One day before Commodity Futures Trading Commission (CFTC) chairman J. Christopher Giancarlo testified on cryptocurrency before the US Senate Banking Committee, the agency's general counsel, Daniel J. Davis, issued a memorandum to staff entitled "Guidance Regarding Ethics Laws and Regulations Related to Employee Holdings and Transactions in Cryptocurrencies." ETHNews obtained a copy of the document for review.
In the memorandum, Davis explained that established rules and regulations related to CFTC employee transactions in commodities apply to their holdings and transactions in cryptocurrencies. This means that across the board, CFTC employees may not trade cryptocurrency derivatives products (i.e. bitcoin futures, swaps). "While there is no restriction on buying or selling commodities including cryptocurrency per se, there is a blanket prohibition against transacting in futures and swaps," wrote Davis.
The CFTC's guidance also clarified that employees are not allowed to purchase cryptocurrencies "on margin" or transact in cryptocurrencies if they have related nonpublic information. These are ethical standards that apply to commodities generally – cryptocurrencies are no exception.
ETHNews spoke with the CFTC's director for the office of public affairs, Erica Elliott Richardson, who shed some light on the guidance. Here's what she had to say:
"Bloomberg got many of the facts correct, but of course, a sensationalist headline really missed the main point: Under statute, the CFTC cannot issue a blanket ban to employees on ownership of anything. It's a first amendment issue and due process property rights [issue].
If we were to say that by coming to work at the agency, employees could not own commodities, everyone would be starving and naked, because they wouldn't be able to buy corn or cotton, and they wouldn't be able to drive to work because they couldn't buy gas."
"We do not have jurisdiction over all commodities," she continued. "We have jurisdiction over commodity futures (hence the name: Commodity Futures Trading Commission), and we can and do ban trading for employees in futures and swaps. Employees of government agencies, like the CFTC, are subject to long-established laws and regulations on conflicts of interest, insider trading, and ownership restrictions of regulated assets."
Richardson spelled it out in simple terms: "We do not regulate bitcoin. We regulate bitcoin futures products."
"The real story of this memo is that despite our legal restrictions on issuing a blanket ban for all employees, our chairman has made the point that anyone at the agency involved in oversight of bitcoin futures products should not own the underlying asset, bitcoin."
She added, "Context is important here. Bitcoin futures (and the underlying cash market) are the smallest of small fractions of the markets our agency oversees. So, no, we cannot issue a blanket ban that says the library staff at the agency cannot transact in bitcoin. However, we can make sure that those employees actively involved in the regulation and oversight of the bitcoin futures market don't own the underlying asset."
According to Richardson, no CFTC employees have been terminated or otherwise sanctioned for violations of ethics rules and regulations related to cryptocurrency futures products. Also worth noting is that the CFTC does not have the authority to require pre-clearance of cryptocurrency trades, something which the Securities and Exchange Commission is requiring of its employees.
With regard to tokens distributed through ICOs, Richardson said, "The CFTC cannot issue any requirements to employees regarding legal financial transactions beyond those currently enumerated in the CEA, 7 U.S.C. 13(c) and (d)(1), the CFTC's supplemental ethics regulations at 5 C.F.R. 5101 and 17 C.F.R. 140.735, which are outlined in our memo. Broadly speaking, Initial Coin Offerings do not fall under the CFTC's jurisdiction."
This afternoon, Angela Walch, an associate professor at St. Mary's University School of Law, shared her thoughts on the memo:
"I see the memo as the CFTC cautioning its employees on the ethical issues that could be raised by their trading in cryptocurrencies, encouraging them to consider and seek advice from the CFTC ethics team before trading in cryptocurrencies, noting that employees may not transact in cryptocurrencies if they have nonpublic information about them from their work at the CFTC, and advising that those who participate in CFTC dealings related to cryptocurrencies may not trade in them for conflict of interest reasons."
Walch added, "Please don't take this to mean that I think employees of the CFTC or the SEC or any other regulatory body considering cryptocurrencies should be able to trade in these instruments."
ETHNews previously reported on the CFTC's "heightened review" process for virtual currency derivatives and the self-certification process which was successfully used by a number of traditional exchanges to list bitcoin futures.
Earlier this month, at a Technical Advisory Committee meeting led by Chief Innovation Officer Daniel Gorfine, the CFTC passed motions to create subcommittees dedicated to distributed ledger technology and virtual currencies. The agency also recently issued a warning about virtual currency pump-and-dump schemes.