Are Bitcoins futures? Depends who's asking

January 20, 2014 08:07 AM

Just asking? Like most people, the "virtual currency" is largely a mystery to me. Here are some choices of how the Commodity Futures Trading Commission (CFTC) might regulate it.

1. Is it a "commodity" under the definition in the Commodity Exchange Act? That definition was greatly expanded when the CFTC was created in 1974. While it had previously consisted of a long list of farm products, I offered congressional staff two new phrases to expand its breadth: "goods and articles" and "services, rights and interests." No one questioned that these phrases covered currencies; indeed, the Chicago Mercantile Exchange's currency futures complex was immediately regulated under that definition. So, even if Bitcoin and its imitators are viewed as currency, they are "commodities" under the law today. But, the CFTC's reach is limited when only a physical commodity is involved -- mainly to price manipulations.

2. Is Bitcoin a "futures contract?" Maybe. A futures contract is not defined in the Act specifically, but it has been defined in the courts as a commitment to deliver or receive an asset -- including U.S. dollars -- in the future at a pre-agreed price. Today, many futures contracts call for "cash settlement" in lieu of transferring the referenced asset and, as noted above, currencies are also an underlying asset (or "commodity"). Bitcoins appear to have value only because of their convertibility into official currencies. Even merchants that accept Bitcoin do so with the expectation of such conversion (how else to pay employees, bankers and suppliers?). On the other hand, there does not appear to be any fixed agreement as to price; so far, at least, one cannot "hedge" with Bitcoin except, perhaps, against fluctuations in the value of the currency into which it is convertible. But, if Bitcoin is a futures contract, the CFTC not only has sweeping jurisdiction, but exclusivity to boot.

3. Is Bitcoin a "swap"? Who knows? If you ascribe to my theory that swaps are either futures contracts (e.g., interest-rate swaps) or options (e.g., credit default swaps), item #2 above should apply and, in any event, the CFTC has jurisdiction over most swaps, thanks to the Dodd-Frank Act.

One of former Chairman Gensler's final acts at the CFTC was to opine that the agency MAY have jurisdiction over Bitcoin. This followed hard on the heels of complaints about being denied the funding from Congress even to address pre-existing agency duties. In the end, the answer may be budget driven, absent a scandal that cannot be ignored.

What do you think?

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