CFTC clarifies blockchain rules under pressure from petition

Crazy Commentary : Since the definition of regulation in the blockchain environment is still a gray area, the American law firm Steptoe LLP submitted a petition to the U.S. Commodity Futures Trading Commission (CFTC), requesting the CFTC to formulate clearer rules for blockchain-based transactions. At the same time, it hopes that the CFTC can add blockchain to the legislative agenda, so that a wider community can participate in it. They hope that this rule will better fit the design of blockchain technology in the next few years.

Translation: Nicole

US law firm Steptoe & Johnson LLP has filed a petition with the U.S. Commodity Futures Trading Commission (CFTC), asking the CFTC to establish clearer rules for blockchain-based transactions.

The petition, co-authored by Steptoe partner Micah Green and senior policy advisor Michael Dunn (a former CFTC commissioner), focuses on a June case brought by Hong Kong-based exchange Bitfinex, which paid $75,000 to traders after it was accused of never properly delivering a certain amount of funds.

Although Bitfinex was fined, it still reached a settlement with the CFTC. However, the issue considered in the petition is that the specific changes Bitfinex implemented, called compliance rules, were not announced to the public, so the blockchain rules that met the CFTC's definition could not be generalized to the wider market.

Michael Dunn

“Absent a definitive Commission statement defining the necessary elements, participants must determine what constitutes lawful and what constitutes problematic through an evaluation of enforcement orders, which focus on a single entity and may be instructive but are not always so,” Green and Dunn wrote.

The petition argues that the definition of regulation in the blockchain context remains a gray area, and the authors believe that such regulation is "harmful" to digital currencies and blockchain startups.

For example, those supporting the petition believe that the CFTC’s ruling puts Bitfinex in trouble because they control the private keys of bitcoins loaned to traders, a practice the CFTC interprets as meaning that the bitcoins in question were not actually issued.

Such language, the petition argues, could ultimately be interpreted to mean that custody and wallet control should be directly connected to the blockchain environment. And, these observers say, when combined with long settlement times on public blockchains, this could make certain blockchain business models based on instantaneous transfers more difficult to execute.

To better understand and address these concerns, the petition asks the CFTC to add blockchain to its legislative agenda so it can consult with the broader community on how to decide on a more formal definition.

“Given that the digital currency markets and applications of blockchain technology are both extremely novel areas, a notice-and-comment legislative process will allow for public participation and will inform the Commission of considerations and potential unintended consequences as the ‘actual delivery’ element is developed,” the notice reads.

More broadly, the petition raises questions about regulatory definitions, an issue that has persisted under current U.S. state laws intended to cover blockchain-based digital currencies.

Appearing for the first time in the BitLicense, New York’s licensing system, the Technology Initiative Group has been more active in lobbying for rule definitions that they believe better fit the design of blockchain technology in recent years.