Virtual Currency and the Blockchain

Smart Contracts That Violate the Commodity Exchange Act: What Parties Are Liable?


In recent years, the U.S. Commodity Futures Trading Commission (CFTC) has devoted significant resources to addressing how the requirements of the Commodity Exchange Act (CEA) and the regulations thereunder apply to transactions involving Bitcoin and other virtual currencies.[1] The CFTC has not adopted any rules specific to virtual currencies, but rather has made clear that derivatives contracts based on a virtual currency are subject generally to the same CFTC regulations that apply to other types of derivatives contracts that have traditionally been within the CFTC’s jurisdiction.[2] Additionally, the CFTC has noted that derivatives contracts are susceptible to automation through smart contracts and distributed ledger technology (DLT) and “[e]xisting law and regulation apply equally regardless what form a contract takes . . . [even to] contracts [or parts of contracts] that are written in code[.]”[3]


Getting Smarter: CFTC Publishes Smart Contracts Primer


An Orrick lawyer authored an article titled “Getting Smarter: CFTC Publishes Smart Contracts Primer,” addressing LabCFTC’s recently released “Primer on Smart Contracts.” The Primer provides (i) a high-level overview of smart contract technology and applications, (ii) a discussion of the potential role of the CFTC in smart contract regulation and (iii) a discussion of the unique risks and governance challenges posed by smart contracts. The article is available here.

CFTC Chairman Giancarlo Testifies on Virtual Currency and FinTech


On July 25, Commodity Futures Trading Commission (“CFTC”) Chairman Giancarlo testified before the House Committee on Agriculture to address the priorities and recent work of the agency.[1] The testimony touched on a number of areas, but focused in significant part on the CFTC’s oversight of virtual currencies and financial technology (“FinTech”). Those portions of the testimony are summarized below.


Cause for Caution: Virtual Currency-Related Enforcement Actions

On January 19 the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC”) issued a joint statement warning about potential enforcement actions involving the offering of digital instruments: “When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws.”[1] In conjunction with this warning, the CFTC brought a number of virtual currency enforcement actions in January, three of which are discussed below. READ MORE

Recent Blockchain Regulatory Developments


Blockchain and distributed ledger technology (“DLT”) applications outside of the bitcoin context are attracting the attention of financial entities, prompting regulators to become increasingly focused on these possible applications.[1]  Recently, for example: (i) potential financial and securities applications of DLT were discussed in depth at a “FinTech Forum” held at the Securities and Exchange Commission (“SEC”); (ii) the Federal Reserve Board published a paper titled “Distributed Ledger Technology in Payments, Clearing, and Settlement”; and (iii) the Financial Industry Regulatory Authority (“FINRA”) published a paper titled “Distributed Ledger Technology: Implications of Blockchain for the Securities Industry.”[2]  Each of these recent developments is discussed in turn below. READ MORE

CFTC Considers Blockchain Technology

The disruptive effects of blockchain technology on the financial system may take several years to materialize. Nevertheless, in preparation, regulators are increasingly focused on understanding potential uses of blockchain technology and considering related legal issues.  Many regulators are already familiar with bitcoin, the popular virtual currency underpinned by blockchain technology.[1]  As discussed below, the bitcoin blockchain, which records and makes publicly available every transaction ever made in that virtual currency, is a “distributed ledger” created by a “consensus algorithm” that ensures that each local copy of the distributed ledger is identical to every other local copy.  It is widely expected that such distributed ledger technology (“DLT”) will be used in the future to track the ownership of financial, legal, physical, electronic, and other types of assets and, as discussed below, to automate the performance of certain contracts.

The CFTC has begun to consider the implications of DLT with respect to the derivatives markets. For example, a meeting of the CFTC Technology Advisory Committee (the “TAC”) on February 23, 2016 featured a panel presentation, titled “Blockchain and the Potential Application of Distributed Ledger Technology to the Derivatives Markets.”[2]  In addition, CFTC Commissioner J. Christopher Giancarlo has recently given numerous speeches on the topic to various groups, including Markit Group and the Depository Trust & Clearing Corporation.[3]  An overview of DLT is provided below, followed by a summary of certain points, including legal considerations, from the TAC meeting and Commissioner Giancarlo’s speeches. READ MORE

Responses to ESMA Call for Evidence on Investment Using Virtual Currency or Distributed Ledger Technology Published


Earlier this year, the European Securities and Markets Authority (“ESMA”) published a “call for evidence [on] investment using virtual currency or distributed ledger technology.”[1]  ESMA established July 21, 2015 as the deadline for market participants and other stakeholders to respond to the call for evidence and to submit feedback and any additional information on the following topics:

  1. virtual currency investment products, e., collective investment schemes or derivatives such as options and contracts for differences that have virtual currencies as an underlying or invest in virtual currency related businesses and infrastructure;
  2. virtual currency based assets/securities and asset transfers, e., financial assets such as shares, funds, etc. that are exclusively traded using virtual currency distributed ledgers (also known as blockchains); and
  3. the application of the distributed ledger technology to securities/investments, whether inside or outside a virtual currency environment.

Respondents to the call for evidence included various major financial institutions and significant participants in the bitcoin and virtual currency markets.[2] Among other topics, many responses discussed how distributed ledger technology may be used to record ownership of essentially any type of financial asset. Such a distributed ledger could facilitate nearly immediate transactions and settlement. Several responses also addressed “smart contracts,” in which multiple stages of a transaction could be initially encoded and subsequently triggered by external factors. For example, a smart contract could be designed to transfer from one account to another, at a future date, an amount of money determined by the price of a particular security on that date. A trusted data provider could relay that price, when known, to the smart contract, which then would automatically perform the appropriate transfer of money and terminally settle the transaction. More complex contractual mechanisms, including various legal requirements and ISDA standards, could be encoded into a smart contract as well.

[1] The call for evidence (and related responses) is available at:

[2] Respondents included, among others, ABN AMRO Clearing Bank N.V., CFA Institute, CME Group, DBT Labs, Deutsche Bank, Digital Asset Transfer Authority, ECSDA (European Central Securities Depositories Association), Euroclear SA/NV, Intesa Sanpaolo S.p.A., Krypto FIN ry, LedgerX LLC, Lykke Corp, Modular FX Services Limited,, PAYMIUM, SWIFT, and Tradernet Limited.


NYDFS Finalizes BitLicense Regulations


On June 3, 2015, the New York Department of Financial Services (“NYDFS”) released its final BitLicense regulations, which Superintendent Benjamin Lawsky described as “the first comprehensive framework for regulating digital currency firms.”[1]  As previously reported, the NYDFS originally released proposed BitLicense regulations on July 17, 2014.[2]  After receiving thousands of public comments, primarily voicing concern over the possible scope of regulation, the NYDFS made major revisions and released re-proposed BitLicense regulations on February 4, 2015.[3] READ MORE

NYDFS Releases Revised BitLicense Proposal


On February 4, 2015, the New York State Department of Financial Services (“NYDFS”) released a revised version of its proposed virtual currency regulations (commonly referred to as “BitLicense”), originally released in July 2014. Nearly 4,000 formal comment letters were submitted by advocacy groups, financial service providers, law firms, individuals and others on the original proposal.  A 30-day public comment period began upon publication of the revised proposal in the New York State Register on February 25, 2015.  Section I below summarizes significant changes that the revised version of the BitLicense proposal made to the original, and Section II provides an outline of the overall proposed BitLicense regime, as amended. READ MORE

The Bitcoin Marketplace and Regulatory Environment: An Overview


In the fourth quarter of 2014, bitcoin’s volatile price generally fluctuated between $300 and $400, about one-third of its all-time peak of around $1,200 from one year before. Despite this price drop during 2014, startup companies and financial products focused on bitcoin continue to burgeon, and, in turn, various regulators have recently proposed regulations, made pronouncements, and taken enforcement actions related to bitcoin. Section I below outlines significant companies and products in the bitcoin space, and Section II summarizes the state of bitcoin regulation.[1] READ MORE