CFTC Finds That a Bitcoin Is a ''Commodity''
Commentary by Bob Zwirb
The CFTC entered an order and simultaneously settled charges against a California-based financial services company and its CEO for operating a facility that traded and processed options on bitcoins without complying with the CEA or CFTC Rules.
The CFTC found that the company and its CEO operated an online facility that offered to connect the buyers and sellers of bitcoin option contracts but failed to register the facility as a Swap Execution Facility or Designated Contract Market. Accordingly, the company violated Section 5h(a)(1) of the CEA and CFTC Rule 37.3(a)(1).
In a first ruling of its kind, the CFTC found that bitcoins and other virtual currencies are "commodities" by definition under the CEA. As a result, the CFTC concluded that the activities related to commodity option transactions were not conducted in compliance with a provision of the CEA or of the rules otherwise applicable to swaps, and were not conducted pursuant to the CFTC Rule 32.3 "trade option" exemption.
The order requires the financial services company and its CEO to cease and desist from further violations of the CEA and CFTC regulations, as charged, and to comply with specified undertakings. CFTC Director of Enforcement Aitan Goelman stated that innovation surrounding bitcoin and other virtual currencies "does not excuse those acting in this space from following the same rules applicable to all participants in the commodity derivatives markets."
Commentary
That bitcoin transactions are now subject to CFTC regulation is due in no small part to the expansive definition of the term "commodity" in the Commodity Exchange Act. Originally, that term was limited to certain agricultural commodities, but Congress broadened the coverage of the CEA gradually over time - first, by adding more agricultural commodities to the list of enumerated regulated commodities, and then, in 1974, by broadening the term even more to include "all other goods and articles . . . and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in." As the Division of Enforcement understates in today's Order, "[t]he definition of a 'commodity' is broad." Additionally, jurisdiction may be asserted even if there is no futures market for the named commodity. As a result of this expansive definition, trading in virtually any derivative that is connected to a "commodity" is now subject to the CEA, regardless of the nature of underlying commodity or whether a futures market exists for the relevant commodity. Perhaps they should change the name of the CFTC to the Commodity Derivatives Trading Commission and refer to it as the CDTC.