CFTC Issues Final Interpretive Guidance On 'Actual Delivery' Of Digital Asset

• Published date: 23 June 2020
• Subject Matter: Finance and Banking, Financial Services, Commodities/Derivatives/Stock Exchanges
• Law Firm: Shearman & Sterling LLP
• Author: Ms Donna Parisi, Geoffrey B. Goldman, Azam H. Aziz and Jennifer Oosterbaan

Introduction

The Commodity Futures Trading Commission (the CFTC) has issued long-awaited final interpretive guidance regarding the "actual delivery" exception to retail commodity transactions involving digital or virtual currencies under the Commodity Exchange Act (the CEA) (the "Interpretative Guidance").^[1] Of significance for market participants, the guidance describes the primary factors that the Commission will consider when evaluating whether "actual delivery" has occurred for purposes of a key exemption from the CEA that permits leveraged retail commodity transactions. The interpretation represents another step in the CFTC's efforts to clarify the application of its rules to digital asset transactions.

Background

In 2010, as part of its efforts to address an area of judicial uncertainty with respect to certain leveraged retail commodity transactions,^[2] Congress applied provisions of the CEA to specified "retail commodity transactions" pursuant to CEA section 2(c)(2)(D). In particular, CEA section 2(c)(2)(D) addresses any agreement, contract or transaction in any commodity that is (i) entered into with, or offered to (even if not entered into with), a person that is neither an eligible contract participant nor an eligible commercial entity ("retail"), and (ii) on a leveraged or margined basis, or financed by the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis. Absent an applicable exception, such transactions must be executed on a designated contract market (generally in a manner similar to regulated futures contracts), and intermediaries offering such transactions must be registered as futures commission merchants.^[3]

One such exception exists for contracts of sale resulting in "actual delivery" within "28 days or such other longer period as the Commission may determine by rule or regulation based upon the typical commercial practice in cash or spot markets for the commodity involved."^[4] The Commission issued guidance in 2013 as to the meaning of "actual delivery" as used in CEA section 2(c)(2)(D) (the "2013 Guidance"). The 2013 Guidance explained that the Commission will "employ a functional approach and examine how the agreement, contract or transaction is marketed, managed and performed, instead of relying solely on language used by the parties in the agreement, contract or transaction."^[5] The 2013 Guidance also provided examples of actual delivery, particularly those that involve transfer of title and possession of the commodity to the purchaser or a depository acting on the purchaser's behalf.^[6]

Following its 2015 determination that virtual currencies such as...