On March 24, 2020, the Commodity Futures Trading Commission (“CFTC”) issued its final interpretive guidance (the “Interpretation”) concerning the meaning of “actual delivery” in the context of retail commodity transactions involving “virtual currencies.” The Interpretation states that “actual delivery” of retail virtual currency transactions occurs when:
(1) a retail person secures: (i) 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) the ability to use the entire quantity of the commodity freely in commerce (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 or counterparty seller do not retain any interest in, legal right, 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.
Building on other guidance concerning what constitutes “actual delivery” in the context of retail commodity transactions, the Interpretation provides greater certainty regarding whether retail virtual currency transactions are exempt from CFTC regulation.
Under the Commodity Exchange Act (“CEA”), the CFTC has exclusive jurisdiction over a commodity transaction that is entered into with a person that is neither an “eligible contract participant” nor an “eligible commercial entity” (such a person referred to as a “retail” person) and that is entered into a leveraged or margined basis, or financed by the offeror, unless the transaction results in “actual delivery” of the commodity within 28 days.
On June 2, 2016, shortly after stating in a settlement order that bitcoin and other virtual currencies are encompassed in the “commodity” definition under the CEA, the CFTC brought an enforcement action against a Hong Kong-based cryptocurrency exchange for offering virtual currency transactions to retail customers on leveraged, margined, or financed basis without satisfying the retail commodity transaction actual delivery exemption under the CEA. Specifically, the CFTC alleged that, after delivering virtual currencies to retail persons, the exchange maintained control over the private keys tied to the applicable virtual currencies. As a result, the CFTC’s position was that the virtual currencies were not actually delivered.
Following this enforcement action, market participants submitted requests to the CFTC for guidance on what constitutes “actual delivery” for virtual currencies under the CEA, noting that the CFTC’s previous actual delivery guidance from 2013 with respect to retail commodity transactions did not address the unique characteristics of virtual currencies. On December 20, 2017, the CFTC issued the proposed interpretation, which is now finalized in the Interpretation.
The Interpretation and Examples
As set forth more fully above, the Interpretation provides that, in the CFTC’s view, actual delivery of retail commodity transactions in virtual currency has occurred where, within 28 days, (1) a customer has possession and control of the full amount of virtual currency and is able to use it freely and (2) the offeror and counterparty seller do not retain any interest in, legal right, or control over the virtual currency.
To further clarify the Interpretation, the CFTC provided illustrative examples: two examples where actual delivery has occurred and three examples where actual delivery has not occurred.
- Example 1 – Actual delivery has occurred if, within 28 days, the relevant public blockchain has shown the transfer of the entire quantity of purchased virtual currency (including any portion of the purchase made using leverage, margin, or other financing) from the counterparty seller’s blockchain address to the retail purchaser’s blockchain address, over which the retail purchaser maintains sole possession and control (i.e., a wallet-to-wallet transfer of virtual currency). If an intermediary (such as an exchange) is involved, the relevant public blockchain must show the transfer of the virtual currency (1) from the counterparty seller’s blockchain address to the intermediary’s blockchain address and (2) from the intermediary’s blockchain address to the retail purchaser’s blockchain address, over which the retail purchaser maintains sole possession and control.
- Example 2 – Actual delivery has occurred if, within 28 days, (1) the offeror or counterparty seller has delivered the entire quantity of purchased virtual currency (including any portion of the purchase made using leverage, margin, or other financing) into the possession of a depository (i.e., wallet or other relevant storage system) other than one owned, controlled, operated by, or affiliated with, the counterparty seller that has entered into an agreement with the retail purchaser to hold the virtual currency as the retail purchaser’s agent; (2) the retail purchaser has secured full control over the virtual currency (i.e., the ability to remove as soon as practicable from the depository, and use freely, the entire quantity of virtual currency); and (3) there are no liens resulting from, or relating to, the use of margin, leverage, or financing used to obtain the entire quantity of virtual currency. Additionally, this example requires that no portion of the virtual currency is subjected to a forced sale or otherwise removed from the retail purchaser’s control.
- Example 3 – Actual delivery has not occurred if, within 28 days, the entire quantity of virtual currency is not transferred from a digital account or ledger system owned or operated by, or affiliated with, the offeror or the counterparty seller to a separate, independent, appropriately licensed depository or blockchain address, over which the retail purchaser maintains possession and control in accordance with Example 2.
- Example 4 – Actual delivery has not occurred if, within 28 days, a book entry is made by the offeror or counterparty seller purporting to show the delivery of the virtual currency to the retail purchaser, but the offeror or counterparty seller has not actually delivered the entire quantity of the virtual currency (including any portion of the purchase made using leverage, margin, or other financing) to the retail purchaser in accordance with Example 1 or Example 2, regardless of any purported enforceable obligation to deliver the virtual currency to the retail purchaser.
- Example 5 – Actual delivery has not occurred if, within 28 days, the purchase or sale of virtual currency is rolled, offset against, netted out, or settled in cash or virtual currency (other than the purchased virtual currency) between the retail purchaser and the offeror or counterparty seller.
As noted, these examples are meant to be illustrative. In this regard, the Interpretation notes that, in determining whether actual delivery has occurred with respect to any particular retail virtual currency transaction, the CFTC will continue to “employ a functional approach” and “assess all relevant factors that inform an actual determination.”
It is worth noting that CFTC Chairman Heath Tarbert stated that he anticipates that, for a period of 90 days, the CFTC will not initiate any enforcement actions relating to the Interpretation that “were not plainly evident from prior CFTC guidance, enforcement actions, and case law” in order to “prevent any potential market disruptions associated with efforts to assimilate this guidance.” 
The CFTC’s Interpretation represents a welcome step forward in clarifying what constitutes “actual delivery” for, and how CFTC regulations apply to, virtual currencies, and we hope this action may even prompt other regulatory agencies to issue guidance on related terms (e.g., “custody”) in the digital asset space.
 “Virtual currencies” is a term intended to refer to certain blockchain-enabled digital assets that serve as a medium of exchange.
 Reference to the offeror or counterparty seller includes any of their respective affiliates or other persons acting in concert with the offeror or counterparty seller on a similar basis.
 7 U.S.C. § 2(c)(2)(D)(ii)(III)(aa). Notwithstanding this exemption, such transactions do remain subject to CFTC anti-fraud and anti-manipulation jurisdiction. 7 U.S.C. § 9(1).
 In re BFXNA INC. d/b/a BITFINEX, CFTC Docket No. 16-19 (June 2, 2016). The CFTC alleged that the exchange was engaging in illegal, off-exchange commodity transactions and acting as an unregistered futures commission merchant. The exchange settled all charges with the CFTC and paid $75,000 in civil penalties.
 A private key is an alphanumeric code that is tied algorithmically to the user’s public address (through which he or she sends or receives virtual currency on a blockchain) and that allows a user to spend virtual currency that he or she receives.
 In 2013, the CFTC issued guidance in the context of retail commodity transactions in which it explained that it would take a “functional approach” to determine whether actual delivery of a commodity has occurred under the CEA. In this guidance, the CFTC provided a list of factors that it would consider to determine whether “actual delivery” occurred, including, among them, whether a retail person had ownership, possession, and title of the commodity. See Retail Commodity Transactions Under Commodity Exchange Act, 78 FR 52,426 (Aug. 23, 2013) (the “2013 Guidance”), available at https://www.federalregister.gov/documents/2013/08/23/2013-20617/retail-commodity-transactions-under-commodity-exchange-act.
 Retail Commodity Transactions Involving Virtual Currency, 82 FR 60,335 (Dec. 20, 2017), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2017-27421a.pdf. The Interpretation does not address certain issues market participants raised in response to the proposed interpretation. The CFTC declined to (1) modify the definition of “virtual currency” set forth in its proposed interpretation, (2) define the concept of “title” in the context of virtual currencies (but notes that title may connote elements of possession and control) and (3) decrease the 28-day actual delivery period given that the standard delivery time for virtual currencies is much shorter (i.e., 1-2 days).