Background

Under Commodity Exchange Act (CEA) section 2(c)(2)(D), retail commodity transactions are defined as transactions in a commodity that are offered to or entered into with retail customers on a margined, leveraged, or financed basis.³ If a transaction qualifies as a “retail commodity”⁴ transaction, it is treated “as if” it is a futures contract and must be traded on a registered exchange (i.e., a designated contract market – “DCM”).⁵ One exception to section 2(c)(2)(D) is for transactions that result in “actual delivery” of the purchased commodity to the buyer within 28 days of execution.⁶

In 2013, the CFTC issued final interpretive guidance on the meaning of “actual delivery” under CEA section 2(c)(2)(D) (the 2013 Final Interpretive Guidance).⁷ Under the 2013 Final Interpretive Guidance, “actual delivery” is deemed to have occurred only if title to the full quantity of the commodity transfers to the buyer, where the buyer takes possession of the commodity directly or at an institution acting on the buyer’s behalf.⁸ In 2015, the CFTC began applying the term “commodity” to virtual currencies and thereby spurring questions on how contracts on virtual currencies fit into the regulatory framework for commodities.⁹ With various entities defining differently what qualifies as “actual” delivery and given the significance of such analysis in the context of commodities, it became evident that guidance from the CFTC was necessary.¹⁰ On December 15, 2017, the CFTC issued the 2017 Proposed Interpretive Guidance of the meaning of “actual delivery” in the context of retail commodity transactions in virtual currency. The 2017 Proposed Interpretive Guidance deemed “actual delivery” to have occurred when a customer who purchased virtual currency using margin, leverage, or another financing arrangement has the ability to (1) take possession and control of the full quantity of the virtual currency, and (2) use the virtual currency freely in commerce – including off the platform on which it was purchased – within 28 days of the transaction.¹¹

The Final Interpretive Guidance

The Final Interpretive Guidance closely tracks the 2017 Proposed Interpretive Guidance. The CFTC noted that it continues to interpret the term “virtual currency” broadly as “a digital asset that encompasses any digital representation of value or unit of account that is or can be used as a form of currency (i.e., transferred from one party to another as a medium of exchange); may be manifested through units, tokens, or coins, among other things; and may be distributed by way of digital ‘smart contracts,’ among other structures.”¹²

With respect to whether or not “actual delivery” has occurred in the context of retail commodity transactions in virtual currency, the CFTC set forth the following two-step approach: (1) the customer must secure (i) possession and control of the entire quantity of the commodity, irrespective of whether it was purchased with any financing arrangement, and (ii) the ability to use the entire quantity of the commodity freely in commerce no later than 28 days from the date of the transaction and at all times thereafter; and (2) the offeror and counterparty seller must not retain any interest, legal right, or control over the commodity purchased with any financing agreement at the expiration of 28 days from the date of the transaction.¹³

Importantly, as it did in both the 2013 Final Interpretive Guidance¹⁴ and the 2017 Proposed Interpretive Guidance,¹⁵ the CFTC emphasized that “actual delivery” does not occur if, before the end of 28 days, the transaction is rolled, netted, or cash-settled between the customer and the offeror.¹⁶ In addition, the Final Interpretive Guidance also expanded on when the transfer of the virtual currency to a depository affiliated with the offeror may constitute “actual delivery.” According to the CFTC, “actual delivery” occurs when the affiliated depository is (i) a financial institution, (ii) a separate line of business from the offeror and beyond the offeror’s control, (iii) a separate legal entity, (iv) predominantly operating as a custodian, (v) appropriately licensed, (vi) allowing the customer to engage in cold storage of the virtual currency, and (vii) contractually authorized to act as the customer’s agent.¹⁷

Finally, the CFTC also provided the following examples of cases to further clarify what constitutes “actual delivery”:¹⁸

• Example 1: Actual delivery has occurred if within 28 days after entering into the agreement (i.e. timely), the public distributed ledger of the transfer reflects the transfer of the entire quantity.
• Example 2: Timely actual delivery has occurred if (i) the counterparty seller or offeror has delivered the entire quantity, (ii) the purchaser has secured full control, and (iii) the commodity delivered is not subject to any liens or other third-party rights.
• Example 3: Timely actual delivery occurs only if the full amount is transferred away from a digital account affiliated with the offeror or counterparty seller and received by a separate, independent, appropriately licensed depository or blockchain address in which the customer maintains possession and control.
• Example 4: Timely actual delivery has not occurred if the transaction is merely reflected by the seller’s book entry.
• Example 5: Timely actual delivery has not occurred if the commodity is rolled, offset against, netted out, or settled in cash or another virtual currency between the parties.

The Final Interpretive Guidance makes clear that the purpose of a retail commodity transaction in virtual currency is for the purchaser to take full, unencumbered possession of the virtual currency within 28 days of the transaction being executed so that the purchaser can use the virtual currency freely in commerce thereafter. If market participants who are offering leveraged or margined products in virtual currency to retail customers cannot meet the CFTC’s standards for “actual delivery,” they must offer such products “as if” they are futures contracts under the CEA.

1. CFTC, Retail Commodity Transactions Involving Virtual Currency, unpublished (approved Mar. 23, 2020), (interpreting 17 C.F.R. pt. 1). In his statement of support for the Final Interpretive Guidance, CFTC Chairman Heath Tarbert stated that he anticipates a 90-day grace period where the CFTC Division of Enforcement will not initiate enforcement actions based on the Final Interpretive Guidance “that were not plainly evident from prior CFTC guidance, enforcement actions, and case law.” Statement of Chairman Heath P. Tarbert in Support of Interpretive Guidance on Actual Delivery for Digital Assets, (Mar. 24, 2020). The Chairman noted that transactions that are rolled or offset are an example of “plainly evident” conduct given that the CFTC had previously identified such transactions as inconsistent with “actual delivery.”
2. CFTC, Retail Commodity Transactions Involving Virtual Currency, 82 Fed. Reg. 60,335 (Dec. 15, 2017) (interpreting 17 C.F.R. pt. 1).
3. CEA section 2(c)(2)(D)(i). Specifically, the types of entities (“eligible contract participants” - ECPs) that would not be considered a retail customer under the CEA include financial institutions, insurance companies, and investment companies trading for their own account. Individuals meeting certain investment thresholds are also not considered retail customers. See CEA section 1a(18).
4. A “retail customer” is any entity that does not qualify as an ECP or as an eligible commercial entity (ECE). See CEA section 2(c)(2)(D)(iv). If an both counterparties to the transactions are ECPs, then they do not need to rely on the “actual delivery” exception under CEA section 2(c)(2)(D).
5. CEA section 2(c)(2)(D)(iii).
6. CEA section 2(c)(2)(D)(ii)(III)(aa).
7. CFTC, Retail Commodity Transactions Under Commodity Exchange Act, 78 Fed. Reg. 52,426, 52,428 (Aug. 23, 2013) (interpreting 17 C.F.R. pt. 1).
8. Id.
9. In re Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-29, 2015 WL 5535736, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 33,538 (CFTC Sept. 17, 2015) (consent order); 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). See below for the CFTC’s definition of “virtual currencies.”
10. See CFTC v. Hunter Wise Commodities, LLC, et al., 749 F.3d 967 (11th Cir. 2014); CFTC v. Monex Credit Company, et al., 931 F.3d 966, 973 (9th Cir. 2019). See also Peter Y. Malyshev, Christine Parker, Justin J. Mirabal, Joseph M. Motto, Implications of the CFTC v. Monex decision for trades in commodities and crypto-assets, Reed Smith Client Alerts (Sep. 3, 2019).
11. 2017 Proposed Interpretation at 60,339.
12. Final Interpretive Guidance at 27.
13. Id. at 30.
14. 2013 Final Interpretive Guidance at 52,429.
15. 2017 Proposed Interpretive Guidance at 60,340.
16. Final Interpretive Guidance at 31.
17. Id. at 19.
18. Id. at 34-35.

Client Alert 2020-214