Corporate Alert: CFTC Finds That Bitcoin Is a Commodity
On September 17, 2015, the US Commodity Futures Trading Commission (CFTC) issued an Order filing and simultaneously settling charges against Coinflip Inc., d/b/a Derivabit (Coinflip), and its chief executive officer Francisco Riordan. The charges were due to Coinflip operating a bitcoin derivative trading business without complying with the Commodity Exchange Act (CEA) and CFTC Regulations. The CEA and CFTC Regulations require any business that facilitates the trading or processing of commodity options to register with the CFTC or otherwise be exempt from registration.
In connection with the Order, the CFTC formally determined that bitcoins and other virtual currencies are “encompassed in the definition” of commodities under Section 1a(9) of the CEA and are “properly defined as commodities.” Under the Order, Coinflip agreed to cease and desist its bitcoin option activities and further cooperate with the US government in any investigations or matters relating to such activities. (Read the CFTC’s announcement.)
On December 10, 2014, in testimony before the US Senate Committee on Agriculture, Nutrition and Forestry, CFTC Chairman Timothy Massad stated that “[d]erivative contracts based on a virtual currency represent one area within our responsibility.” As such, this settlement is consistent with prior testimony and demonstrates that the CFTC’s regulatory authority extends to derivative contracts based on virtual currency.
Virtual currency exchanges that provide platforms for the purchase or sale of bitcoins and other virtual currencies at then-market prices are regulated by the US Department of Treasury’s Financial Crimes Enforcement Network and, in many states, state laws applicable to Money Service Businesses or virtual currency exchanges. However, the Coinflip settlement demonstrates that any platform that facilitates the purchase or sale of virtual currency derivatives (including swaps) must register with the CFTC and comply with its rules and regulations and the CEA.