Earlier today, LabCFTC released, “A Primer on Virtual Currencies,” which it describes as being the first of a series of publications “to help market participants and innovators navigate the FinTech landscape”. The publication, which provides an overview of “virtual currencies and their potential use-cases,” is noteworthy for several reasons:
First, as a structural matter, the primer addresses three key considerations in a clear and concise manner
- An overview of virtual currencies, bitcoin, and Blockchain technologies;
- The role of the CFTC, as well as permitted and prohibited uses and comments about initial coin offerings (ICO’s); and
- Risks of virtual currencies.
Second, the overview portion of the publication contains a useful reference overview of the difference between public and private ledger systems (see Slide 6). While quite basic in substance, this resource may be of value to readers who are asked this question by stakeholders involved in FinTech projects who are relatively new to this technology. (In fact, the entire overview portion of the publication may be useful in that regard.)
Third, the second portion of the publication (The Role of the CFTC) emphasizes several themes that we have been discussing in other blog postings regarding the scope of the CFTC’s jurisdiction, as well as what constitutes permitted and prohibited activities. The CFTC has jurisdiction over not only derivatives that use virtual currencies, but also over any virtual currency transaction in interstate commerce that involves fraud of manipulation (see slide 11). Permitted virtual currency activities clearly involve CFTC-regulated platforms (see Slide 12). Prohibited virtual currency activities include the trading of a virtual currency “futures or option contract or swap” over an unregistered platform. In this regard, we note that the terms “futures contract or option or swap” have complex and nuanced meanings developed through statutory and administrative guidance, as well as case law in certain instances. Other examples of prohibited activities cited are manipulative trading of virtual currencies and “certain schemes involving virtual currency marketed to retail customers” (see Slide 13).
Fourth, in discussing the decentralized autonomous organization report issued by the Securities and Exchange Commission in July 2017 (the DAO Report), the LabCFTC primer observed that although the SEC concluded that the particular tokens involved in the ICO were “securities” under the federal securities laws,
“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.”
In other words, the federal commodity laws and the federal securities laws will not necessarily be applied in a mutually exclusive manner and market participants should take a “multi-dimensional” approach to the analysis of the potential regulatory considerations in respect of their virtual currency activities (see Slide 14).
Finally, the risks of virtual currencies include: operational risks, cybersecurity risks, speculative risks, and fraud and manipulation risks (see Slides 15 to 20). The primer acknowledges the presence of unregulated virtual currency trading platforms and exchanges, while cautioning that such exchanges may present risks in three of the four identified risk categories (operational risks, cybersecurity risks, and fraud and manipulation risks).
We look forward to reviewing the other installments in the CFTC’s regulatory guidance and providing our readers with what we hope to be timely and useful analysis in the future.
Good day. Very good primer. DR2