CFTC ruling that bitcoin and digital currency are commodities

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Recent action brought against Coinflip by the CFTC clarifies definition of digital currencies as ‘commodities’. The CFTC states: “Bitcoin and other virtual currencies are encompassed in the definition [of commodity] and properly definehttps://www.flickr.com/photos/lendingmemo/11702685083/in/photolist-iQ8jyt-9f2zVa-rn4MxA-9f2zRR-bb3f8k-q6QgE3-89BpxG-9f5Ji7-8NLEmR-8PKTui-yTo3Y-mRYkeZ-8nkQLA-89Bqn3-3gGWAT-bxkzjx-5cKvCX-5cPQT5-4YpSFF-jKGJL4-rPmKi-cxdddL-z4zmg-5vL77V-jKP59E-9f5JgG-9f2Ahp-9f5Jb3-9f5J61-9f2A3M-9f5HT1-89BqMS-oZusdb-9f5J2C-84tcmM-7dLyhw-mUn8Dh-mUn8vw-mUn8gd-mUkgkc-mUk8Uc-mUkga2-mUkg6p-mUk8Bi-mUn7C9-mRYkFk-mRYbeB-mRYb9g-mRYb8e-mRZXq5d as commodities“.

The Coinflip platform is/was a standard matching facility holding margin for counterparties, pricing contracts in USD but only allowing bitcoin into the platform for payment/settlement. The CFTC looked at the instruments traded on the platform.

From three instruments, forwards, options and futures on the platform, the CFTC focused on the option contracts available. CFTC stated that “although referenced in its solicitation materials, Coinflip did not offer any futures contracts“. Regarding bitcoin forwards activity, the CFTC states that “although these activities may have violated, or led to violations of, the Commmodity Exchange Act [(the Act)], the Commission does not address this conduct here” (footnote 4).

The CFTC found that “Coinflip [had] designated numerous put and call options contracts as eligible for trading” (page 2) on their platform and, therefore, was in violation of s 4c(b) Commodity Exchange Act (the Act) relating to ‘options’. The targeted activities were offering to enter into, entering into or confirming the execution of option contracts involving commodities, in this case bitcoin.

The implication of this classification under the Act meant that Coinflip should have been registered as a swap execution facility or designated contract market, a requirement under s5h(a)(1) of the Act. This is because a ‘swap’ includes option contracts.

This ruling is unsurprising but clarifies both bitcoin’s definition in terms of it officially being a commodity in the US (when considering whether an instrument is regulated by the CFTC or not) and the necessary requirement for licensing. The CFTC accepted Coinflip’s offer for settlement, meaning Coinflip had to cease trading and cooperate with the CFTC.

Note: the definition of an option contract seems to hinge also on presentation. In the Act it states that an option is any [emphasis added] “transaction involving any commodity… which is of the character of, or is commonly known to the trade as, an ‘option'”. So the presentation and semantics of contracts is probably as important as its ‘character’.