Federal Register, Volume 83 Issue 241 (Monday, December 17, 2018) 
[Federal Register Volume 83, Number 241 (Monday, December 17, 2018)]
[Pages 64563-64566]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27167]



Request for Input on Crypto-Asset Mechanics and Markets

AGENCY: Commodity Futures Trading Commission.

ACTION: Request for input.


SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') in furtherance of the LabCFTC initiative is seeking public
comment and feedback on this Request for Input (``RFI'') in order to
better inform the Commission's understanding of the technology,
mechanics, and markets for virtual currencies beyond Bitcoin, namely
here Ether and its use on the Ethereum Network. The Commodity Exchange
Act (``CEA'') grants the Commission regulatory authority over the
commodity futures markets. The Commission is seeking public feedback in
furtherance of oversight of these markets and regulatory policy
development. The input from this request will advance the CFTC's
mission of ensuring the integrity of the derivatives markets as well as
monitoring and reducing systemic risk by enhancing legal certainty in
the markets. The RFI seeks to understand similarities and distinctions
between certain virtual currencies, including here Ether and Bitcoin,
as well as Ether-specific opportunities, challenges, and risks. The
Commission welcomes all public comments on these and related issues.

DATES: Comments must be received on or before February 15, 2019.

[[Page 64564]]

ADDRESSES: You may submit comments, identified by the title, ``Virtual
Currency RFI,'' by any of the following methods:
     CFTC website: https://comments.cftc.gov. Follow the
instructions to Submit Comments through the website.
     Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Same as Mail, above.
    Please submit comments by only one of these methods.
    All comments should be submitted in English or accompanied by an
English translation. Comments will be posted as received to https://www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the Commission to consider information
that may be exempt from disclosure under the Freedom of Information Act
(``FOIA''), a petition for confidential treatment of the exempt
information may be submitted according to the procedures established in
the Commission's regulations at 17 CFR 145.9.\1\ The Commission
reserves the right, but shall have no obligation, to review, prescreen,
filter, redact, refuse, or remove any or all of your submission from
https://www.cftc.gov that it may deem to be inappropriate for
publication, such as obscene language. All submissions that have been
redacted or removed that contain comments on the merits of the RFI will
be retained in the public comment file and will be considered as
required under the Administrative Procedure Act and other applicable
laws, and may be accessible under the FOIA.

    \1\ 17 CFR 145.9. All Commission regulations cited herein are
set forth in chapter I of Title 17 of the Code of Federal

and Chief Innovation Officer, (202) 418-5625; Bianca M. Gomez, Counsel
on FinTech and Innovation, Office of General Counsel, (202) 418-5627;
or [email protected].


I. Background

A. Introduction

    The CEA grants the Commission regulatory authority over the
commodity futures markets.\2\ LabCFTC was launched by the Commission in
order to further the CFTC's goal of evolving as a 21st century
regulator and keeping pace with technological innovation. LabCFTC is
dedicated to facilitating market-enhancing financial technology
(``FinTech'') innovation, informing policy, and ensuring that we have
the regulatory and technological tools and understanding to keep pace
with changing markets. LabCFTC is designed to make the CFTC more
accessible to all innovators and to inform the Commission's
understanding of emerging technologies and their regulatory
implications. One such area of emerging innovation involves virtual

    \2\ See, e.g., 7 U.S.C. 5(b).

    In further advancing its mission, LabCFTC published a primer on the
topic of virtual currencies in October 2017 (the ``Primer'') in order
to help educate the public on potential applications and use-cases, the
CFTC's role and jurisdictional oversight, and potential risks and
challenges that investors and users may face involving virtual

    \3\ ``A CFTC Primer on Virtual Currencies,'' (Oct. 17, 2017),

    In December 2017, the Chicago Mercantile Exchange Inc. (``CME'')
and the CBOE Futures Exchange (``CFE'') self-certified and began
offering new contracts for bitcoin futures products following
discussions with Commission staff regarding compliance with the CEA and
Commission rules and regulations. In line with Chairman Giancarlo's
repeated statements \4\ regarding the unique nature and risks of
virtual currency-related products, the CFTC's Division of Market
Oversight (``DMO'') and Division of Clearing and Risk (``DCR'') issued
on May 21, 2018 a joint staff advisory \5\ that gives exchanges and
clearinghouses registered with the CFTC guidance on certain
enhancements when listing a derivative contract based on virtual
currency pursuant to Commission regulations. The input being sought
here will better inform the Commission and its operating divisions as
the market evolves and potentially seeks to list new virtual currency
based futures and derivatives products.

    \4\ See, e.g., Testimony of Chairman J. Christopher Giancarlo
before the Senate Committee On Appropriations Subcommittee on
Financial Services and General Government (June 5, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo47.
    \5\ CFTC Staff Advisory No. 18-14 (May 21, 2018), https://www.cftc.gov/sites/default/files/idc/groups/public/%40lrlettergeneral/documents/letter/2018-05/18-14_0.pdf.

B. Bitcoin as a Virtual Currency

    In its October 2017 Primer, LabCFTC cited the IRS to define a
virtual currency as ``a digital representation of value that functions
as a medium of exchange, a unit of account, and/or a store of value . .
. [but that] does not have legal tender status.'' \6\ The Primer
further noted key characteristics of Bitcoin, including that it:

    \6\ See Primer, supra note 3, at 4 (citing IRS Notice 2014-21,
available at https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies). See also Proposed Interpretation on
Virtual Currency ``Actual Delivery'' in Retail Transactions (Dec.
15, 2017), 82 FR 60335 (Dec. 20, 2017), https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2017-27421a.pdf.

    [ssquf] Is ``pseudonymous'' (or partially anonymous) in that an
individual is identified by an alpha-numeric public key/address;
    [ssquf] Relies on cryptography (and unique digital signatures) for
security based on public and private keys and complex mathematical
    [ssquf] Runs on a decentralized peer-to-peer network of computers
and ``miners'' that operate on open-source software and do ``work'' to
validate and irrevocably log transactions on a permanent public
distributed ledger visible to the entire network;
    [ssquf] Solves the lack of trust between participants who may be
strangers to each other on a public ledger through the transaction
validation work noted in the bullet above; and
    [ssquf] Enables the transfer of ownership without the need for a
trusted, central intermediary.
    The Primer noted potential applications or use cases of a virtual
currency like Bitcoin, including that it may serve as a store of value,
be used for trading, enable payments and value transfers, power
applications built upon the virtual currency network, and facilitate
money transfers or international remittances. The Primer further
highlighted a range of potential risks around virtual currencies,
including technology, operational, cybersecurity, speculative, and
fraud and manipulation risks.

C. Ether as a Virtual Currency

    In June 2018, the Director of the Securities and Exchange
Commission's (``SEC'') Division of Corporation Finance, Bill Hinman,
delivered a speech which conveyed Mr. Hinman's personal views. In the
speech, he addressed the question of whether ``a digital asset that was
originally offered in a securities offering [could] ever be later sold
in a manner that does not constitute an offering of a security.'' He
explained among other factors that since the network on which Bitcoin
operates appears to be decentralized and there is no central third
party whose efforts are

[[Page 64565]]

a key determining factor in the success of Bitcoin, ``[a]pplying the
disclosure regime of the federal securities laws to the offer and
resale of Bitcoin would seem to add little value.'' He further stated
that, in addition to Bitcoin, ``based on my understanding of the
present state of Ether, the Ethereum network and its decentralized
structure, current offers and sales of Ether are not securities
transactions.'' Finally, he stated that ``[o]ver time, there may be
other sufficiently decentralized networks and systems where regulating
the tokens or coins that function on them as securities may not be
required.'' \7\

    \7\ ``Digital Asset Transactions: When Howey Met Gary
(Plastic),'' Remarks of William Hinman, Director, Division of
Corporation Finance, SEC at the Yahoo Finance All Markets Summit:
Crypto (June 14, 2018), https://www.sec.gov/news/speech/speech-hinman-061418.

    Ether is a virtual currency that was launched on the Ethereum
Network in 2015. It is an open network that currently relies on a proof
of work consensus mechanism, but developers, including through the
Ethereum Foundation, have plans to shift the protocol to a proof of
stake consensus model in order, at least in part, to reduce energy
consumption required to validate the ledger.\8\ The Ethereum Network is
often viewed as a platform that permits ready creation and use of smart
contracts that can power decentralized applications or organizations.
In this way, Ether is used as ``fuel'' to compensate miners for
maintaining a public ledger for such networks.\9\ To date, Ether has
typically been one of the top three virtual currencies by market

    \8\ See Ethereum Foundation, Frequently Asked Questions,
available at https://www.ethereum.org/ether (last visited Aug. 22,
    \9\ See id.

II. Request for Input

    The Commission is seeking public feedback namely on Ether and the
Ethereum Network in order to better understand these technologies given
Ether's size in the market and potentially unique attributes relative
to Bitcoin. The Commission is issuing this RFI in order to gather
public feedback on a range of questions related to the underlying
technology, opportunities, risks, mechanics, use cases, and markets,
related to Ether and the Ethereum Network. The requested information
will inform the work of LabCFTC and the Commission as a whole. The
Commission welcomes any relevant comments, including related topics
that may not be specifically mentioned but which a commenter believes
should be considered.

Specific Questions for Input

    In addition to any general input, the Commission is interested in
responses to the following questions:

Purpose and Functionality

    1. What was the impetus for developing Ether and the Ethereum
Network, especially relative to Bitcoin?
    2. What are the current functionalities and capabilities of Ether
and the Ethereum Network as compared to the functionalities and
capabilities of Bitcoin?
    3. How is the developer community currently utilizing the Ethereum
Network? More specifically, what are prominent use cases or examples
that demonstrate the functionalities and capabilities of the Ethereum
    4. Are there any existing or developing commercial enterprises that
are using Ether to power economic transactions? If so, how is Ether
recorded for accounting purposes in a comprehensive set of financial
    5. What data sources, analyses, calculations, variables, or other
factors could be used to determine Ether's market size, liquidity,
trade volume, types of traders, ownership concentration, and/or
principal ways in which the Ethereum Network is currently being used by
market participants?
    6. How many confirmations on the Ethereum blockchain are sufficient
to wait to ensure that the transaction will not end up on an invalid


    7. How is the technology underlying Ethereum similar to and
different from the technology underlying Bitcoin?
    8. Does the Ethereum Network face scalability challenges? If so,
please describe such challenges and any potential solutions. What
analyses or data sources could be used to assess concerns regarding the
scalability of the underlying Ethereum Network, and in particular,
concerns about the network's ability to support the growth and adoption
of additional smart contracts?
    9. Has a proof of stake consensus mechanism been tested or
validated at scale? If so, what lessons or insights can be learned from
the experience?
    10. Relative to a proof of work consensus mechanism does proof of
stake have particular vulnerabilities, challenges, or features that
make it prone to manipulation? In responding consider, for example,
that under a proof of stake consensus mechanism, the chance of
validating a block may be proportional to staked wealth.
    11. There are reports of disagreements within the Ether community
over the proposed transition to a proof of stake consensus model. Could
this transition from a proof of work to a proof of stake verification
process result in a fragmented or diminished Ether market if the
disagreements are not resolved?
    12. What capability does the Ethereum Network have to support the
continued development and increasing use of smart contracts?


    13. How is the governance of the Ethereum Network similar to and
different from the governance of the Bitcoin network?
    14. In light of Ether's origins as an outgrowth from the Ethereum
Classic blockchain, are there potential issues that could make Ether's
underlying blockchain vulnerable to future hard forks or splintering?

Markets, Oversight and Regulation

    15. Are there protections or impediments that would prevent market
participants or other actors from intentionally disrupting the normal
function of the Ethereum Network in an attempt to distort or disrupt
the Ether market?
    16. What impediments or risks exist to the reliable conversion of
Ether to legal tender? How do these impediments or risks impact
regulatory considerations for Commission registrants with respect to
participating in any transactions in Ether, including the ability to
obtain or demonstrate possession or control or otherwise hold Ether as
collateral or on behalf of customers?
    17. How would the introduction of derivative contracts on Ether
potentially change or modify the incentive structures that underlie a
proof of stake consensus model?
    18. Given the evolving nature of the Ether cash markets underlying
potential Ether derivative contracts, what are the commercial risk
management needs for a derivative contract on Ether?
    19. Please list any potential impacts on Ether and the Ethereum
Network that may arise from the listing or trading of derivative
contracts on Ether.
    20. Are there any types of trader or intermediary conduct that has
occurred in the international Ether derivative markets that raise
market risks or challenges and should be monitored closely by trading
venues or regulators?
    21. What other factors could impact the Commission's ability to
properly oversee or monitor trading in derivative

[[Page 64566]]

contracts on Ether as well as the underlying Ether cash markets?
    22. Are there any emerging best practices for monitoring the
Ethereum Network and public blockchains more broadly?

Cyber Security and Custody

    23. Are there security issues peculiar to the Ethereum Network or
Ethereum-supported smart contracts that need to be addressed?
    24. Are there any best practices for the construction and security
of Ethereum wallets, including, but not limited to, the number of keys
required to sign a transaction and how access to the keys should be
    25. Are there any best practices for conducting an independent
audit of Ether deposits?
    In providing your responses, please be as specific as possible, and
offer concrete examples where appropriate. Please provide any relevant
data to support your answers where appropriate. The Commission
encourages all relevant comments on related items or issues; commenters
need not address every question.

III. Conclusion

    The Commission appreciates your time and effort responding to this
RFI on Crypto-asset Mechanics and Markets. The information provided by
stakeholders will help us refine our understanding of this area of
innovation and better inform the work of the Commission, including the
evaluation of potential derivatives contracts. More broadly, the input
from this request will further aid the Commission in identifying
FinTech trends and related opportunities, challenges, and risks. In
that respect, we look forward to continuing to engage proactively with
the innovator community and market participants in order to help
facilitate market-enhancing innovation and ensure market integrity.

    Issued in Washington, DC, on December 11, 2018, by the
Christopher Kirkpatrick,
Secretary of the Commission.

Appendix to Request for Input on Crypto-asset Mechanics and Markets--
Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.

[FR Doc. 2018-27167 Filed 12-14-18; 8:45 am]