Imagine a blockchain promoter offers to sell virtual currency that will be developed in the future and allows purchasers to put down a small amount of the purchase price now and pay the rest later, with delivery to purchaser's wallets and full payment by purchasers for the tokens to occur in the future. Based on previous Commodity Futures Trading Commission ("CFTC") guidance, there has been uncertainty regarding whether and when this type of arrangement would be subject to CFTC regulation. New guidance issued by the CFTC this week provides additional clarity on whether and when specific transactions regarding virtual currencies are subject to CFTC regulation.
The CFTC has adopted new guidance1 on when certain levered transactions in virtual currencies are excepted from regulation as "futures" because they result in actual delivery of the currency to a purchaser within 28 days. To rely on this exception, a purchaser must, under the new guidance, 1) secure possession and control of all of the purchased currency, including any amount purchased using margin or leverage, and 2) have the ability to use all of the virtual currency in commerce in no more than 28 days. In addition, the seller and/or offeror cannot retain any interests in, legal right to, or control over the virtual currency.
Among other things, the new guidance suggests that the sponsors of a virtual currency and associated blockchain may need to deliver that currency to a wallet or similar address off the platforms they sponsor. In addition, transfers made only by book entry or through cash settlement cannot rely on the spot market exception. Finally, the seller or offeror must deliver the full amount of any virtual currency purchased through margin or leverage.
Section 2(c)(2)(D) of the Commodity Exchange Act ("CEA") subjects "retail commodity transactions"—transactions in commodities with retail purchasers2—that involve margin or leverage to certain regulations applicable to futures contracts (for example, on-exchange trading and broker registration requirements). Sales that result in "actual delivery" of a commodity within 28 days, however, are excepted from these requirements.3
The CFTC views "virtual currencies" as "commodities"4 subject to the retail commodity transaction provisions of the CEA. In an enforcement action against Bitfinex, for example, the CFTC noted that the virtual currency platform did not effect "actual delivery" to customers buying bitcoin, because Bitfinex held the purchased bitcoins in wallets that it owned and controlled.5
The CFTC has assessed "actual delivery" based on a variety of factors outlined in previous guidance (particularly an interpretive release issued in 20136), including (among others) transfer of both title and possession. The CFTC also stated in the 2013 guidance that "mere book entries" and cash settlement of a transaction do not constitute actual delivery.
Because concepts like title are difficult to apply in the context of digital assets, there has been some confusion in the market regarding what "actual delivery" means for virtual currencies. To address that confusion, the CFTC issued proposed interpretive guidance in December 20177 and adopted a modified version of that guidance in March 2020, discussed in this alert.
Under the new guidance, two primary factors demonstrate "actual delivery" of virtual currency:
- A customer must secure:
- Possession and control of the entire quantity of the virtual currency, even if all or a portion was purchased on margin or using leverage or any other financing arrangement, and
- 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
- The offeror and counterparty seller (including any of their respective affiliates or other persons acting in concert with them) cannot retain any interest in, legal right, or control over any of the virtual currency purchased on margin, leverage, or other financing arrangement at the expiration of 28 days from the date of the transaction.
An offeror for these purposes may encompass persons or entities that present, solicit, or otherwise facilitate retail commodity transactions. This can include, for example, persons or entities that sponsor a blockchain or blockchain-based platform or have participation interests in a foundation, consensus, or other collective that controls operational decisions on the relevant protocol, or who can otherwise control the protocol.
The CFTC provided several examples of when actual delivery does and does not occur:
- Actual delivery occurs if there is a record of transfer on the relevant public distributed ledger or blockchain address and, as a result, the virtual currency moves to a blockchain address under the purchaser's sole control. If a third-party offeror (such as an execution venue) acts as intermediary, the public distributed ledger should reflect a transfer from the seller to the third-party offeror and then to the purchaser.
- Actual delivery also occurs if:
- The seller or offeror delivers the entire quantity of virtual currency purchased to a depository (e.g., a wallet) other than one owned, controlled, operated by, or affiliated with the seller, where the depository has entered into an agreement with the purchaser to hold virtual currency as agent for the purchaser, without regard for any asserted interest of the offeror or seller;
- The purchaser has secured full control over the currency; and
- No liens relating to any margin or leverage continue after 28 days.
- Actual delivery does not occur if the full amount of virtual currency is not transferred away from a digital account or ledger system owned or operated by the offeror or seller and received by a separate, independent, and licensed depository or blockchain address in which the customer maintains possession or control in accordance with example 2.
- Actual delivery does not occur if book entry is made by the offeror or seller purporting to show delivery, but the seller or offeror has not, in accordance with the methods described in example 1 or 2, actually delivered the currency.
- Actual delivery also does not occur if the transaction is offset against, netted out, or settled in cash or another virtual currency.
As noted above, this guidance suggests that the sponsor of a blockchain may need to deliver a virtual currency for receipt off its network, rather than in a wallet or other holding system that it can, in theory, control. It also means, consistent with the 2013 guidance, that cash settlement does not constitute actual delivery. In addition, the guidance extends to any virtual currency purchased on margin or through leverage or other financing arrangements, which must be delivered and fully usable by the purchaser, without any associated liens, even if the purchaser has ongoing obligations to pay for the currency.
Finally, it is worth noting that the CFTC generally defined "virtual currency" as a digital asset that is, or can be used as, a medium of exchange in commerce, including within a particular blockchain ecosystem. Other types of digital assets that may be commodities, but not virtual currencies, would be subject to the 2013 guidance.
The CFTC emphasized that its guidance is intended to be flexible in light of the "complex and dynamic nature" of the virtual currency markets. In other words, as industry practice changes, the CFTC expects to monitor and provide additional guidance.
 CFTC, Retail Commodity Transactions Involving Certain Digital Assets (Final Interpretive Guidance) (March 23, 2020).
 “Retail commodity transactions” include all transactions with a counterparty that is not an “eligible contract participant” (generally, financial institutions, insurance companies, broker-dealers, and investors with more than $10 million in assets, unless the transaction is used for hedging purposes) or “eligible commercial entity” (generally, an eligible contract participant or other entity approved by the CFTC that has a demonstrable ability to make or take delivery of an underlying commodity of a contract; incurs risks related to the commodity; or is a dealer that regularly provides risk management, hedging services, or market-making activities to entities trading commodities or derivative agreements, contracts, or transactions in commodities).
 CEA Section 2(c)(2)(D)(ii)(III).
 In re Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-29, 2015 WL 5535736, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 33,538 (CFTC Sept. 17, 2015) (consent order); In re TeraExchange LLC, CFTC Docket No. 15-33, 2015 WL 5658082, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 33,546 (CFTC Sept. 24, 2015) (consent order).
 In re BFXNA INC. d/b/a BITFINEX, CFTC Docket No. 16-19 (June 2, 2016) (consent order).
 CFTC, Retail Commodity Transactions under Commodity Exchange Act, 78 Fed. Reg. 52,426 (Aug. 23, 2013).
 CFTC, Retail Commodity Transactions Involving Virtual Currency, 82 Fed. Reg. 60335 (Dec. 17, 2017).