[Federal Register Volume 83, Number 241 (Monday, December 17, 2018)]
[Notices]
[Pages 64563-64566]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27167]


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COMMODITY FUTURES TRADING COMMISSION


Request for Input on Crypto-Asset Mechanics and Markets

AGENCY: Commodity Futures Trading Commission.

ACTION: Request for input.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') in furtherance of the LabCFTC initiative is seeking public 
comment and feedback on this Request for Input (``RFI'') in order to 
better inform the Commission's understanding of the technology, 
mechanics, and markets for virtual currencies beyond Bitcoin, namely 
here Ether and its use on the Ethereum Network. The Commodity Exchange 
Act (``CEA'') grants the Commission regulatory authority over the 
commodity futures markets. The Commission is seeking public feedback in 
furtherance of oversight of these markets and regulatory policy 
development. The input from this request will advance the CFTC's 
mission of ensuring the integrity of the derivatives markets as well as 
monitoring and reducing systemic risk by enhancing legal certainty in 
the markets. The RFI seeks to understand similarities and distinctions 
between certain virtual currencies, including here Ether and Bitcoin, 
as well as Ether-specific opportunities, challenges, and risks. The 
Commission welcomes all public comments on these and related issues.

DATES: Comments must be received on or before February 15, 2019.

[[Page 64564]]


ADDRESSES: You may submit comments, identified by the title, ``Virtual 
Currency RFI,'' by any of the following methods:
    <bullet> CFTC website: https://comments.cftc.gov. Follow the 
instructions to Submit Comments through the website.
    <bullet> Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
    <bullet> Hand Delivery/Courier: Same as Mail, above.
    Please submit comments by only one of these methods.
    All comments should be submitted in English or accompanied by an 
English translation. Comments will be posted as received to https://www.cftc.gov. You should submit only information that you wish to make 
available publicly. If you wish the Commission to consider information 
that may be exempt from disclosure under the Freedom of Information Act 
(``FOIA''), a petition for confidential treatment of the exempt 
information may be submitted according to the procedures established in 
the Commission's regulations at 17 CFR 145.9.\1\ The Commission 
reserves the right, but shall have no obligation, to review, prescreen, 
filter, redact, refuse, or remove any or all of your submission from 
https://www.cftc.gov that it may deem to be inappropriate for 
publication, such as obscene language. All submissions that have been 
redacted or removed that contain comments on the merits of the RFI will 
be retained in the public comment file and will be considered as 
required under the Administrative Procedure Act and other applicable 
laws, and may be accessible under the FOIA.
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    \1\ 17 CFR 145.9. All Commission regulations cited herein are 
set forth in chapter I of Title 17 of the Code of Federal 
Regulations.

FOR FURTHER INFORMATION CONTACT: Daniel Gorfine, Director of LabCFTC 
and Chief Innovation Officer, (202) 418-5625; Bianca M. Gomez, Counsel 
on FinTech and Innovation, Office of General Counsel, (202) 418-5627; 
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or <a href="/cdn-cgi/l/email-protection#2c604d4e6f6a786f6c4f4a584f024b435a"><span class="__cf_email__" data-cfemail="e2ae8380a1a4b6a1a281849681cc858d94">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

    The CEA grants the Commission regulatory authority over the 
commodity futures markets.\2\ LabCFTC was launched by the Commission in 
order to further the CFTC's goal of evolving as a 21st century 
regulator and keeping pace with technological innovation. LabCFTC is 
dedicated to facilitating market-enhancing financial technology 
(``FinTech'') innovation, informing policy, and ensuring that we have 
the regulatory and technological tools and understanding to keep pace 
with changing markets. LabCFTC is designed to make the CFTC more 
accessible to all innovators and to inform the Commission's 
understanding of emerging technologies and their regulatory 
implications. One such area of emerging innovation involves virtual 
currencies.
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    \2\ See, e.g., 7 U.S.C. 5(b).
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    In further advancing its mission, LabCFTC published a primer on the 
topic of virtual currencies in October 2017 (the ``Primer'') in order 
to help educate the public on potential applications and use-cases, the 
CFTC's role and jurisdictional oversight, and potential risks and 
challenges that investors and users may face involving virtual 
currencies.\3\
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    \3\ ``A CFTC Primer on Virtual Currencies,'' (Oct. 17, 2017), 
https://www.cftc.gov/sites/default/files/idc/groups/public/documents/file/labcftc_primercurrencies100417.pdf.
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    In December 2017, the Chicago Mercantile Exchange Inc. (``CME'') 
and the CBOE Futures Exchange (``CFE'') self-certified and began 
offering new contracts for bitcoin futures products following 
discussions with Commission staff regarding compliance with the CEA and 
Commission rules and regulations. In line with Chairman Giancarlo's 
repeated statements \4\ regarding the unique nature and risks of 
virtual currency-related products, the CFTC's Division of Market 
Oversight (``DMO'') and Division of Clearing and Risk (``DCR'') issued 
on May 21, 2018 a joint staff advisory \5\ that gives exchanges and 
clearinghouses registered with the CFTC guidance on certain 
enhancements when listing a derivative contract based on virtual 
currency pursuant to Commission regulations. The input being sought 
here will better inform the Commission and its operating divisions as 
the market evolves and potentially seeks to list new virtual currency 
based futures and derivatives products.
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    \4\ See, e.g., Testimony of Chairman J. Christopher Giancarlo 
before the Senate Committee On Appropriations Subcommittee on 
Financial Services and General Government (June 5, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo47.
    \5\ CFTC Staff Advisory No. 18-14 (May 21, 2018), https://www.cftc.gov/sites/default/files/idc/groups/public/%40lrlettergeneral/documents/letter/2018-05/18-14_0.pdf.
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B. Bitcoin as a Virtual Currency

    In its October 2017 Primer, LabCFTC cited the IRS to define a 
virtual currency as ``a digital representation of value that functions 
as a medium of exchange, a unit of account, and/or a store of value . . 
. [but that] does not have legal tender status.'' \6\ The Primer 
further noted key characteristics of Bitcoin, including that it:
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    \6\ See Primer, supra note 3, at 4 (citing IRS Notice 2014-21, 
available at https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies). See also Proposed Interpretation on 
Virtual Currency ``Actual Delivery'' in Retail Transactions (Dec. 
15, 2017), 82 FR 60335 (Dec. 20, 2017), https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2017-27421a.pdf.
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    [ssquf] Is ``pseudonymous'' (or partially anonymous) in that an 
individual is identified by an alpha-numeric public key/address;
    [ssquf] Relies on cryptography (and unique digital signatures) for 
security based on public and private keys and complex mathematical 
algorithms;
    [ssquf] Runs on a decentralized peer-to-peer network of computers 
and ``miners'' that operate on open-source software and do ``work'' to 
validate and irrevocably log transactions on a permanent public 
distributed ledger visible to the entire network;
    [ssquf] Solves the lack of trust between participants who may be 
strangers to each other on a public ledger through the transaction 
validation work noted in the bullet above; and
    [ssquf] Enables the transfer of ownership without the need for a 
trusted, central intermediary.
    The Primer noted potential applications or use cases of a virtual 
currency like Bitcoin, including that it may serve as a store of value, 
be used for trading, enable payments and value transfers, power 
applications built upon the virtual currency network, and facilitate 
money transfers or international remittances. The Primer further 
highlighted a range of potential risks around virtual currencies, 
including technology, operational, cybersecurity, speculative, and 
fraud and manipulation risks.

C. Ether as a Virtual Currency

    In June 2018, the Director of the Securities and Exchange 
Commission's (``SEC'') Division of Corporation Finance, Bill Hinman, 
delivered a speech which conveyed Mr. Hinman's personal views. In the 
speech, he addressed the question of whether ``a digital asset that was 
originally offered in a securities offering [could] ever be later sold 
in a manner that does not constitute an offering of a security.'' He 
explained among other factors that since the network on which Bitcoin 
operates appears to be decentralized and there is no central third 
party whose efforts are

[[Page 64565]]

a key determining factor in the success of Bitcoin, ``[a]pplying the 
disclosure regime of the federal securities laws to the offer and 
resale of Bitcoin would seem to add little value.'' He further stated 
that, in addition to Bitcoin, ``based on my understanding of the 
present state of Ether, the Ethereum network and its decentralized 
structure, current offers and sales of Ether are not securities 
transactions.'' Finally, he stated that ``[o]ver time, there may be 
other sufficiently decentralized networks and systems where regulating 
the tokens or coins that function on them as securities may not be 
required.'' \7\
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    \7\ ``Digital Asset Transactions: When Howey Met Gary 
(Plastic),'' Remarks of William Hinman, Director, Division of 
Corporation Finance, SEC at the Yahoo Finance All Markets Summit: 
Crypto (June 14, 2018), https://www.sec.gov/news/speech/speech-hinman-061418.
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    Ether is a virtual currency that was launched on the Ethereum 
Network in 2015. It is an open network that currently relies on a proof 
of work consensus mechanism, but developers, including through the 
Ethereum Foundation, have plans to shift the protocol to a proof of 
stake consensus model in order, at least in part, to reduce energy 
consumption required to validate the ledger.\8\ The Ethereum Network is 
often viewed as a platform that permits ready creation and use of smart 
contracts that can power decentralized applications or organizations. 
In this way, Ether is used as ``fuel'' to compensate miners for 
maintaining a public ledger for such networks.\9\ To date, Ether has 
typically been one of the top three virtual currencies by market 
capitalization.
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    \8\ See Ethereum Foundation, Frequently Asked Questions, 
available at https://www.ethereum.org/ether (last visited Aug. 22, 
2018).
    \9\ See id.
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II. Request for Input

    The Commission is seeking public feedback namely on Ether and the 
Ethereum Network in order to better understand these technologies given 
Ether's size in the market and potentially unique attributes relative 
to Bitcoin. The Commission is issuing this RFI in order to gather 
public feedback on a range of questions related to the underlying 
technology, opportunities, risks, mechanics, use cases, and markets, 
related to Ether and the Ethereum Network. The requested information 
will inform the work of LabCFTC and the Commission as a whole. The 
Commission welcomes any relevant comments, including related topics 
that may not be specifically mentioned but which a commenter believes 
should be considered.

Specific Questions for Input

    In addition to any general input, the Commission is interested in 
responses to the following questions:

Purpose and Functionality

    1. What was the impetus for developing Ether and the Ethereum 
Network, especially relative to Bitcoin?
    2. What are the current functionalities and capabilities of Ether 
and the Ethereum Network as compared to the functionalities and 
capabilities of Bitcoin?
    3. How is the developer community currently utilizing the Ethereum 
Network? More specifically, what are prominent use cases or examples 
that demonstrate the functionalities and capabilities of the Ethereum 
Network?
    4. Are there any existing or developing commercial enterprises that 
are using Ether to power economic transactions? If so, how is Ether 
recorded for accounting purposes in a comprehensive set of financial 
statements?
    5. What data sources, analyses, calculations, variables, or other 
factors could be used to determine Ether's market size, liquidity, 
trade volume, types of traders, ownership concentration, and/or 
principal ways in which the Ethereum Network is currently being used by 
market participants?
    6. How many confirmations on the Ethereum blockchain are sufficient 
to wait to ensure that the transaction will not end up on an invalid 
block?

Technology

    7. How is the technology underlying Ethereum similar to and 
different from the technology underlying Bitcoin?
    8. Does the Ethereum Network face scalability challenges? If so, 
please describe such challenges and any potential solutions. What 
analyses or data sources could be used to assess concerns regarding the 
scalability of the underlying Ethereum Network, and in particular, 
concerns about the network's ability to support the growth and adoption 
of additional smart contracts?
    9. Has a proof of stake consensus mechanism been tested or 
validated at scale? If so, what lessons or insights can be learned from 
the experience?
    10. Relative to a proof of work consensus mechanism does proof of 
stake have particular vulnerabilities, challenges, or features that 
make it prone to manipulation? In responding consider, for example, 
that under a proof of stake consensus mechanism, the chance of 
validating a block may be proportional to staked wealth.
    11. There are reports of disagreements within the Ether community 
over the proposed transition to a proof of stake consensus model. Could 
this transition from a proof of work to a proof of stake verification 
process result in a fragmented or diminished Ether market if the 
disagreements are not resolved?
    12. What capability does the Ethereum Network have to support the 
continued development and increasing use of smart contracts?

Governance

    13. How is the governance of the Ethereum Network similar to and 
different from the governance of the Bitcoin network?
    14. In light of Ether's origins as an outgrowth from the Ethereum 
Classic blockchain, are there potential issues that could make Ether's 
underlying blockchain vulnerable to future hard forks or splintering?

Markets, Oversight and Regulation

    15. Are there protections or impediments that would prevent market 
participants or other actors from intentionally disrupting the normal 
function of the Ethereum Network in an attempt to distort or disrupt 
the Ether market?
    16. What impediments or risks exist to the reliable conversion of 
Ether to legal tender? How do these impediments or risks impact 
regulatory considerations for Commission registrants with respect to 
participating in any transactions in Ether, including the ability to 
obtain or demonstrate possession or control or otherwise hold Ether as 
collateral or on behalf of customers?
    17. How would the introduction of derivative contracts on Ether 
potentially change or modify the incentive structures that underlie a 
proof of stake consensus model?
    18. Given the evolving nature of the Ether cash markets underlying 
potential Ether derivative contracts, what are the commercial risk 
management needs for a derivative contract on Ether?
    19. Please list any potential impacts on Ether and the Ethereum 
Network that may arise from the listing or trading of derivative 
contracts on Ether.
    20. Are there any types of trader or intermediary conduct that has 
occurred in the international Ether derivative markets that raise 
market risks or challenges and should be monitored closely by trading 
venues or regulators?
    21. What other factors could impact the Commission's ability to 
properly oversee or monitor trading in derivative

[[Page 64566]]

contracts on Ether as well as the underlying Ether cash markets?
    22. Are there any emerging best practices for monitoring the 
Ethereum Network and public blockchains more broadly?

Cyber Security and Custody

    23. Are there security issues peculiar to the Ethereum Network or 
Ethereum-supported smart contracts that need to be addressed?
    24. Are there any best practices for the construction and security 
of Ethereum wallets, including, but not limited to, the number of keys 
required to sign a transaction and how access to the keys should be 
segregated?
    25. Are there any best practices for conducting an independent 
audit of Ether deposits?
    In providing your responses, please be as specific as possible, and 
offer concrete examples where appropriate. Please provide any relevant 
data to support your answers where appropriate. The Commission 
encourages all relevant comments on related items or issues; commenters 
need not address every question.

III. Conclusion

    The Commission appreciates your time and effort responding to this 
RFI on Crypto-asset Mechanics and Markets. The information provided by 
stakeholders will help us refine our understanding of this area of 
innovation and better inform the work of the Commission, including the 
evaluation of potential derivatives contracts. More broadly, the input 
from this request will further aid the Commission in identifying 
FinTech trends and related opportunities, challenges, and risks. In 
that respect, we look forward to continuing to engage proactively with 
the innovator community and market participants in order to help 
facilitate market-enhancing innovation and ensure market integrity.

    Issued in Washington, DC, on December 11, 2018, by the 
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

Appendix to Request for Input on Crypto-asset Mechanics and Markets--
Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioners Quintenz, 
Behnam, Stump, and Berkovitz voted in the affirmative. No 
Commissioner voted in the negative.

[FR Doc. 2018-27167 Filed 12-14-18; 8:45 am]
 BILLING CODE 6351-01-P


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