This Article originally appeared in the Thomson Reuters FinTech Law Report, Volume 18, Issue 6 (2016).
On September 17, 2015, the Commodity Futures Trading Commission (“CFTC”) issued an order (“Coinflip Order”) settling charges brought against Coinflip, Inc., the operator of an online trading platform that facilitated the trading of derivatives on Bitcoin and other digital currencies, also referred to by the CFTC and other regulators as “virtual currencies” (“Bitcoin Derivatives”), including U.S. dollar cash-settled options. The CFTC found that Coinflip, Inc. had violated the Commodity Exchange Act (“CEA”) and CFTC rules by failing to register as a swap execution facility (“SEF”) or designated contract market (“DCM”). The direct impact of the Coinflip Order is minimal, as the platform itself had already shut down due to lack of volume. However, the Coinflip Order represents a watershed in the development of virtual currencies, as it is the first time that the CFTC has affirmatively asserted that Bitcoin and other virtual currencies are “properly defined as commodities” and that the CFTC has jurisdiction over Bitcoin Derivatives.
The CFTC’s assertion that virtual currencies are commodities, by itself, should not be particularly surprising. The definition of “commodity” under the CEA is extremely broad, and CFTC Chairman Timothy Massad has expressed the view that Bitcoin Derivatives are within his agency’s purview. What is noteworthy, however, is the type of commodity the CFTC apparently views Bitcoin to be— i.e., not a currency, but more akin to a precious metal or physical asset. This has clear implications for how Bitcoin Derivatives markets may develop in the future. Moreover, the CFTC formally asserting its jurisdiction over Bitcoin Derivatives will trigger important compliance and registration obligations for market participants. As the CFTC’s Director of Enforcement recently commented, “while there is a lot of excitement surrounding Bitcoin and other virtual currencies, innovation does not excuse those acting in this space from following the same rules applicable to all participants in the commodity derivatives markets.”