schemes involving virtual currency marketed to retail customers, such as off-exchange financed commodity transactions with persons who fail to register with the CFTC."
On crowdfunding through token offerings (popularly referred to as initial coin offerings or ICOs), LabCFTC's primer draws conclusions from parameters that were previously defined in the SEC’s DAO ICOs), LabCFTC's primer draws conclusions from parameters that were previously defined in the SEC’s DAO report from July, wherein the SEC says tokens used in crowdfunding are akin to securities under federal laws. The primer goes on to say:
"There 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. The CFTC looks beyond form and considers the actual substance and purpose of an activity when applying the federal commodities laws and CFTC regulations."
As the report continues, it lists what LabCFTC identified as potential pitfalls of cryptocurrencies that encompass operational, cybersecurity, speculative, fraud, and manipulation risks. The primer offers investors advice on how to make intelligent decisions by doing their due diligence and researching their target investments in order to avoid "schemers and fraudsters seeking to capitalize on the current attention focused on virtual currencies."