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”). 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.
In 2010, as part of its efforts to address an area of judicial uncertainty with respect to certain leveraged retail commodity transactions, 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.
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.” 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.” 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.
Following its 2015 determination that virtual currencies such as bitcoin are commodities for purposes of the CEA, the CFTC acknowledged that virtual currencies require additional guidance in the context of CEA Section 2(c)(2)(D) and subsequently proposed a virtual currency-specific interpretation of the “actual delivery” exception to retail commodity transaction treatment (the “Proposed Interpretation”). The Proposed Interpretation set out two central tenets of the CFTC’s view on when actual delivery of virtual currency has occurred:
Given the potentially exacting nature of these requirements, responses from market participants were mixed. One comment letter highlighted certain potential issues resulting from examples that the CFTC provided of successful and unsuccessful “actual delivery.” Arguing that the Proposed Interpretation “would unintentionally raise the threat of cybertheft while undermining anti-money laundering (AML) and economic sanctions programs enforced by exchanges acting under a variety of Federal and state regulations,” the commenter recommended focusing instead “on the usability of the digital assets by the purchaser.” Other commenters raised issues concerning the meaning of “title” in the context of virtual currency and retail commodity transactions, the length of time during which “actual delivery” could occur, the demonstration of possession and control and depository independence.
In adopting the final Interpretive Guidance, the CFTC acknowledged the many potential uses of virtual currency and related technology and its desire not to stifle innovation, but also expressed concern about potential risk to retail customers and maintaining the protections for such customers afforded by Congress. As such, the Interpretative Guidance states that the CFTC will “continue to follow the 2013 Guidance and ‘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 to the agreement, contract or transaction.” Affirming the general position in the Proposed Interpretation, “actual delivery” has occurred when:
The CFTC reiterated that “in the context of an ‘actual delivery’ determination in virtual currency, physical settlement involving the entire amount of purchased commodity must occur” within 28 days. Further, a “cash settlement or offset mechanism . . . is not consistent with the Commission’s interpretation.” The CFTC did, however, provide certain additional flexibility with respect to the use of custodial arrangements to hold virtual currency in a manner consistent with the actual delivery requirement.
To illustrate its position, the CFTC provided the following examples of successful and unsuccessful “actual delivery”:
Example 1: Actual delivery of virtual currency will have occurred if, within 28 days after entering into an agreement, contract or transaction, there is a record on the relevant public distributed ledger or blockchain address of the transfer in full of the purchased virtual currency to the purchaser’s blockchain address, over which the purchaser maintains sole possession and control.
Example 2: Actual delivery of virtual currency will have occurred if, within 28 days after entering into a transaction: (1) the counterparty seller or offeror has delivered the entire quantity of the virtual currency purchased into the possession of an unaffiliated depository, (2) the purchaser has secured full control over the virtual currency and (3) with respect to the commodity being delivered, no liens (or other interests or legal rights of the offeror, counterparty seller, or persons acting in concert with the offeror or counterparty seller on a similar basis) resulting or relating to the use of margin, leverage, or financing used to obtain the entire quantity of the commodity delivered will continue after the 28-day period.
Example 3: Actual delivery will not have occurred if, within 28 days of entering into a transaction, the full amount of the purchased commodity is not transferred away from a digital account or ledger system owned or operated by, or affiliated with, the offeror or counterparty seller (or their respective execution venues) and received by a separate, independent, appropriately licensed, depository or blockchain address in which the customer maintains possession and control.
Example 4: Actual delivery will not have occurred if, within 28 days of entering into a transaction, a book entry is made by the offeror or counterparty seller purporting to show that delivery of the virtual currency has been made to the customer, but the counterparty seller or offeror has not actually delivered the entire quantity of the virtual currency purchased.
Example 5: Actual delivery will not have occurred if, within 28 days of entering into a transaction, the agreement, contract or transaction for the purchase or sale of virtual currency is rolled, offset against, netted out or settled in cash or virtual currency (other than the purchased virtual currency) between the customer and the offeror or counterparty seller (or persons acting in concert with the offeror or counterparty seller).
The Interpretative Guidance is the latest step in the CFTC’s continued efforts to expand and clarify its jurisdiction over digital assets and virtual currencies. In light of recent interest in offering margin trading functionality on virtual currency exchanges, though, how market participants implement this guidance remains to be seen. It is likely that additional questions as to the meaning of actual delivery, for particular market structures, execution arrangements and depository arrangements, will continue to arise. Suffice to say, we will keep an eye on this space as the situation develops.
 See CFTC Issues Final Interpretive Guidance on Actual Delivery for Digital Assets, Commodity Futures Trading Commission (Mar. 24, 2020).
 See CFTC v. Zelener, 373 F.3d 861, 865–66 (2004).
 See 7 U.S.C. §§ 6(a), 6d(a); 7 U.S.C. § 2(c)(2)(D); Bats BZX Exchange, Inc., Release No. 34-80206 (Mar. 10, 2017), at 28 (“[a]lthough the CFTC can bring enforcement actions against manipulative conduct in spot markets for a commodity, spot markets are not required to register with the CFTC, unless they offer leveraged, margined, or financed trading to retail customers”).
 7 U.S.C. § 2(c)(2)(D)(ii)(III).
 Retail Commodity Transactions Under Commodity Exchange Act, 78 Fed. Reg. 52,426, 52,427 (published Aug. 23, 2013).
 See id. at 52,427–28.
 See In re Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-29, 2015 WL 5535736, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 33,538 (CFTC Sept. 17, 2015) (consent order); In re TeraExchange LLC, CFTC Docket No. 15-33, 2015 WL 5658082, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 33,546 (CFTC Sept. 24, 2015) (consent order).
 See Retail Commodity Transactions Involving Virtual Currency, 82 Fed. Reg. 60,335 (published Dec. 20, 2017).
 See id. at 60,339.
 See Interpretative Guidance at 8.
 See Coinbase, Comment Letter on Proposed Guidance on Retail Commodity Transactions Involving Virtual Currency (Mar. 20, 2018).
 See id. at 1.
 See Interpretative Guidance at 11–16.
 See Interpretative Guidance at 29.
 See Interpretative Guidance at 30.
 Interpretative Guidance at 30–31 (emphasis added).
 Interpretative Guidance at 31–32.
 See Interpretative Guidance at 32–35 (emphasis added).
 The CFTC noted, however, that actual delivery may still occur where liens remain on collateral other than the specific virtual currency that is the subject of the transaction.
 Notably, the Interpretive Guidance permits certain affiliations between the offeror and the purchaser’s depository, provided that the depository is separated from the execution venue and certain additional safeguards, including as to independence and licensing, are satisfied.