Comment Text:
The Commodity Futures Trading Commission “CFTC” regulates option and future markets. Mission & Responsibilities, U.S. Commodity Futures Trading Commission (2018), http://www.cftc.gov/About/MissionResponsibilities/index.htm. The CFTC looks to protect users of commodity markets from abusive practices including fraud and market manipulation. Id. The agency's power derives from the Commodities Exchange Act "CEA," which helps prevent fraudulent practices in the future commodity marketplace. Id. Following the financial crisis of 2008, the agency focused on future market participant protection by ensuring financial institutions adhere to the strict consumer protection regulations provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Id.
The total virtual currency market-cap, four-hundred-sixty billion dollars, led the CFTC to interpret the term "actual delivery" of retail commodity transactions involving "virtual currency." Global Charts: Total Market Capitalization, Cryptocurrency Market Capitalizations (March 1, 2018), https://coinmarketcap.com/charts/. The CEA provides the CFTC oversight authority of retail commodity transactions, and CEA Section 2(c)(2)(D) allows the agency control over retail customers in the futures marketplace with less than ten million in discretionary investments. 7 U.S.C. § 1a(18)(xi)(1) (PL 115-128, approved 2/22/18). CEA Section 2(c)(2)(D) gives the CFTC authority over the “actual delivery” of retail commodities, including virtual currency, if “actual delivery” occurs after a twenty-eight-day period. 7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa) (PL 115-128, approved 2/22/18).
The December 15, 2017, proposed interpretation of "actual delivery" lays out the groundwork for what constitutes "actual delivery" for virtual currency. Commodity Futures Trading Commission, Retail Commodity Transactions Involving Virtual Currency, 82 Fed. Reg. 60339 (Dec. 20, 2017). The CFTC’s proposed interpretation provides authority to regulate virtual currency twenty-eight-days after the transaction occurs. Id. After the twenty-eight-day period passes, a retail commodity customer must have the ability to "take possession and control of the entire quantity of the virtual currency" and freely use the currency inside and outside of the trading platform where the currency was purchased. Id. The CFTC is seeking comments on their interpretation of "actual delivery" concerning customer depository’s and if currency placement in a customer’s depository constitutes the customer taking "actual possession" of a virtual currency. Id. Example two, provided in the CTFC’s request for comment, states that virtual currency sellers, “must not own, control, or operate” the exchange platform selling virtual currency. Id. at 60340. Because exchanges usually provide the depository for a buyer’s virtual currency purchase, there must be an agreement between the purchasing party that allows the platform to “act as the purchaser’s agent and hold the purchased virtual currency." Id. The two proposed depository conditions must occur within twenty-eight days of purchase, and once the twenty-eight-day period begins, no liens or interest may be placed on the virtual currency located in the purchaser's depository by the seller. Id.
Example two is designed to protect the virtual currency buyer’s interest in a transaction free from theft and unfair interest. The platforms used for virtual currency transactions act as brokers between the purchasing customer and virtual currency seller. There are several ways the purchasers of virtual currency can store their commodity; most common are intangible wallets directly connected the broker's platform or tangible offline storage devices. In agreement with the CFTC's interpretation of depositories, once the currency has moved into the wallet, the currency can no longer be controlled by the seller. However, the issue is the affiliation between the broker owning the purchasing platform and the consumer purchasing the virtual commodity. Example Two does not comment on the control of the virtual currency in the platform offered to the buyer by the virtual commodity exchange. This storage practice is commonplace amongst virtual currency purchasers and allows the virtual currency ecosystem to run with efficiency. It also creates the potential for theft by exchange platforms, specifically those based outside of the United States. An unscrupulous exchange platform with access to a customer's online wallet, holding their virtual currency on their exchange, could move the currency quickly to their storage wallet. For the CFTC to maximize customer protection, they should recommend customers use their own physical offline storage devices. The CFTC should draft and post a recommendation framework laying out how to move virtual currency to a tangible wallet from an online-based exchange wallet where the purchased virtual currency is only accessible by the purchasing customer. Additionally, the CFTC should research and provide their stamp of approval to specific wallets they feel will best protect the customer from theft. Another way the CFTC can further safeguard customers includes containing a list of exchanges they define as safe for customers to store their currency.
The CFTC request comment on whether the current twenty-eight-day delivery period, outlined in CEA Section (c)(2)(D) regarding virtual currencies, is suitable and request comment on whether a two-day period, like the one in place governing foreign exchange transactions, is more applicable to virtual currency. 7 U.S.C. § 2(c)(2)(C)(i) (LexisNexis, PL 115-128, approved 2/22/18). CEA Section (c)(2)(D) only allows the CFTC regulatory power over virtual currency after a twenty-eight-day period because virtual currency is "retail commodity transaction" definition. Id. To shorten the CEA Section (c)(2)(D) twenty-eight-day period the CFTC would need to procure the assistance of Congress. The growing amount of United States income allocated to virtual currencies, coupled the month-long timeframe necessary for the CFTC to protect citizens, provides a dangerous environment for purchasing parties. A two-day period would provide a significantly larger impact on purchaser protection by decreasing the amount of time a virtual currency seller can hold currency paid for by the purchasing party. The price fluctuation of nearly all virtual currency, coupled with the lengthily current time before actual delivery takes place, puts the purchasing party in a precarious monetary position. For example, on January 6th Bitcoin’s cost was $17,175.00, twenty-eight days later, February 14th, Bitcoin’s value was $9,480.27 which amounts to a staggering $7,694.73 decrease. Bitcoin (BTC), Cryptocurrency Market Capitalizations, https://coinmarketcap.com/currencies/bitcoin/. By providing the seller a twenty-eight-day period before constituting "actual delivery" and providing the buyer possession, the purchasing party must suffer a net loss of 45%. The twenty-eight-day period would also provide the purchaser with no opportunity to sell their purchased bitcoin, which alleviates their net-loss. Compare the above example with a two-day spread January 6th to January 8th; the resulting loss would be $2194.99 or 8%. Due to the nature of virtual currency’s substantial price swings, there’s always a high-level risk to purchase. However, a CFTC proposal to Congress suggesting a revision of CEA Section (c)(2)(D) providing a considerably shorter “actual delivery” timeframe would best allow CFTC to protect the funds of future market participants.
The CFTC proposed rule of actual delivery should strengthen virtual currency exchange platforms protection of consumers funds with regulations proposed interpretation of depositories being free from virtual seller control. Additionally, the CFTC should urge Congress to shorten the delivery period provided by CEA Section (c)(2)(D).
