CFTC Requests Information Regarding Virtual Currency Ether, Possibly in Connection with Evaluating Potential Derivatives Contracts

The Commodity Futures Trading Commission published on December 17, 2018 a request for industry input regarding the technology, mechanics and markets for the virtual currency Ether and its use on the Ethereum Network. The responses to this request could inform the CFTC’s understanding of the market for Ether and any derivatives contracts on Ether that designated contract markets (DCMs) may list in the future. The CFTC regulates the U.S. derivatives markets (futures, options on futures and swaps), and under authority granted to it under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, also has authority to bring enforcement actions for fraud and market manipulation in cash commodities in interstate commerce.

The CFTC has undertaken to regularly inform itself of financial technology developments and to engage with market stakeholders in this area through its LabCFTC initiative.³ The CFTC is already familiar with the leading virtual currency Bitcoin, and futures on Bitcoin are currently traded on the Chicago Mercantile Exchange and CBOE Futures Exchange.⁴ The CFTC is seeking to better understand the similarities between Bitcoin and Ether and to understand unique aspects of Ether and the Ethereum Network.

In addition to general input, the CFTC is seeking specific information about the following aspects of Ether and the Ethereum Network: purpose and functionality; technology; governance; markets, oversight and regulation; and cybersecurity and custody.

Although the CFTC may use the information gathered from the request to evaluate potential derivatives contracts listed on exchanges, that evaluation would not necessarily be part of a CFTC approval process for listing new derivatives contracts on Ether. 

The Commodity Exchange Act permits DCMs to submit a written self-certification to the CFTC that the contract complies with the CEA and CFTC regulations or voluntarily to submit the contract for CFTC approval. Unless the CFTC finds that the contract would violate the CEA or CFTC regulations, the DCM may list the new contract one full business day following the self-certification submission; however, in practice DCMs engage with the CFTC staff prior to making the submission.⁵

The CME and CBOE Futures Exchange self-certification of Bitcoin futures contracts in December 2017 was controversial at the time. Clearing member firms complained to the CFTC through their trade organization that they were left out of the process of approval of the new contracts. Even if clearing member firms do not plan to trade certain contracts for their clients, they must contribute to the clearinghouse’s guarantee fund and commit to assessment obligations during clearinghouse shortfalls and so are exposed to the risks these instruments pose.⁶

Following the controversy, the CFTC staff issued an advisory to DCMs and clearinghouses providing guidance on additional risk mitigation enhancements they should make when seeking to list derivatives contracts on virtual currencies, and stating the CFTC staff’s expectation that those exchanges and clearinghouses engage with market stakeholders such as their members as part of the new contract listing process.⁷

Public comments must be received on or before February 15, 2019.

Footnotes

1) Request for Input on Crypto-Asset Mechanics and Markets, 83 Fed. Reg. 64563 (Dec. 17, 2018).

2) CFTC Rule 180.2. The CFTC takes the position that virtual currencies are commodities.

3) Further information regarding the LabCFTC initiative.

4) Bitcoin futures trading began on these exchanges in December 2017. For information regarding the contracts and their launch, please refer to the Dechert OnPoint on the subject.

5) CFTC Backgrounder on Self-Certified Contracts for Bitcoin Products, CFTC Fact Sheet, (Dec. 1, 2017).

6) CEO and President Walt Lukken, Futures Industry Association, Open Letter to CFTC Chairman Christopher Giancarlo Regarding the Listing of Cryptocurrency Derivatives (Dec. 6, 2018).

7) Advisory with Respect to Virtual Currency Derivative Product Listings, CFTC Staff Advisory 18-14 (May 21, 2018).