Statement of CFTC Chairman Heath P. Tarbert Regarding COVID-19 Before the FSOC Principals Meeting

March 26, 2020

Thank you, Secretary Mnuchin.  I want to commend you for your outstanding leadership in working with the President and Congress to develop a comprehensive response to the impact of the COVID-19 (coronavirus) pandemic on our nation’s economy.  I also very much appreciate your convening this public meeting on the measures FSOC members are taking to safeguard the U.S. financial system during this unprecedented period of market volatility. 

In turbulent and uncertain times like this, it is important that market participants, as well as the general public, know we are on the job.  But it is critical that they also have a sense of what we are doing.  In that regard, I welcome this opportunity to highlight some of the steps the CFTC is taking in light of the coronavirus pandemic.  We have a tremendously dedicated staff who are rising to this moment.

First, we are actively monitoring derivatives markets and their participants.  We are in frequent contact with trading venues, and are checking regularly on the financial resources and operational status of key market participants and intermediaries.  But we are especially focused on the critical “pipes” at the clearinghouses through which trades are margined and settled.  I am pleased to report that market infrastructures continue to operate seamlessly.  Clearinghouses have issued—and brokers and dealers have met—margin calls occurring multiple times each day.  The value of investments may have dropped significantly, but the markets have not frozen as some did in 2008.

Second, we are using our regulatory framework to promote orderly and liquid markets.  The rules and principles underlying our framework were developed to promote resilience in both normal and stressed market conditions, and they are doing just that.   We stand ready to adapt these tried and true principles, as needed, to changing conditions.

Third, we are responding swiftly to changing conditions by granting practical, targeted relief.  Social distancing has created novel hurdles to complying with regulatory requirements that were written with traditional, centralized offices in mind.  For instance, teleworking traders may not have access to recorded phone lines, which the CFTC otherwise requires when brokers take customer orders by phone.  Last week, we issued nine no-action letters that provide temporary relief from those kinds of recordkeeping and operational requirements.  In addition, we extended temporary margin relief for market participants with the smallest uncleared swaps portfolios.  We continue to encourage registrants to identify relief or other assistance that may be needed to help ensure the industry can support orderly and liquid markets in the face of the coronavirus.

Fourth, we are maintaining clear and frequent communications with all relevant stakeholders, including Congress and our fellow financial regulators here in America and overseas.  The FSOC and the President’s Working Group on Financial Markets are serving as essential channels for information sharing and coordinated action.  The almost daily conversations that are happening between and among many of the agencies, both at a principal level and between and among staff, are vitally important at this time. 

Fifth, I want to emphasize that, while responding to coronavirus-related market disruptions, we may need to change the way our agency does business in the near term.  But we will not alter the substance of that business.  The important policy work of the CFTC will go on. 

Let me share one more observation in closing.  The coronavirus pandemic has led to one of the most volatile periods the derivatives markets have ever experienced.  The number of futures, options, and swaps contracts and trades has surged to an all-time high.  Yet far from amplifying risk throughout our financial system, our derivatives markets so far have acted as shock absorbers for this historic volatility.  Unlike during the 2008 financial crisis, derivatives have internalized the impact of market swings.

There is no question these are unsettling times.  But I am reminded of the words of President Truman: “America was not built on fear.  America was built on courage, on imagination and an unbeatable determination to do the job at hand.”  The CFTC, and the FSOC as a collective, are indeed determined to confront this challenge head on.

Thank you again, Secretary Mnuchin.

-CFTC-

Statement of Commissioner Rostin Behnam Regarding COVID-19 and CFTC Digital Assets Rulemaking

March 24, 2020

We are collectively facing uncertainty in all aspects of our personal and professional lives as a result of COVID-19, and I am confident we will get through these trying times.  While I voted to approve today’s action in connection with digital assets, as a financial leader, I believe the Commodity Futures Trading Commission (“CFTC”) should instead solely focus on mission critical matters that address the real and rapidly developing challenges that our financial markets, the economy, and the American public are now facing on a daily basis.

I am very pleased, and commend the Chairman, my fellow Commissioners, agency Division Directors and staff, who are themselves adjusting in real-time to the new realities of social distancing and teleworking, for issuing, in the past week, no-action relief aimed at providing market participants and registrants with necessary relief.[1]  These important actions enable market participants and registrants to focus their efforts on business continuity, market stability, and personnel management in these turbulent times.  On that note, for the immediate future, and until financial markets demonstrate signs of stability and normalcy again, I believe the CFTC should temporarily table all non-critical policy work, shifting all our efforts and resources towards monitoring market and institutional stability and resiliency, prioritizing surveillance and enforcement, working with other regulators, and exhaustively engaging with market participants to consider necessary agency action that will alleviate market disruptions and support stable financial markets.

Above all else, the CFTC should protect retail customers and members of the public who are feeling the effects of the current economic uncertainty.  I applaud the Chairman’s action last week to issue a Customer Advisory, notifying the public to be on high alert for fraudsters that are seeking to profit from recent market volatility related to COVID-19.[2]  Finally, as the CFTC actively engages with market participants and the public to address the current market environment, I would strongly support extending all current open comment periods on rule proposals, which will allow commenters to solely focus their efforts on the immediate needs of the day, and ensure – after we get through these uncertain times – that the CFTC receives fulsome comments to these important policy proposals.

Regarding today’s action, the interpretive guidance that we are finalizing today was proposed in December 2017 – nearly two and a half years ago.[3]  The public comment period ended on March 20, 2018 – more than two years ago.[4]  In the rapidly developing world of digital assets, two years is a lifetime.  I am concerned that the views of market participants and the needs of the public may have changed during the past two years, and would have preferred to reopen the comment period, allowing for riper input.  In fact, there are likely multiple new market participants who never had an opportunity to comment.  I am hopeful that today’s action provides market participants with further clarity as to how the Commission views actual delivery in the virtual currency context.  However, I would prefer to be certain.

As a general matter, today’s action represents a small step forward in the broader policy discussion surrounding financial technology, and the regulatory patchwork that currently governs it.  The patchwork is our greatest hurdle to integrating virtual currency and the many new opportunities that financial technology more generally has the potential to provide financial markets and the global economy.  The CFTC can address specific issues like actual delivery, but alone it cannot address the regulatory patchwork.

I have long advocated for a more inclusive conversation regarding the advent of financial technology, believing that a thorough examination and discussion of the technology within our current legal and regulatory framework will best serve technologists, market participants, and customers.  I am still hopeful, and will continue to advocate —at the appropriate time—for this larger conversation, convened by policymakers, to hash out a path forward that will ensure that technologists, and logically the technology they create, stays in the United States, supporting American innovation, jobs, and national security.[5]

I would like to again thank the Chairman, Division Directors, LabCFTC, and all CFTC staff for their hard work on this final interpretive guidance, and the other matters discussed above that the CFTC has taken swift action on in the past week, particularly under trying circumstances as we operate within the new realities of communication and the work environment.

[1] CFTC Provides Relief to Market Participants in Response to COVID-19 (March 17, 2020), https://www.cftc.gov/PressRoom/PressReleases/8132-20; CFTC Issues Second Wave of Relief to Market Participants in Response to COVID-19 (March 17, 2020), https://www.cftc.gov/PressRoom/PressReleases/8133-20; CFTC Issues Third Wave of Relief to Market Participants in Response to COVID-19 (March 20, 2020), https://www.cftc.gov/PressRoom/PressReleases/8136-20.

Statement of Chairman Heath P. Tarbert in Support of Interpretive Guidance on Actual Delivery for Digital Assets

March 24, 2020

I am pleased to support the CFTC’s final interpretive guidance on actual delivery for digital assets used as a medium of exchange. These digital assets are colloquially known as “virtual currencies” or “cryptocurrencies.” Our action provides long-awaited guidance to trading platforms, custodians, and other key market infrastructures and participants regarding those digital assets that are both “commodities” under U.S. law and traded via leverage provided by the counterparty or trading platform. This action also reflects the CFTC’s growing expertise in this space as well as my commitment to continued U.S. fintech leadership and providing our market participants with clarity. 

Legislative Background

It is important to put this guidance in the larger context of the CFTC’s jurisdiction over leveraged spot “retail commodity transactions,” a subject that is both arcane and technical. As part of the Dodd-Frank Act, Congress added a new section to our governing statute, the Commodity Exchange Act (“CEA”), addressing leveraged spot retail commodity transactions. This section—codified as section 2(c)(2)(D) of the CEA—makes these transactions subject to certain enumerated provisions of the CEA “as if they were” futures contracts. Those enumerated CEA provisions include on-exchange trading and broker registration requirements, among others. So what is this all about? In short, it is about sealing a loophole.

Since the creation of the CFTC, the agency has had exclusive jurisdiction over commodity futures. Simply put, a futures contract is a standardized agreement that allows the long (short) side to buy (sell) a given commodity at a specified price at a later date. Under the CEA, these contracts must be traded on organized exchanges that the CFTC regulates. Some percentage of the contract value is deposited as margin with the exchange’s clearinghouse during the duration of the futures contract.

Futures contracts are different from bills of sale, which represent a transaction consummated in the present, as opposed to a later date. (We call these cash or “spot” transactions.) They are also different from forward contracts, which are less standardized, i.e., more bespoke to the parties to the agreement, and nearly always contemplate delivery of the relevant commodity.

But let us suppose that someone decides to purchase a given commodity with some money down, with both delivery and final payment to be made at some future date. Suppose also that the individual could decide to trade out of the position at any time to lock in whatever gains or losses he or she has incurred. Then guess what? That starts to look an awful lot like a futures contract—with identical economics yet without any regulation.

The CFTC necessarily began to treat these arrangements as futures contracts. But some courts disagreed, holding these schemes were wholly outside the CEA. So Congress took action.[1] While making clear that look-alike products would be regulated as futures contracts, Congress also prescribed a number of exceptions to ensure that section 2(c)(2)(D) would cover only those transactions that closely resemble futures and other CFTC-regulated derivatives, and not ordinary financed commercial sales.

One key exception carves out transactions that “result[ ] in actual delivery within 28 days.”[2] The guidance we are issuing today interprets this “actual delivery” exception as it applies to any digital asset that is a “commodity” under the CEA—such as Bitcoin and Ether, for example[3]—and is used as a medium of exchange (so-called “virtual currencies”).

Prior Interpretive Actions

This is not the CFTC’s first action interpreting the actual delivery exception. In 2013, we issued guidance taking a functional, facts-and-circumstances approach to determining when actual delivery has occurred.[4] Federal appellate courts have since interpreted this exception consistent with our 2013 guidance, focusing on the need for the purchaser to obtain “possession and control” of the commodity following the 28-day delivery period.[5] The CFTC itself has also previously interpreted the actual delivery exception in the context of digital assets, concluding that the exception was not met where Bitcoin was transferred to a virtual wallet under the control of the trading platform rather than the customer.[6]

Since 2017, when we first proposed the guidance we are finalizing today, we have also benefited from specific comments received, as well as from considerable experience and public input in the area of digital assets generally. Our understanding of the issues has been enhanced through (i) regular engagement with digital asset firms and users via each of our policymaking Divisions, as well as LabCFTC and the Technology Advisory Committee; (ii) responses to our 2018 request for information on the evolution of digital asset markets;[7] and (iii) the listing of digital asset derivatives on many CFTC-registered futures exchanges and swap execution facilities.

The digital assets community has waited patiently for more than two years for answers to their legitimate questions. Today I am pleased that we will provide the clarity they are seeking and deserve. Our guidance synthesizes relevant judicial precedent and CFTC positions, particularly appellate case law focusing on the elements of “possession and control,” including a purchaser’s ability to use a digital asset freely in commerce. It then applies this synthesized view in a series of non-exclusive, illustrative examples to provide additional clarity and certainty to the market.

Process Considerations

I have previously said that the CFTC “is most transparent when we regulate through public notice-and-comment rulemakings that require a majority vote of presidentially-nominated, Senate-confirmed officials. We should do so whenever possible.”[8] But I have also acknowledged that rulemaking is not appropriate for every circumstance. Areas involving fast-evolving technology and market structure—such as the digital asset space—may be better-suited to flexible guidance that can be more quickly adapted to fit the rapid pace of change.

I believe this guidance strikes the right balance. The CFTC voluntarily issued a proposed version of the guidance for public comment, and the final version addressing those comments is now subject to a vote of the Commission. In that sense, the process for issuing this guidance has in many ways tracked a traditional notice-and-comment rulemaking.

But by taking the form of guidance rather than a regulation, this release efficiently and flexibly communicates the CFTC’s current views on how the actual delivery requirement may apply in various situations. Given the complex and dynamic nature of digital asset markets, I believe it is appropriate to take an adaptable approach while the agency continues to follow developments in this area.

To prevent any potential market disruptions associated with efforts to assimilate this guidance, I anticipate that for a period of 90 days the CFTC will forbear from initiating enforcement actions addressing aspects of this guidance that were not plainly evident from prior CFTC guidance, enforcement actions, and case law.[9] I hope this use of prosecutorial discretion will help to maintain orderly, liquid digital asset markets.

Conclusion

To function well, markets and their participants need regulatory certainty. At the same time, rapid evolution in the fintech space often necessitates an adaptable regulatory framework. I believe this interpretive guidance provides the right blend of certainty and flexibility. As U.S. digital asset markets evolve, so too may our regulatory approach. While it remains to be seen whether so-called “virtual currencies” will gain traction on par with traditional currencies or even other commodity classes, it is critically important that the United States continue to be a leader in blockchain technology.[10] Under my leadership, the CFTC will continue to do its part to encourage innovation through sound regulation.  

-CFTC-
 

[1] See Hearing to Review Implications of the CFTC v. Zelener Case Before the Subcomm. on General Farm Commodities and Risk Management of the H. Comm. on Agriculture, 111th Cong. 52–664 (2009) (statement of Rep. Marshall, Member, H. Comm. on Agriculture) (“If in substance it is a futures contract, it is going to be regulated. It doesn’t matter how clever your draftsmanship is.”); 156 Cong. Rec. S5, 924 (daily ed. July 15, 2010) (statement of Sen. Lincoln) (“Section 742 corrects [any regulatory uncertainty] by extending the Farm Bill’s ‘Zelener fraud fix’ to retail off-exchange transactions in all commodities.”) (emphasis added).

[2] Section 2(c)(2)(D) contains additional carve-outs specifically addressed to commercial financed transactions. One excludes from the scope of section 2(c)(2)(D) transactions involving “eligible commercial entities” and certain other agricultural entities acting within their line of business. Another excepts from section 2(c)(2)(D) any retail commodity transaction that “creates an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver and accept delivery, respectively, in connection with the line of business of the seller and buyer.”

[3] E.g., In re Coinflip, Inc., d/b/a Derivabit, CFTC Docket No. 15-29, 2015 WL 5535736, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 33,538 (CFTC Sept. 17, 2015) (consent order) (concluding that Bitcoin is a commodity under the CEA); 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) (same); In re BFXNA Inc., CFTC No. 16-19, 2016 WL 3137612, at *5 (June 2, 2016) (consent order) (same); see also CFTC v. McDonnell, 287 F. Supp. 3d 213, 217 (E.D.N.Y. 2018) (same); CFTC v. My Big Coin Pay, Inc., 334 F. Supp. 3d 492, 495–98 (D. Mass. 2018) (concluding that virtual currency similar to Bitcoin is a commodity); Heath P. Tarbert, Chairman, CFTC, Interview at Yahoo! Finance All Markets Summit (Oct. 10, 2019) (“Yahoo! Interview”) (stating belief that current version of Ether is a commodity).

[4] Retail Commodity Transactions Under Commodity Exchange Act, 78 Fed. Reg. 52,426 (Aug. 23, 2013) (“2013 Guidance”).

[5] CFTC v. Hunter Wise Commodities, LLC, 749 F.3d 967, 980 (11th Cir. 2014) (“While we need not defer to the agency’s interpretation because the statutory text is unambiguous . . . we note also that the interpretation the court adopts today harmonizes with the Commission’s own informal interpretation.”) (internal citations omitted); CFTC v. Monex Credit Company, 931 F.3d 966, 972-75 (9th Cir. 2019).

[6] In re BFXNA INC. d/b/a BITFINEX, CFTC Docket No. 16-19 (June 2, 2016) (consent order).

[7] See, e.g., Commission Request for Input on Crypto-Asset Mechanics and Markets, 83 Fed. Reg. 64,563 (Dec. 17, 2018); CFTC, Technology Advisory Committee (Mar. 14, 2020), https://www.cftc.gov/About/CFTCCommittees/TechnologyAdvisory/tac_meetings.html.

[8] Heath P. Tarbert, Chairman, CFTC, Statement: “Tripling Down on Transparency” (Dec. 10, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement121019.

[9] For example, I do not anticipate that the CFTC’s Division of Enforcement (“DOE”) would bring an enforcement action alleging a failure of actual delivery based on an affiliation between a trading platform and a depository during this 90-day time period that is inconsistent with the guidelines set forth in this guidance. By contrast, in my view it would be acceptable for DOE to initiate an enforcement action based on transactions during this time period that are merely “rolled” or “offset,” without further indicia of delivery, as the Commission has previously identified such transactions as inconsistent with actual delivery under section 2(c)(2)(D). See, e.g., 2013 Guidance at 52,429 (stating that actual delivery would not be satisfied where a transaction is “rolled, offset, or otherwise netted with another transaction or settled in cash between the buyer and the seller,” but the seller does not otherwise deliver the commodity into the possession of the buyer or a depository acting for the buyer that meets certain criteria). 

[10] See, e.g., Yahoo! Interview, supra note 3 (stating that the United States must be a leader in blockchain technology, creating an environment conducive to responsible financial innovation); Heath P. Tarbert, Chairman, CFTC, Fintech Regulation Needs More Principles, Not More Rules, Fortune (Nov. 19, 2019), https://fortune.com/2019/11/19/bitcoin-blockchain-fintech-regulation-ctfc/ (“Ensuring that America remains a global fintech leader will be essential to our future prosperity.”); Heath P. Tarbert, Chairman, CFTC, Interview on CNBC (Nov. 19, 2019) (“I want the United States to lead, particularly in the blockchain technology that underlies digital assets.”).

Statement of Chairman Heath P. Tarbert Before the Energy and Environmental Markets Advisory Committee Meeting

March 24, 2020

I first want to recognize the hard work of our staff and market participants in the face of immense economic and personal difficulties around the country.  Each of us recognizes that we have responsibilities based on our positions, including the responsibility to help the American economy continue to operate.  The firms that use U.S. derivatives markets are drivers of the American and global economy.  Only with functioning derivatives markets can our country overcome the challenges we are facing and jump start an economic recovery.

Despite the unprecedented turbulence wracking global markets, the American derivatives markets are so far showing resilience.  Margin calls are being met by all our major clearing members.  Sellers can find buyers, and buyers can find sellers.  This continued functioning of the derivatives markets is thanks to all the dedicated women and men throughout this industry.

The American energy sector has been hit particularly hard in the past month by both the coronavirus and the crude oil standoff between Saudi Arabia and Russia.  This double dose of volatility reinforces the importance of derivatives markets in allowing participants on every side of the market to mitigate and manage their price risks.  Without functioning derivatives markets, the impact on energy producers would be far greater.

The CFTC has engaged all its resources to monitor and address developments in the markets.  Through data received from exchanges, clearinghouses, clearing members, and swaps participants, we are able to identify issues as they develop.  Using this information, we are able to coordinate responses better with our fellow regulators, our market operators, and our market participants.

The CFTC is also providing targeted regulatory relief, where appropriate, to address the unanticipated challenges facing industry.  Last week, the agency issued a series of no-action letters to facilitate working remotely in light of social distancing.  With respect to the energy industry, the CFTC also issued no-action relief to a bank active in lending to domestic oil and gas exploration and production companies.  This targeted relief will help the bank continue its vital lending activities to this sector—and offsetting that risk in the derivatives markets—without triggering registration as a major swap participant, a registration class largely intended to capture large speculative swaps traders such as hedge funds.

At the same time, while we are laser focused on the turbulence in our market, the agency must continue pursuing its broader mandate.  The current turbulence in the markets will eventually subside and we will take stock of the system’s resiliency.  In the meantime, we must push forward with all the vital issues we were called to address even during normal times.  To that end, I am looking forward to comment letters on our position limits proposal by the close of the comment period on April 29, 2020.  While we cannot entertain in-person meetings with Commissioners or staff on this or other open proposals, I highly recommend that members of the public arrange telephonic meetings with our dutiful staff.

Like workplaces around the country, the CFTC has had to adjust the way it operates.  However, we remain open for business and will carry on with our important oversight duties.  We do not take our positions for granted and will continue to provide the high level of professionalism the American people rightly expect of us.

-CFTC-

Statement of Commissioner Dawn D. Stump before the CFTC Energy and Environmental Markets Advisory Committee

Resilience

March 24, 2020

The mission of the Commodity Futures Trading Commission (CFTC) is to promote the integrity, RESILIENCE, and vibrancy of the U.S. derivatives markets through sound regulation.  Today, I want to focus on resilience – not just as it relates to regulating the derivatives markets but, more generally, how it was demonstrated and revered during my upbringing in Texas and how those lessons resonate today.  I grew up in an area almost exclusively dependent upon production agriculture and 175 miles (a short distance by Texas standards) from the Permian Basin, the state’s oil producing region.  Both industries are critical to the economy of Texas and the nation, but during my childhood in the 1980s the agriculture and energy sectors were in a state of turmoil due to depressed market conditions and credit constraints.  While these were extremely difficult times, I can attest that the dedication to produce energy and food was never lost, nor was the respect for innovation and markets. In fact, the resilience of these industries is rooted in a trust that if they do their part to feed, clothe, and power the nation, innovators will develop technologies to improve their efficiencies and markets will operate transparently to help them better manage their risks.

My somewhat distanced childhood memories now serve as vivid reminders that our resilience is dependent upon a shared commitment to do our part.  In today’s environment, public health is everyone’s priority.  As such, food deliveries, expedited grocery restocking, virtual classrooms, school meal distribution, and expanded hotspot locations in areas without internet services all promote stability and social distancing – none of which would be possible without reliable sources of energy.

As for the CFTC’s part in all of this, we have an obligation to preserve the integrity of the market tools for those who produce, distribute, and consume energy during these volatile times.  They need all available tools to manage their risks and reliably discover prices on transparent market venues.  I am grateful for all of those here at the CFTC who have been carrying out the agency’s responsibilities during these difficult times, especially the team that will present today’s discussion.  This group has worked day and night over the past few weeks.

Price discovery is sometimes a grim job but it is nonetheless our task to fulfill.  In July of 2008, I distinctly recall West Texas Intermediate crude prices soaring to $147 per barrel.  Last week, the same market touched $20 per barrel.  In each of these circumstances, we acknowledge that there are real-world implications for consumers and producers and we must ensure that the price is transparent regardless of its favorability.  Only then are these markets able to serve their risk management function.  We also take seriously our obligation to ensure that those who may attempt to manipulate the markets are held accountable.   

Over the past few weeks I have been in touch with folks in various commodity businesses.  Like the entire nation, they are worried about the public health situation.  Like many others, they are concerned about the sustainability of their livelihood.  The commodity production and distribution business is inherently risky, and we as a nation are grateful to those who are willing to take on such endeavors in order that we might eat and power our modern lives.   Today we are reminded that resilience is everyone’s shared responsibility, and at the CFTC it is a part of our mission. 

-CFTC-

Opening Statement of Commissioner Dan M. Berkovitz before the Energy and Environmental Markets Advisory Committee

March 24, 2020

Good morning, and welcome to the Energy and Environmental Markets Advisory Committee (EEMAC or Committee).  This is a challenging time for our nation and financial markets. I thank the Committee members and associate members for joining us today.

Recognizing our committee members’ attention to current events, we have postponed our discussion on the position limits rulemaking.  Instead, members of the CFTC’s Division of Market Oversight will brief the Committee on the recent developments and volatility in the derivatives markets.  In times of market stress, it is critical that our markets be transparent and that participants have accurate and up-to-date information.

A reliable supply of energy is central to this country’s infrastructure and economy, both under normal circumstances and in national emergencies.  We need energy to continue to operate our industries and facilities, manufacture needed supplies, transport supplies and emergency personnel to where they are needed, operate our communications infrastructure, and heat and cool our homes, hospitals, and workplaces.  I would like to express my gratitude to our fellow citizens in the energy industry who are working to provide these essential services to the American people.

The CFTC remains focused on protecting the integrity of the derivatives markets.  In addition to our own monitoring, we are in daily—and often more frequent—communication with our exchanges, clearinghouses, and intermediaries.  We are committed to ensuring that the derivative markets remain able to fulfill their central purposes of price discovery and risk management.  We also are committed to maintaining market participants’ access to these markets, while not compromising market integrity.  To date, derivatives markets have been functioning effectively, but we are vigilant as conditions evolve.

The CFTC’s Market Intelligence Branch has been leading daily briefings over the past few weeks to apprise Commissioners and staff of market developments.  During these briefings, the CFTC’s operating divisions share key data for the markets we oversee and analyze potential areas of risk.  I thank CFTC staff, including our presenters today, for working around the clock to keep pace with these developments, and for their dedication to this agency and to the markets we regulate.

Presenting today will be three members of the CFTC’s Market Intelligence Branch:  Chief Market Intelligence Officer, Mel Gunewardena, and Market Analysts Chris Goodenow and Mike Nouri.

I would like to welcome the Chairman and Commissioners, who are joining today’s Committee meeting.  I’d like to express my appreciation for the Chairman’s leadership in protecting the health and safety of all of us at the CFTC, and to each of the Commissioners for their hard work and collaboration in meeting the challenges we face.

Most of us at the CFTC are teleworking in order to protect our staff and our fellow citizens.  I’d like to recognize our Office of Data and Technology for enabling us to telework and for setting up this meeting.  I hope today’s Committee meeting will give market participants and the public a glimpse into how the Commission is adapting to the circumstances and continuing to accomplish its mission.

I would also like to thank a few people who have made this meeting possible, including Dena Wiggins, President and CEO of the Natural Gas Supply Association and the Chair of the EEMAC; Abigail Knauff, the EEMAC Secretary; Lucy Hynes of my staff; and Michelle Ghim from the Office of General Counsel.

Finally, we intend to reschedule the position limits meeting to early May.  We will host that meeting remotely if necessary, so please stay tuned for further details from Abigail regarding the format and schedule of that meeting.

Thank you. 
 

-CFTC-

Statement of Commissioner Brian D. Quintenz in Support of Final Interpretive Guidance: Retail Commodity Transactions Involving Certain Digital Assets

March 24, 2020

I support today’s final interpretive guidance regarding when “actual delivery” has occurred in the context of transactions with retail customers entered into on a leveraged, financed, or margined basis involving digital assets that are, or can be, used as a medium of exchange.  In the past, the Commission has seen platforms offering retail customers the ability to enter into margined or financed transactions on all manner of commodities–foreign currencies, precious metals, for example–that are repeatedly rolled, offset against, or cashed out. Platforms offering digital assets to retail customers on a margined basis are the latest iteration of this activity.

In function, these trades bear many of the hallmarks of futures trading by allowing retail customers to speculate on price movements of the underlying commodity, but without any of the important customer protections afforded by regulated futures exchanges.  Recognizing the potential for fraud and abuse in these retail markets, the Commodity Exchange Act calls for such trades to be treated as if they were futures, unless the commodity is “actually delivered.”[1]  Historically, the Commission has employed a functional approach to determine whether “actual delivery” has occurred, closely scrutinizing “how the agreement, contract, or transaction is marketed, managed, and performed, instead of relying solely on language used by the parties in the agreement…”[2]  Today’s final interpretive guidance builds upon that functional approach, tailoring it to the unique characteristics of digital assets.

To determine whether “actual delivery” has occurred, the guidance focuses on two primary precepts.  First, the customer must have possession and control of the entire quantity of the virtual currency, including the ability to use the virtual currency freely in commerce no later than 28 days from the date of the transaction.  Second, the offeror (typically, the trading platform) and the counterparty seller cannot retain any legal right or control over the virtual currency at the expiration of 28 days from the date of the transaction.  Essentially, the guidance looks to whether the customer has the ability to freely use the virtual currency purchased on margin in interstate commerce. Although “actual delivery” is by its nature a facts and circumstances test, the guidance does provide several non-exclusive examples of what the Commission would view as satisfying the “actual delivery” exception.

The digital asset space is a nascent, evolving, incredibly innovative space, with the potential to offer great efficiencies and enhancements to the markets.  This interpretation is not designed to stifle this innovation.  Instead, it seeks to strike the appropriate balance between protecting the general public from bad actors and financial harm and providing a functional, adaptable regulatory framework to a rapidly evolving business.  As the guidance notes, the Commission will continue to follow developments in the virtual currency markets, evaluating business activities on a case-by-case basis.

I also note that this guidance has been outstanding for over two years.  During that time, the virtual currency markets have matured considerably and firms have made strategic business decisions to develop and grow certain business lines.  In light of those facts, I support the Chairman’s view that the Commission should exercise its prosecutorial discretion to forbear from initiating enforcement actions addressing aspects of this interpretive guidance that were not plainly evident from prior Commission guidance, enforcement actions, and case law for 90 days after its issuance. 

-CFTC-
 

[1] This interpretation only addresses the meaning of the “actual delivery” exception for retail commodity transactions under CEA Section 2(c)(2)(D)(ii)(III)(aa). There is a separate exception under CEA section 2(c)(2)(D)(ii)(III)(bb) for commercial transactions conducted in the normal course of business of the buyer and seller.