U.S. watchdog outlines virtual currency trade exemptions

WASHINGTON (Reuters) - The U.S. derivatives watchdog on Friday published draft legal guidance outlining the basis on which retail virtual currency trading would be exempted from complying with its rules.

A man walks past a bitcoin ATM in Vilnius, Lithuania December 6, 2017. REUTERS/Ints Kalnins

The proposed legal interpretation issued by the Commodity Futures Trading Commission (CFTC) should ultimately see more virtual currency operators come under the CFTC’s direct oversight. It is likely to lead to a flurry of enforcement actions against operators that may be putting investors at risk.

Though industry sources said the interpretation has been months in the making, it comes during heightened regulatory concerns over a bubble in the bitcoin market after the virtual currency raced to new highs of more than $19,000 this week.

Urged on by market participants looking to trade and invest in bitcoin, the CFTC and the Securities and Exchange Commission have been trying to provide greater clarity on how they expect to directly regulate virtual currency transactions.

The CFTC said in 2015 that bitcoin constitutes a commodity under the Commodity Exchange Act (CEA) and should be subject to the same rules applicable to all participants in the commodity derivatives market.

The CEA allows the CFTC to directly regulate retail commodity transactions that involve leverage or margin-financing as a futures contract, meaning platforms or brokers offering such deals must directly register with the regulator.

The rules provide an exception however if the underlying commodity is actually delivered to the retail investor within 28 days.

Friday’s legal interpretation builds on the 2015 ruling by providing guidance on what the CFTC believes would constitute “actual delivery” in the virtual currency market.

Critically, within 28 days of the trade the retail investor has to take entire possession of the virtual currency and be able to spend it freely elsewhere.

By providing clarity over this exemption, the CFTC should be freer to crack down on so-called ‘bucket shop’ outfits that take retail investors’ cash fraudulently claiming to plow it into a virtual currency, but no underlying transaction actually takes place.

The CFTC has called on market participants to comment on the draft guidance within 90 days.

Reporting by Michelle Price; Editing by Meredith Mazzilli and Andrew Hay