Now Effective: The U.S. CFTC’s guidance on “actual delivery” of virtual currency

The Commodity Futures Trading Commission (“CFTC”) has issued interpretive guidance on what constitutes “actual delivery” of a virtual currency. This now-effective guidance clarifies when these products are within the CFTC’s regulatory reach.

Under the Commodity Exchange Act (“CEA”), the CFTC has long had jurisdiction over a contact for future delivery of a “commodity” (including, as described below, certain virtual currencies). Since 2010, the CFTC also has jurisdiction over any “retail” commodity transaction involving leverage or margin except where the transaction ‘‘results in actual delivery [of the commodity] within 28 days or such other longer period” as the CFTC may determine. . . . This exception has required the CFTC to grapple with the nigh metaphysical and oxymoronic interpretation of actual delivery of virtual currencies. After first soliciting public input in 2017 regarding this concept, the CFTC issued final guidance on May 24, 2020 (the “2020 Guidance”) that became effective June 24, 2020.

Virtual currency as a commodity

The 2020 Guidance restates the CFTC’s view that a virtual currency:

  • is an asset that encompasses any digital representation of value or unit of account that is or can be used as a form of currency (i.e., transferred from one party to another as a medium of exchange);
  • may be manifested through units, tokens, or coins, among other things; and
  • may be distributed by way of digital ‘‘smart contracts,’’ among other structures.

The CFTC considers a virtual currency, as described above, to be a commodity as defined in CEA section 1a(9). This is more or less consistent with the broad application of the CEA by the CFTC to many other intangible commodities (e.g., renewable energy credits and emission allowances, certain indices).

How is “actual delivery” of virtual currency achieved?

Paraphrasing the 2020 Guidance, actual delivery occurs when: 

  1. a purchasing party secures (a) possession and control of the virtual currency and (b) the ability to freely use the entire quantity of the virtual currency (i.e., away from any particular execution venue) no later than 28 days from the date of the transaction and at all times thereafter; and 
  2. the offeror (e.g., those with control of a particular blockchain protocol) and the counterparty seller do not retain any interest, legal right, or control over the commodity at the expiration of the 28 days from the date of the transaction.

For example, “actual delivery” will have occurred:

  • if the virtual currency’s public distributed ledger evidences record of the transfer within 28 days of entering into the transaction; or 
  • where seller has delivered the entire quantity, the purchaser has secured full control and the virtual currency is not subject to any legal rights of seller 28 days after the transaction.

In contrast, “actual delivery” will not have occurred where:  

  • a full purchased amount is not transferred away from a digital account or ledger system;
  • a transaction is merely evidenced by the seller’s book entry; or
  • a purchase is rolled, offset against, netted out or settled in cash or virtual currency.