Blockchain and Digital Currencies

In this multi-part posting, we outline key considerations for investment funds and their advisers regarding the application of the U.S commodity laws to cryptocurrency derivatives.  This posting is intended to be a primer on the topic and is not legal advice.  You should consult with your counsel regarding the application of the U.S. commodity laws to your particular facts and circumstances.

First, a few words about our use of the word “cryptocurrency”… In this series of postings, we use the word cryptocurrency (and often the term “crypto”) to refer to traditional virtual currencies, like BTC and ETH, as well as tokens related to a particular software product development initiative (i.e., “coins” sold in an initial coin offering or “ICO”).  We recognize that there are different classifications of cryptos among different groups of market participants; however, when we say “crypto,” we mean cryptocurrency in the broadest sense (inclusive of virtual currencies and tokens).

Having dealt with the initial definitional matter, we now turn to the substance of this Part 1 – Cryptos are Commodities (Except When They Are Not).Continue Reading Cryptocurrency Derivatives, Funds and Advisers: Key Considerations Under U.S. Commodity Laws (Part 1 – Cryptos Are Commodities (Except When They Are Not))

For those of you who have been following along thus far, the U.S. Securities and Exchange Commission (“SEC”) and the SEC’s Division of Trading and Markets (“SEC Staff”) have been wrestling since December 2017 with whether to approve or disapprove exchange-traded funds (“ETFs”) that invest in bitcoin futures contracts.  On August 22, 2018, the SEC Staff decided to reject three proposals that included a total of nine bitcoin futures ETFs, possibly.  Just one day later, the SEC issued stays of all three rejections and elected to review the SEC Staff’s decisions.  With no clear decision, it is worth looking at the reasons for the SEC Staff’s rejection of the three proposals, particularly in light of the SEC’s recent split decision on the rejection of a bitcoin ETF (the “Bitcoin ETF”).

The three rejection orders came against two proposals by NYSE Arca, Inc. (“NYSE Arca”) and one by Cboe BZX Exchange, Inc. (“Cboe BZX”).  The ETFs themselves would predominantly hold bitcoin futures contracts in lieu of holding “physical” bitcoin.  The result would create exposure to the price fluctuations of bitcoin, but the futures-based ETFs would seek to invest in a more “traditional” asset (i.e., a futures contract) that is traded on established futures markets such as the Chicago Mercantile Exchange (“CME”) and Cboe Options Exchange, Inc. (“Cboe”).
Continue Reading SEC Staff Rejects Bitcoin Futures Based ETFs – Commission Stays Rejections Pending Its Review

On July 26, 2018, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) issued an order disapproving a proposed rule change that would have allowed for a bitcoin exchange-traded product (“ETP”) (the “Order”).  However, the Order was not unanimous amongst the SEC’s Commissioners.  Commissioner Hester M. Peirce issued a stand-alone dissent against the Order, arguing that the SEC mischaracterized their worries with the ETP and that the Commission was teetering on stifling the innovation of new investment products in the United States (in this context-bitcoin).

The Order Satisfies the Securities Exchange Act of 1934

First, Commissioner Peirce disagreed with the Commission and argued that the proposal for a rule change to allow for the bitcoin ETP (the “Proposal”) satisfies certain requirements of the Securities Exchange Act of 1934 (the “Exchange Act”).  The Exchange Act requires the SEC to evaluate whether the rules of a national securities exchange (such as Bats BZX Exchange, Inc. (“BZX”)) are designed to prevent fraud and protect investors.  Commissioner Pierce argued that the SEC erroneously focuses on the characteristics underlying the spot market for bitcoin rather than whether the rules of BZX are designed to prevent fraud and protect investors.  For Commissioner Pierce, BZX and its rules could adequately play the role of watch dog over the underlying bitcoin spot markets.
Continue Reading Dissent on the SEC’s Re-Disapproval of a Bitcoin Exchange-Traded Product

On July 26, 2018, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) issued an order, by a 3-1 vote, disapproving a proposed rule change (the “Proposal”) that would have allowed for a bitcoin exchange-traded product (“ETP”) (the “Order”).  In the Order, the SEC re-asserted many of its prior concerns and reasons for denying the same proposal for a bitcoin ETP back in March 2017.
Continue Reading SEC Denies for the Second Time a Proposal for a Bitcoin Exchange-Trade Product

On January 18th, Perkins Coie LLP held a forum entitled Understanding Cryptocurrencies in Asset Management in its New York office.  This forum covered how cryptocurrencies and blockchain technology are affecting the asset management industry with specifics on:

  • Investing in Bitcoin futures and other crypto-derivatives
  • Emerging crypto indices
  • Overview of product development including Bitcoin

By Andrew P. Cross, Laurie Rosini, and Thomas Ahmadifar

On December 15, 2017, the U.S. Commodity Futures Trading Commission (the “CFTC”) issued a proposed interpretation of the term “actual delivery” as used in the provision of the Commodity Exchange Act (the “CEA”) that grants the CFTC explicit authority to oversee the marketplace for “retail commodity transactions.”  This is the second blog posting in a multi-part series (read Part 1 here) that will explore the regulation of retail commodity transactions and the CFTC’s recent proposed interpretation (the “Proposed Interpretation”), the issuance of which we believe represents a potentially significant milestone in the regulation of virtual currency transactions.  We continue our series with an examination of the Proposed Interpretation and its examples for what may constitute “actual delivery” of virtual currency.

Retail Commodity Transactions under Section 2(c)(2)(D)

As we explain in greater detail in Part 1, the CFTC has exclusive jurisdiction over the marketplace for “retail commodity transactions,” arrangements that Section 2(c)(2)(D) of the CEA describes as an agreement, contract, or transaction that is offered or entered into by a party:

  • On a leveraged or margined basis, or financed by the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis; and
  • To or with persons who do not qualify as either an eligible contract participant (“ECP”) or an eligible commercial entity (“ECE”).

Continue Reading CFTC Virtual Currency Proposed Interpretation – Part 2

On December 15, 2017, the U.S. Commodity Futures Trading Commission (the “CFTC“) issued a proposed interpretation of the term “actual delivery” as used in the provision of the Commodity Exchange Act (the “CEA“) that grants the CFTC explicit authority to oversee the marketplace for “retail commodity transactions”.  This is the first blog posting in a multi-part series that will explore the regulation of retail commodity transactions and the CFTC’s recent proposed interpretation (the “Proposed Interpretation“), the issuance of which we believe has represents a potentially significant milestone in the regulation of virtual currency transactions.  We begin our series with a brief look at the history and background of the regulation of retail commodity transactions.
Continue Reading Retail Commodity Transactions Involving Virtual Currencies: An Overview of the CFTC’s Proposed Interpretation (Part 1)

It was a busy morning at the intersection of derivatives and virtual currencies.  Here is an overview of what happened and some thoughts about what it means for the world of virtual currencies.
Continue Reading CBOE and CME Self-Certify Bitcoin Futures, Cantor Self-Certifies Bitcoin Binary Options and NFA Issues Investor Alert

Earlier today, CFTC Commissioner Brian Quintenz spoke at a conference hosted by ISDA in London.  His remarks focused on the central theme of  that conference – the power of technology to transform financial markets.  In this posting, we will provide highlights from Commissioner Quintenz’s speech, as we believe that this speech addresses several key concepts related to FinTech initiatives in the derivatives markets.
Continue Reading CFTC Commissioner Quintenz Addresses ISDA’s Unlocking Value in Derivatives Markets Conference in London

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:
Continue Reading LabCFTC Publishes “A Primer on Virtual Currencies”