CFTC Proposes Bitcoin Regulations to Curb Unlicensed Futures Trading

The U.S. Commodity Futures Trading Commission (CFTC) proposed regulations that will curb unlicensed bitcoin futures trading within the country.

The proposed regulations, announced by the CFTC on Friday, explicitly place bitcoin and other cryptocurrencies under the framework for “actual delivery” that currently governs the purchase of physical commodities such as gold and oil.

Under this framework, exchanges and traders must demonstrate an ability to physically deliver the commodities to their owners within 28 days of purchase. Otherwise, the purchase constitutes a futures contract and is subject to a litany of other regulations governing futures trading.

The full text of the proposed regulatory language has been reproduced below

(1) a customer having the ability to: (i) take possession and control of the entire quantity of the commodity, whether it was purchased on margin, or using leverage, or any other financing arrangement, and (ii) use it freely in commerce (both within and away from any particular platform) no later than 28 days from the date of the transaction; and

(2) the offeror and counterparty seller (including any of their respective affiliates or other persons acting in concert with the offeror or counterparty seller on a similar basis) not retaining any interest in or control over any of the commodity purchased on margin, leverage, or other financing arrangement at the expiration of 28 days from the date of the transaction.

The key point in the proposed language is that the seller may not retain “any interest in or control over any of the commodity” for more than 28 days following the date of the transactions. According to a 23-page document (PDF) accompanying the proposed regulations, this includes exchange-controlled deposit wallets where the trading platform operators — not the traders — retain control of the private keys.

Although the CFTC has long classified bitcoin as a commodity, the physical delivery provision was a thorny issue for cryptocurrency market participants because bitcoin does not exist as a physical entity.

Last year, the CFTC reached a $75,000 settlement with overseas exchange Bitfinex after the commission found that the exchange continued to hold the purchased bitcoins in exchange-controlled wallets after the actual delivery exception expiration date.

The Bitfinex case highlights an important point regarding the extent of the commission’s jurisdiction. The regulations would not just apply to U.S.-based exchanges, but also foreign trading platforms that provide services to Americans. Consequently, this regulatory guidance could lead overseas exchanges that offer margin trading to further restrict access to U.S. residents.

The CFTC will accept public comments on the proposed bitcoin regulations for 90 days, a period that will commence following their publication in the Federal Register.

Bitcoin is ‘Sustainable’: Former CFTC Chief Hopes Futures Will Tame Crypto Markets

bart chilton

Former U.S. Trading Commissioner Bart Chilton has long been critical of the fact that regulators have largely allowed the cryptocurrency markets to operate without oversight.

Last year, Chilton — who ran the Commodity Futures Trading Commission (CFTC) from 2007 to 2014 — called for President Obama to personally instruct the CFTC to establish basic consumer protection legislation, and he has repeatedly warned bitcoin devotees that lack of regulation is a “blind spot” for the industry and could prove to be its undoing.

However, recent developments have made him optimistic that the cryptocurrency markets are maturing and could turn a corner into the mainstream.

“I do think it’s sustainable,” Chilton said of bitcoin during an interview with Fox Business Network’s Maria Bartiromo, declaring that JPMorgan Chase chief executive Jamie Dimon is wrong to call it a “fraud”.

“I don’t know if it’s sustainable at these prices,” he continued, noting that the bitcoin price had experienced a flash crash of almost $1,000 earlier this week. Bitcoin’s volatility has been a sticking point for Chilton in the past, and he has stated that if he still chaired the CFTC he would investigate what he believes is naked market manipulation on bitcoin exchanges.

However, he says that derivatives exchange operator CME Group’s announcement that it will list bitcoin futures contracts could be a tipping point in this regard. Flash crashes won’t “happen to that extent on the futures, because they will have…circuit breakers” that limit the degree to which contract prices can fluctuate on a given day, he explains.

Of course, many bitcoin advocates fear that regulations will stifle innovation. New York’s so-called “BitLicense,” for instance, famously led to an exodus of bitcoin services from the state.

Nevertheless, Chilton maintains that basic consumer protections such as limiting price volatility and reducing counterparty risk are critical to the nascent technology’s continued growth.

“They don’t have to be crazy, overly-zealous regulations,” he concluded. “I think the bitcoin enthusiasts are starting to get this, but it’s been a while,”