The CFTC and Virtual Currencies

03/26/2018 12:31 pm EST


Dan Rutherford

Deputy Director, Office of Customer Education and Outreach, U.S. Commodity Futures Trading Commission


Today, FinTech is driving innovation in financial markets across the globe. New technologies are wide-ranging in scope, from cloud computing and algorithmic trading to distributed ledgers to artificial intelligence and machine learning to network cartography, and many others.

These technologies have the potential for significant or even transformational impact on markets regulated by the U.S. Commodity Futures Trading Commission (CFTC), and on the agency itself. One of the most recent marketplace developments driving a lot of interest is the rise in prominence of virtual currencies.

What are virtual currencies?

A virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value. In some cases, you can spend it like money, but it does not have legal tender status in the United States.

Some virtual currencies have an equivalent value in other currencies, such as U.S. dollars or euros, or can be traded for other virtual currencies. These are referred to as convertible virtual currencies. Bitcoin is one example of convertible virtual currency.

Certain virtual currencies operate on public decentralized ledger systems that capture and record “blocks” of transactions. Collectively, this open system of ledgers is known as the blockchain. Versions of public and private systems may be used by financial institutions, governments, or across industries.

What are the risks?

While virtual currencies have potential benefits, this emerging space also involves various risks, including operational, cybersecurity, speculative, and fraud and manipulation risks. It’s important to know that virtual currencies are relatively unproven and may not perform as expected. For example, some have questioned whether public distributed ledgers are in fact immutable.

The role of the CFTC

The CFTC first found that Bitcoin and other virtual currencies are properly defined as commodities in 2015. The CFTC has oversight over futures, options, and derivatives contracts. The CFTC’s jurisdiction is implicated when a virtual currency is used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce.

Beyond instances of fraud or manipulation, the CFTC generally does not oversee “spot” or cash market exchanges and transactions involving virtual currencies that do not utilize margin, leverage, or financing.

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This article was prepared by the Commodity Futures Trading Commission’s Office of Customer Education and Outreach. The article is provided for general informational purposes only and does not provide legal or investment advice to any individual or entity. Please consult with your own legal adviser before taking any action based on this information.

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