On October 18th, a cryptocurrency platform provider (Poloniex, Inc.) issued a press release announcing that it filed a request for no-action relief with the Commodity Futures Trading Commission (the “CFTC”) seeking request with respect to the CFTC’s laws as they relate to margin and lending transactions. To our knowledge, this is first time that a cryptocurrency platform provider has publicized the submission of such a request and, for that reason alone, the development is noteworthy. A detailed review of the request or underlying law is beyond the scope of this posting. Rather, in this posting we focus on what we consider to be two practical and fundamental observations regarding the potential scope of any hypothetical relief granted in response to such request. Hypothetically speaking, if the CFTC granted the requested relief in the manner presented by the platform provider, then such relief would seem to support the following two interpretations of section 2(c)(2)(D) of the CEA:
1.A platform provider could facilitate a leveraged, margined or financed transaction in respect of a commodity, as long as the underlying commodity is delivered to the purchaser within 28 days. Under such an interpretation, the leverage, margin or financing could arguably remain in place subsequent to the delivery of the commodity without the transaction being subject to regulation by the CFTC. In considering this hypothetical interpretation, we note that section 2(c)(2)(D)(i) of the Commodity Exchange Act (the “CEA”) appears to give the CFTC jurisdiction to regulate the offer of a retail commodity transaction without regard to whether or not the contract is entered into by the parties; and
2.A platform provider would be able to facilitate the ultimate settlement of leveraged, margined or financed cryptocurrency transactions into the platform provider’s digital wallet in a manner that constitutes “actual delivery” for purposes of the exception under section 2(c)(2)(D)(ii)(III)(aa) of the CEA, as long as: a) the platform provider establishes a sub-account on behalf of each platform subscriber; and b) records ownership of the cryptocurrency by the subscriber in that sub-account. We note that this hypothetical interpretive position would appear to be a different approach to the application of the requirements of section 2(c)(2)(D) to settlement into digital wallets from the approach that was presented in a June 2016 CFTC enforcement matter involving Bitfinex. Please see our posting, Making Sense of the CFTC’s Enforcement Order and Settlement with Bitfinex. In particular, in that June 2016 order and settlement, the CFTC took a position that, in the facts and circumstances of that matter, the accounting for individual customer interests in the bitcoin held in an omnibus settlement wallet in platform provider’s own database was insufficient to constitute “actual delivery” for purposes of the exemption from regulation as a retail commodity transaction under section 2(c)(2)(D). In this regard, it is also noteworthy that the CFTC indicated that actual delivery would not occur if a platform provider retained control over the private keys to individually enumerated multi-signature wallets in a situation in which the platform customer lacked a contractual relationship with the third-party firm that established the wallets. Finally, it should also be noted that there appear to have been liens recorded against the wallets that contained the bitcoin under the facts of the June 2016 enforcement order, whereas the platform provider that requested the current no-action relief does not appear to have a lien against the bitcoin in the customer’s account. Although, there is still margin posted by that customer subsequent to the transfer of the bitcoin to the purchaser and, presumably, there is a lien against that margin. In closing, it is readily acknowledged that factual considerations may distinguish a digital wallet offered by one platform provider relative to the digital wallet offered by another platform provider, and that such considerations are important to consider as part of any regulatory analysis.
Obviously, a request for relief does not obligate a regulatory agency to issue the requested relief. So, the impact of the request is largely an “unknown” at this point. Nevertheless, the requested relief presents an opportunity for significant regulatory “navel gazing” about what it could mean if the CFTC were to grant that relief.
Good day. Good “regulatory navel gazing”? DR2