1

Regulating Bitcoin and Block Chain Derivatives

by Houman B. Shadab

Professor of Law, New York Law School

houman.shadab@nyls.edu

Written statement to the Commodity Futures Trading Commission

Global Markets Advisory Committee

Digital Currency Introduction – Bitcoin

October 9, 2014

Summary

Bitcoins are scarce digital commodities that enable parties to transmit 

messages over a network that serves as a universal public ledger. Bitcoins 

fall within the definition of “commodity” under the Commodity Exchange 

Act (CEA) such that derivatives contracts that reference bitcoins are subject 

to regulation by the Commodity Futures Trading Commission (CFTC). Like 

other derivatives, Bitcoin derivatives would likely not be subject to the full 

scope of regulation under the CEA to the extent such derivatives involve 

physical delivery (as opposed to cash settlement) or are nonfungible and not 

independently traded. In addition, Bitcoin swaps are currently too illiquid to 

be subject to mandatory clearing. A growing number of firms are offering

Bitcoin derivatives, most of which are for retail traders. In addition to 

derivatives that reference bitcoins, the Bitcoin (block chain) protocol can 

potentially enable automated derivatives contracts that securely trade, clear, 

and settle without the use of trusted intermediaries. The CFTC should 

consider an exemption for block chain derivatives that meet its policy 

objectives as a result of the rules that the underlying code embeds in the 

transactions.

Table of Contents

I. Introduction .........................................................................................2

II. CFTC Regulation of Bitcoin Derivatives............................................3

A. Futures...................................................................................................... 3

B. Forwards................................................................................................... 6

C. Swaps........................................................................................................ 8

D. Options ................................................................................................... 10

III. Bitcoin Derivatives Firms................................................................10

IV. Block Chain Derivatives..................................................................13

A. Block Chain Smart Contracts................................................................. 13

B. Block Chain Futures............................................................................... 14

C. Regulating Block Chain Derivatives...................................................... 15

V. Conclusion ........................................................................................16
2

I. INTRODUCTION

Bitcoins are scarce digital commodities that enable parties to transmit

messages over a network that serves as a universal public ledger. This 

ledger, also known as the block chain, records the messages and is a 

common feature of all cryptocurrencies, so named because they use 

computational methods that securely transmit messages. Software 

developers are currently creating applications that use bitcoins to enable 

transactions that are automated, disintermediated (peer to peer), and secure. 

These transactions are often referred to “smart contracts” and are designed 

to take the form of decentralized exchange not reliant upon intermediaries 

such as banks, exchanges, or dealers.

As a reflection of its value and multifaceted nature, bitcoins are not just 

an input to innovative software applications. To date, the most common use 

of Bitcoin messages has been for trade—to transfer bitcoins from one 

person to another in exchange for fiat currency or for goods and services. 

For this reason, Bitcoin is commonly (and narrowly) viewed as a digital

currency or payment mechanism.

When used as a means of exchange, the rate of exchange between units 

of bitcoin and fiat currencies has been volatile, as shown in the following 

figure:

Figure 1: Bitcoin Price in U.S. Dollars, Nov. 2013 to Oct. 7, 2014

Due to the price volatility of bitcoins, firms are developing derivatives so 

that merchants, payment processors, and others that accept or hold bitcoins 

can reduce their exposure to its price risk. Firms are also developing Bitcoin 

derivatives for two other reasons common to many types of derivatives: (1) 

to enable parties to speculate on prices, and (2) to enable parties to invest in 

bitcoins without actually holding bitcoins (known as a synthetic 
3

investment). Without Bitcoin derivatives, merchants that accept bitcoins for 

payment typically immediately sell the bitcoins they receive to eliminate 

their exposure to price risk. This activity perversely reduces the price of 

Bitcoin the more it is adopted by merchants. But with Bitcoin derivatives, 

merchants are far more likely to hold the bitcoins they receive as payments, 

thereby causing the price of Bitcoin to be less volatile and better reflect its 

value to market participants.

This statement first discusses regulatory issues and framework 

applicable to derivatives that reference Bitcoin.1 It next surveys the growing 

number of firms that offer Bitcoin derivatives. Finally, this statement 

considers derivatives that are transacted through the underlying Bitcoin 

block chain protocol and considers how they should be regulated.

II. CFTC REGULATION OF BITCOIN DERIVATIVES

Bitcoin derivatives may take the form of futures, forwards, swaps, and 

options. Most of these derivatives are subject to regulation by the 

Commodity Futures Trading Commission (CFTC) pursuant to the 

Commodity Exchange Act (CEA).2 The CFTC regulates futures and swaps 

markets to protect buyers and sellers of derivatives, and other participants in 

the derivatives markets, from fraud, market manipulation, abusive practices,

and systemic risk.

3 Bitcoin derivatives would likely not be subject to the full 

scope of regulation under the CEA to the extent such derivatives involve 

physical delivery (as opposed to cash settlement) or are nonfungible and not 

independently traded. In addition, Bitcoin swaps are currently too illiquid to 

be subject to mandatory clearing.

A. Futures 

In a futures contract, one party agrees to deliver an underlying asset or 

its cash-equivalent to another at a later time at a pre-specified price.4 A 

party concerned with Bitcoin prices decreasing would take the “short” 

position in a futures contract and agree to sell Bitcoin at a specific price. For 

example, on January 1st one party may agree to sell 1 bitcoin on February 

1st for $800. This agreement would lock in a bitcoin-to-dollar exchange rate 

of 0.00125 bitcoins, or BTC. A company that owns or expects to be paid in 

bitcoins, and is concerned about the value of bitcoins dropping against the 

dollar, would be protected against that risk. On the other hand, if bitcoins 

became more valuable after January 1st, the futures contract would still 

require the buyer to sell at what would be below-market prices. 

Futures are standardized with respect to all terms except for price. They 

specify the underlying asset, the amount of the asset to be exchanged, the 

place and month for delivery, and the price.5 The CFTC defines a future as

“[a]n agreement to purchase or sell a commodity for delivery in the future” 
4

in which the price is determined at the outset of the agreement.6 With few 

exceptions, the definition of commodity is defined broadly to include all 

agricultural products and “all services, rights, and interests . . . in which 

contracts for future delivery are presently or in the future dealt in.”7 The 

CEA categorizes commodities into one of three categories: “agricultural 

commodities” such as soybean and wheat,8 “excluded commodities” which 

are made up of financial interests such as prices and price indices, interest 

rates, and currencies,9 and a catch-all category of “exempt commodities” 

that includes energy interests, precious metals, and measurable events such 

as the weather.10 The following figure illustrates these categories of 

commodities:

Figure 2: Categories of Regulated Commodities

The CFTC also distinguishes commodities based upon whether they are 

financial or nonfinancial in nature.11 Another distinction is between tangible 

commodities (such as crops and currencies) and intangible commodities 

(such as price indices, pollution allowances, and contractual rights).12

Commodity futures are subject to the CEA and regulated by the CFTC 

and entities that have self-regulatory responsibilities, including futures 

exchanges and the National Futures Association. Under the CEA, futures 

may only be traded on regulated exchanges.13 Accordingly, trading a futures 

contract requires an account with a futures exchange and compliance with 

the exchange’s requirements such as posting collateral when entering the 

contract (initial margin) and paying more collateral if the market value of 

the contract decreases (variation margin). Trading futures often takes place 

through an intermediary known as a futures commission merchant.

The CEA categorizes regulated futures exchanges as a type of 

designated contract market that are required to comply with 23 “core 

principles.”14 These principles effectively require exchanges to establish 

and enforce rules to protect customers, prevent fraud and manipulation, 

agricultural 

commodities

(e.g., wheat, 

sugar)

excluded 

commodities

(e.g., currencies, 

price indices)

exempt 

commodities

(e.g., energy 

interests, metals)

commodities
5

maintain and disclose records, and maintain fair and orderly markets by, for 

example, enforcing position limits.15 Regulated exchanges are available to 

ordinary retail investors.16 In addition, other futures market intermediaries 

are required to register with the CFTC and are subject to wide ranging 

regulation. These intermediaries include futures commission merchants 

(that serve the function of brokerages),17 introducing brokers,18 commodity 

pool operators,19 and commodity trading advisers.20 The CEA and CFTC 

regulation impose a wide variety of requirements on these intermediaries, 

including obligations involving disclosure, reporting, recordkeeping, ethical 

requirements, protection of customer funds, and capital requirements.21

Although bitcoins fall under the CEA’s definition of commodity, it is 

unclear what category of commodity they fall under. Bitcoins may be 

categorized as an excluded commodity if they are viewed as being a type of 

currency or other financial interest. A means of payment is certainly one use 

for bitcoins. On the other hand, there are several reasons why bitcoins 

should be categorized as an exempt commodity. First, bitcoins may be 

viewed as being similar to precious metals because they are limited in 

supply, capable of being physically delivered (at least in a digital sense), 

and obtained through the computational equivalent of physical mining. In 

addition, like metals, bitcoins are a capital good because they are used to 

produce other goods and services such as digital assets and contracts.22

Second, the CFTC classifies intangible commodities as exempt 

commodities “if ownership of the commodity can be conveyed in some 

manner and the commodity can be consumed.”23 Bitcoins may accordingly 

be viewed as intangible exempt commodities because, even though bitcoins

are digital, they can be owned and “consumed” in the sense of being spent 

(or traded). Finally, bitcoins may be categorized as an exempt commodity 

because commodities that fail to meet the definition of an agricultural 

commodity or an excluded (financial) commodity are classified as exempt 

commodities.24 Classifying bitcoins as exempt commodities and not as 

excluded (currency) commodities would be consistent with the approaches 

taken by U.S. Treasury Department’s Financial Crimes Enforcement 

Network and the Internal Revenue Service.

25

Accordingly, despite the unique nature of bitcoins, they fall within the 

definition of commodity for the purposes of futures regulation. Whether 

bitcoins are classified as excluded or exempt commodities may have 

regulatory implications for Bitcoin swaps and for contracts sold to retail 

investors.26 

Any futures contract referencing bitcoins will thus be subject to the full 

scope of regulation under the CEA. At a minimum, this means that Bitcoin 

futures must be traded on existing regulated exchanges such as the Chicago 

Mercantile Exchange. Otherwise, any platform that offers Bitcoin futures 

would have to come into compliance with the wide-ranging and costly 

regulation required by the CEA for regulated futures exchanges. 
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B. Forwards

A forward is a contract whereby parties agree to trade an asset at a later 

date at a price specified in the present.27 For example, a contract where an 

oil refiner pays an oil producer to deliver oil at a specific time in the future 

and at a specific price is a forward contract.28 In contrast to futures, 

forwards are negotiated to the specific risks and other terms that parties are 

concerned about and do not trade on centralized exchanges. 

Importantly, forward contracts are excluded from CFTC regulation.29

The court in CFTC v. Erskine summarized the policy rationale behind the 

forward exclusion:

The purpose of [the] “cash forward” exception [to CFTC 

regulation] is to permit those parties who contemplate physical 

transfer of the commodity to set up contracts that . . . reduce the 

risk of price fluctuations, without subjecting the parties to 

burdensome regulations. These contracts are not subject to the 

CFTC regulations because those regulations are intended to govern 

only speculative markets; they are not meant to cover contracts 

wherein the commodity in question has an “inherent value” to the 

transacting parties.30

The forward exclusion originated in permitting farmers and crop buyers 

to lock in a price without being subject to a legislative scheme intended to 

curb “excessive speculation and price manipulations occurring on the grain 

futures markets,”31 but not the grain markets themselves.32 The forward 

exclusion applies not to price speculators, but to parties for whom the 

commodity has “inherent value;” that is, to those that actually use 

underlying commodity for commercial purposes.33

However, the distinction between a futures and a forward is not defined 

by statute or regulation and may be unclear. Accordingly, courts have 

adopted various approaches to determine whether parties are unlawfully 

using off-exchange futures contracts disguised as unregulated forwards. 

Traditionally, the distinction between futures and forwards turns on an 

analysis of the totality of the circumstances surrounding the contracts in 

question. Under this approach, some of the main differences between 

futures and forwards are that forwards are non-standardized, do not trade on 

an exchange, and, perhaps most importantly, are intended by the parties to 

physically deliver the commodity as opposed to a cash settlement of the 

market versus contract price difference.34 In the words of the CFTC, the 

“primary purpose of a forward contract is to transfer ownership of the 

commodity and not to transfer solely its price risk.”35 Transfer of ownership 

may include the transfer of intangible commodities, such as pollution rights, 

such that a contract that transfers the ownership of an intangible may 

qualify as a forward contract.36
7

In CFTC v. Co Petro Marketing Group, the court found that contracts 

marketed to the public for the purchase of fuel that did not require physical 

delivery to be futures. The court explained that purchasers of such contracts 

were speculators without the intent or capacity for physical delivery.37

Other factors the Co Petro court considered important in finding the 

contracts to be futures were their high degree of standardization, and that

Co Petro acted like an exchange by promising to offset its customers’ 

contracts and standing ready to liquidate the contracts and collect customer 

deposits.38 In In re Grain Land Cooperative, the court found that a 

cancellation provision in a contract for a producer to deliver grain was the 

decisive factor in precluding the contract from being a forward.39 It further 

held that the contracts in question were futures because they were used by 

producers to speculate, never intended for physical delivery, and 

standardized as to quantity, delivery, and fees.40

More recently, courts distinguishing between futures and forwards in 

the context of currencies have rejected the totality of the circumstances 

approach. Instead, they articulate the distinction as being that futures 

markets are for the sale of contracts independent of commodities while 

forward markets are for the sale of commodities.

41 In other words: a 

forward contract is a “sale for deferred delivery. A futures contract, by 

contrast, does not involve a sale of the commodity at all. It involves a sale of 

the contract.”

42 In CFTC v. Zelener, the court held that contracts that 

permitted buyers to purchase currency on a deferred basis were forwards 

and not futures because the contracts were not fungible (each customer 

purchased a unique amount and had unique settlement dates) and hence 

there was no trading of the contracts.43 The contracts were found to be 

forwards despite the fact that they permitted customers to obtain the 

economically equivalent position as a futures contract by continually 

extending their contracts and postponing delivery of the currency.44 Zelener

also identified two essential characteristics of futures (as opposed to 

forwards) markets: the existence of a centralized (intermediary) 

clearinghouse that takes on counterparty risk, and the ability to exit a 

position by purchasing an offsetting contract from a dealer.45

Yet another approach to distinguishing between futures and forwards 

was put forward by the Sixth Circuit Court of Appeals.46 The court in CFTC 

v. Erskine stated that “a futures contract is a contract for a future 

transaction, while a forward contract is a contract for a present transaction 

with future delivery.”

47 The court argued its approach was superior to the 

traditional totality of the circumstances test and the Zelener approach 

because it applies to intangible commodities such as prices as well as 

physical commodities.48 Erskine specifically defined each type of contract 

with a six-element set of characteristics. Applying those definitions to the 

contracts at issue, Erskine found that contracts to buy or sell foreign 

currencies were forwards because they were not fungible, not traded on an 

exchange, did not have set unit sizes or require a particular currency, and 
8

did not have a set price or settlement date.49 The Erskine court found the 

contracts to be forwards despite them being cash settled (no physical 

delivery) and permitting continuous roll over (or offsets).50 Indeed, both of 

these latter two approaches to the futures/forward distinction reject the 

relevancy of whether the contract intends or results in physical delivery of 

the commodity.51 (I'm not sure why he had to state two ways for 

future/forward. Is this really that important of an issue?)

Just like other commodities, certain types of contracts will qualify as 

Bitcoin forwards, and not Bitcoin futures, and hence not be subject to the 

full scope of regulation under the CEA. Depending on which of the 

foregoing approaches a court applies, Bitcoin derivatives are more likely to 

qualify as forwards to the extent such contracts involve physical delivery or 

are nonfungible and not independently traded. 

C. Swaps

A third type of potential Bitcoin derivative is a Bitcoin swap. A swap is 

a contract in which each counterparty agrees to an exchange of payments 

related to the value or return of some underlying asset or event.52 The 

structure of Bitcoin swaps may resemble a foreign exchange (FX) swap. In 

an FX swap, two parties borrow a foreign currency from each other and 

agree to pay each other back at a specified exchange rate.53 FX swaps may 

also be cash-settled and not entail the parties actually exchanging 

currencies. FX swaps are used to hedge against or speculate on foreignexchange (rate) risk. A merchant accepting Bitcoin would be able to use a 

Bitcoin swap to protect itself against a price decrease by being promised to 

be paid if the value of Bitcoin drops relative to the dollar. Trading a swap 

that references an index of virtual currencies could be another way to hedge 

Bitcoin price risk.

The Securities and Exchange Commission (SEC) has exclusive 

jurisdiction over swaps based on securities and narrow-based indices. The 

CFTC has exclusive jurisdiction over most other types of swaps, including 

those based on commodities, currencies, and interest rates.54 Swaps must be 

cleared by a regulated central counterparty clearinghouse55 and be traded on 

either a designated contract market or a swaps execution facility (SEF), 

unless no such trading venue makes the swap available for trading.56

Nonetheless, uncleared swaps are still subject to mandatory margin, 

reporting, and margin segregation requirements.57

The CEA defines a SEF as “a trading system or platform in which 

multiple participants have the ability to execute or trade swaps by accepting 

bids and offers made by multiple participants.”58 SEFs must comply with 15 

core principles and regulatory requirements including executing trades 

through an order book or a request for quote system involving three or more 

participants.59 In contrast to multi-dealer SEF platforms, single-dealer 

trading platforms are not required to register and be regulated as a SEF or a 
9

designated contract market.

60 In a single-dealer platform, only one market 

participant is able to trade with other traders.

Swaps contracts are not available to retail investors; parties to a swaps 

contract must be eligible contract participants.

61 In practice, parties to a 

swaps contract typically enter a trade with a futures commission merchant 

who in turn transacts with a clearinghouse. 

The two major categories of regulated entities are swaps dealers that 

make markets in swaps, and major swaps participants, so defined because 

their swaps exposures are deemed to pose a systemic risk.62 These entities 

are required to register with the CFTC and are subject to a wide range of 

disclosure, reporting, capital, clearinghouse margin, and business conduct 

requirements.63 Non-financial, commercial end-users of swaps are not 

subject to entity-level regulation or the mandatory clearing and trading 

requirement so long as they only use swaps to hedge commercial risk.64 For 

example, an airline may use swaps to hedge their exposure to increases in 

fuel prices without being subject to the regulations. Nonetheless, all users of 

swaps are prohibited from engaging in fraud or manipulative behavior.65

As of March 2014, the CFTC has applied the clearing requirement to 

standard interest rate swaps and certain index credit default swaps.66 This 

determination was based on what swaps were actually being cleared by 

clearing organizations.67

The Treasury Department, pursuant to its legislative authority,68

exempted certain physically settled foreign exchange swaps and forwards 

from the clearing and trading mandate.69 This is because the physical 

settlement risk associated with the contracts is well managed and they are 

short-dated such that compliance with the mandate would not reduce 

systemic risk.70 Non-deliverable foreign exchange forwards were not 

exempted by the Treasury Department, and therefore are subject to the 

clearing mandate unless the CFTC provides an exemption.

It is not clear what swaps the CFTC will determine qualify for an 

exemption or will subject to mandatory clearing requirement in the future. It 

is important to note, however, that not all swaps can be cleared and traded 

in a practical or economic sense. Among other characteristics, swaps that 

are capable of being cleared and traded must possess a sufficient degree of 

standardization and trading volume.71

Bitcoin swaps are not likely to be subject to the mandatory clearing 

requirement due to a lack of sufficient trading volume. Nonetheless, they 

would still be subject to the margin and other requirements for uncleared 

swaps. In addition, to the extent that Bitcoin swaps are structured and are 

recognized as foreign exchange swaps, they may also be exempted from 

mandatory clearing and trading.72 Alternatively, to the extent a Bitcoin 

derivatives contract is structured and recognized as a contract involving a 

nonfinancial commodity intended for physical delivery, it will be deemed a 
10

forward contract and hence excluded from any aspect of swaps regulation.73

Merchants that accept Bitcoin are likely to fall under the commercial 

end-user exception to mandatory clearing and trading. This is because 

merchants would be entering into the swap to hedge the commercial risk 

associated with accepting Bitcoin as a method of payment. In principle, the 

use of Bitcoins swaps for this purpose is no different than a merchant using 

FX swaps to hedge foreign currency exchange-rate risk when it sells 

overseas—a well-recognized category of exempt commercial end-user.74

D. Options

Option contracts are a fourth type of possible Bitcoin derivative. A call 

option gives the purchaser the right to purchase an asset at pre-specified 

price and only has value if that price is below the market price. A put option 

works the opposite way.75 A call option would enable a merchant selling 

Bitcoin denominated goods to be protected if the price increases. A Bitcoin 

put option would protect against Bitcoin price declines by guaranteeing the 

option to sell at a pre-specified price. 

Options on commodities fall within the definition of “swap” under the 

CEA.76 Accordingly, options are generally regulated as swaps.77 However, 

just as CFTC regulation may not reach forwards based largely on their 

physical delivery of commodities, options that entail physical delivery are 

exempt from CFTC regulation, but only if they are traded between entities 

that include financially sophisticated parties and commercial users.

78

Accordingly, Bitcoin options used by qualifying entities may be exempt

from CFTC regulation if they are structured to involve physical delivery. 

III. BITCOIN DERIVATIVES FIRMS

Several firms offer (or purport to offer) market participants a variety of 

Bitcoin derivatives such as futures, options, and swaps. The following is a 

survey of such firms based upon information that is available through their 

website and other public sources. This analysis should not be construed as

an endorsement of any firm or as implying that the firms are actually 

operational and offer agreements that function as claimed. 

ICBIT is generally recognized as one of the largest Bitcoin derivatives 

firms, reportedly facilitating $15 million worth of transactions in May 

2014.79 ICBIT describes itself as “The First Ever Bitcoin Futures Market” 

where “Margin trading using futures contracts is available now to 

everyone.” The firm’s website further states that ICBIT provides a margin 

system with upper and lower limits within a trading session that are similar 

to any major futures exchange.” ICBIT notes that the “typical” uses for its 

contracts are miners, merchants, and others to hedge Bitcoin price risk and

for traders to speculate and arbitrage. Users do not purchase options or 

futures contracts from ICBIT itself but rather are matched with other buyers 
11

or sellers who have an opposite and corresponding risk profile.80

As of October 5, 2014, ICBIT was offering five contracts, each dated 

monthly: October 2014, November 2014, December 2014, January 2015, 

and February 2015. Although described as futures, the contracts settle 

physically in bitcoins. ICBIT.se states its BTC/USD-4.14 contract is 

“Settled in BTC, quoted in USD”

81 and explains that for a party using their 

platform to take a short position in Bitcoin against the dollar, “if rate goes 

down he would get as many Bitcoins as it's needed to buy $6000 on the spot 

market.”

82 On the unofficial FAQ, the description of ICBIT’s clearing 

process also implied physical delivery.83

Setting aside jurisdictional issues, ICBIT may be selling contracts that 

fall under the CFTC’s jurisdiction. The fact that ICBIT labels the contracts 

futures, refers to itself as a futures exchange, and recognizes that the 

agreements may be used for speculation suggests that the contracts are 

futures. On the other hand, other facts indicate that ICBIT is selling 

forwards. ICBIT seems to only match traders and not serve as a central 

counterparty. In addition, the ICBIT contracts contemplate physical 

delivery of bitcoins and not cash settlement.

China-based Bitcoin exchange OKCoin began to offer Bitcoin-USD 

futures in September 2014. On the company’s blog, OKCoin states that 

Shortly following the launch of our USD order book we became the 

first major exchange to add a futures trading platform. We started off 

featuring three different contract types: weekly, bi-weekly, and 

monthly. Shortly thereafter we decided to add quarterly contracts as 

well due to customer demand. We have seen a strong response to our 

futures platform with our 24 hour volume reaching a high of ~60,000 

BTC during this past week.84 

France-based BTC Oracle claims to offer Bitcoin binary options as a 

broker. Unlike standard options, binary options either pay out a fixed 

amount if the option expires “in the money” or nothing if it does not (such 

that the buyer loses their purchase price). BTC Oracle offers option 

durations of 15 minutes, 3 hours, 1 day, 3 days, 7 days. The maximum size 

per transaction is 1 Bitcoin. An option predicated on the rise of Bitcoin 

prices at the end of the time period will be paid out with a multiplier if the 

price rises, and not if the price decreases. The converse is true for options 

predicated on the decrease in Bitcoin prices. BTC Oracle describes as 

example of a trade on its platform in the following way:

If you buy an option for 1 Bitcoin on up3h (thinking that the price 

will rise 3 hours from now) with 1.9 price multiplier, and the price 

on bitstamp is 124.27$ at that time, then: 

- If the price is 128.13$ after 3 hours (the option expires in-themoney), we send you back 1 * 1.9 = 1.9 Bitcoins. 
12

- If the price is 123.87$ after 3 hours (the option expires not in-themoney), your Bitcoin is lost. 

We look for the price at the exact time of the creation of the 

option. (The last trade before the option creation timestamp 

determines the price at a given time) 

Even if your option starts at 123.12$ and the price at the expiration 

is 123.13$, then you win. 

Conversely, we look for the exact price to check whether you 

lose.85

Other firms offering binary options on Bitcoin include Trade Rush located 

in Gibraltar and anyoption based in Cyprus.

New Jersey-based TeraExchange offers a CFTC regulated, cash-settled 

Bitcoin-dollar swap. As the firm describes it, the contract is a 

bitcoin forward [that] is a short-term, cash-settled forward between 

two counterparties. On the contracted settlement date, the profit or 

loss is adjusted between the two counterparties based on the 

difference between the contracted rate entered into on trade date 

and the prevailing Tera Bitcoin Price Index on the agreed notional 

amount.86

The TeraExchange contract is not centrally cleared. It also utilizes a 

proprietary bitcoin price index as part of its swaps transactions to ensure the 

price of the contract is not readily susceptible to manipulation. Although 

TeraExchange worked with the CFTC in developing the contract, it was not 

technically “approved” by the Commission but was rather self-certified 

pursuant to CFTC regulation 40.2(a).

87

Another platform offering Bitcoin swaps is the British Virgin Island 

registered Bitfinex. The firm offers total return swaps that require one party 

to exchange an interest rate in return for obtaining synthetic exposure to the 

return of an underlying cryptocurrency.88 Both legs of the trade are cash. On 

October 6, 2014, it was reported that New York-based SolidX raised $3 

million to develop a total return swap also providing investors exposure to 

Bitcoin returns without being required to own actual bitcoins.89

Hong Kong-based Bitcoin Mercantile Exchange, or BitMEX, is 

currently in development. Although details of BitMEX contracts are not yet 

public, based on statements on its website, and the blog posts and an 

interview of its founder and CEO Arthur Hayes, the firm will be offering 

bona fide Bitcoin futures.

Singapore-based BTC.sx is a platform that offers bitcoin-denominated 

margin trading. Users can deposit bitcoins to a wallet created by BTC.sx 

and can then speculate on Bitcoin price movements by opening long or 

short positions for varying lengths of time.90 For each open position taken, 
13

users must hold deposits equal to the size of the trade multiplied by the 

price and by a measure of current market volatility.91 This allows the 

BTC.sx platform to leverage each position at 100 times the value of the bet, 

allowing investors a broader possible return on each investment.92 As of 

April 2014, the firm reportedly processed about $44 million in Bitoin-based 

trades.93 By January of 2014, BTC.sx reported $35 million in total trading 

since its launch and an active user base of 3,300 traders.94 Camp BX is 

another platform that offers margined Bitcoin trades by matching users’ 

orders and not serving as a counterparty to any trade. It is headquartered in 

Alpharetta, Georgia.

IV. BLOCK CHAIN DERIVATIVES

As noted in the Introduction, Bitcoin is not just a digital medium of 

exchange or even only a decentralized payment system. Rather, the 

messages underlying Bitcoin transactions can be used for a wide variety of 

software-enabled “smart” transactions, including complex payments 

embedded in financial transactions such as loans and the recording and 

conveyance of property titles. A smart commercial loan, for example, could 

be set up to automatically deduct the principal and interest payments from a 

borrower’s account, immediately accelerate full repayment if the borrower 

breaches a loan covenant, and adjust the interest rate based on changes to 

the borrower’s creditworthiness.

A. Block Chain Smart Contracts

Smart transactions are possible in part because transactions that use 

bitcoins to communicate information are programmable. This means that 

parties can determine upfront the nature of their contractual relationship in 

various states of world and have that relationship automatically carried out 

without the parties having to engage in any monitoring, additional conduct, 

or legal enforcement. 

Using software and technology to improve financial transactions and 

related services hardly new, however. Software assists and enables many 

aspects of the derivatives market. These include storing, monitoring, and 

disseminating information about prices and other market data, the 

performance, risk, and other characteristics of specific counterparties, and 

the value and risk of individual positions and entire portfolios. Software

also enables parties to trade according to pre-programmed algorithms and 

assists in reporting and confirming trades. Software is used in the clearing 

of trades by, for example, automating various aspects of collateral 

management and trade matching by clearinghouses using standardized 

messaging protocols such as Financial Information eXchange (FIX) or

Extensible Markup Language (XML). Indeed, a goal of many derivatives 

software providers is to provide fully automated “straight through 
14

processing” of transactions from order to settlement.

Despite the widespread use of software in derivatives markets, the 

bitcoin protocol may enable functionality that is currently not available. 

Contracts executed on the block chain are secure and publicly verifiable. 

The transactions are secure because, by using cryptography, the messages 

that communicate contract terms and contract performance cannot be 

reversed, tampered with, or corrupted. In addition, by using a public ledger, 

the transactions can be verified by, and communicated to, all market 

participants. Finally, because the block chain ledger is not operated by a 

particular institution but is decentralized, the bitcoin protocol enables 

transactions to take place without intermediaries. In effect, the block chain 

takes the place of an intermediary.

Although most block chain contract platforms are still works in 

progress, software developers have identified several features as being 

common to how they would operate. One feature is the use of multisignatures (multi-sig). With multi-sig, two or more parties are required to 

approve a transaction before funds can be released or some other aspect of 

the contract can move forward. A closely related feature is placing funds in 

escrow and not allowing them to be released until each party is satisfied 

with the performance of the other as reflected in a digital signature.

Additional security could be added to a transaction by requiring the 

signature of a third or even more parties, who play a role in authenticating 

performance. Information and data can be incorporated into block chain 

contracts through the use of “oracles” that monitor prices, performance, or 

some other aspect of the real world. Oracles interact with a block chain 

contract by providing a digital signature that reflects some state of the 

world. Ripple Labs is developing an oracle that executes code in addition to 

providing information about the world. The potential benefit of this type of 

oracle is that it is able to provide complex decisionmaking without altering 

an underlying block chain protocol in a way that could compromise its

speed or integrity.

95

B. Block Chain Futures

Futures agreements are highly standardized and for that reason may be 

the first type of block chain enabled smart contract to be developed. Smart 

futures would not require an exchange or central counterparty to be traded, 

cleared, and settled. That is because these activities and the related 

decisionmaking would be embedded in the code that makes up the digital 

agreement. The following figure illustrates that traders would interact with a 

programmable futures contract built around the block chain instead of with

an exchange:
15

Figure 3: Futures Contract Built Around Block Chain

smart futures contract

A smart futures contract would have all its terms (quality, quantity, 

delivery) be pre-programmed except for the price. The price for each 

contract could be determined by an algorithm that incorporates market data 

through an oracle. In addition, the 23 core principles that regulated 

exchanges must comply with could be programmed as part of each futures 

agreement. For example, the block chain could be programmed to prevent 

excessive orders and large positions that could manipulate or disrupt

markets. In terms of risk management, once a customer establishes an 

account and deposits in a specified electronic wallet the bitcoins required to 

purchase or establish margin, the futures contract could automatically make 

adjustments to the wallet to maintain the margin and settle the agreement 

upon expiration. 

A block chain based futures market could have advantages over a 

traditional exchange-centered market. First, trades may settle faster and at 

lower cost with no (or fewer) derivatives intermediaries. In addition, a block 

chain futures market may be less susceptible to manipulation because there 

would be no incumbent firms that stand to benefit from the revenues 

generated by bad actors. The block chain (or several interconnected block 

chains) may also allow for the formation of a single, globally integrated 

futures market that is not fragmented by customers, products, or disparate 

national regulatory regimes. Block chain based technology may also allow 

innovations to occur by connecting futures markets to other block chainbased markets. These could include not only other financial markets, but 

also commodity markets that, for example, automatically enter into futures 

trades on behalf of an agricultural producer if projected crop prices drop 

below a certain level.96

C. Regulating Block Chain Derivatives

Inevitably, and perhaps soon, the CFTC will have to face the question of 

how to approach regulation of block chain-based derivatives agreements 

trader 1

trader 2

trader 3

trader 4

trader 5

trader 6

Bitcoin block chain
16

and markets. One potential approach would be for the CFTC to treat block 

chain derivatives as no different from traditional agreements. This would 

entail, for example, requiring block chain futures to ultimately interface and 

be traded on a regulated exchange subject to its standard rules and 

procedures.

Another approach would be for the CFTC to exempt certain block chain 

derivatives from the scope of the CEA. The qualifying transactions would

be those that meet CFTC policy objectives as a result of the applicable rules 

embedded in the underlying code. In such a case, an additional layer of 

rules from the CFTC’s regulatory regime would be unnecessary. This 

approach seems preferable because it does not compromise the CFTC’s 

goals while at the same time fostering innovation.

V. CONCLUSION

As the Bitcoin market matures, there may be less of a need for 

derivatives to reduce price volatility due to prices becoming more stable. 

But for now, at least, Bitcoin derivatives serve the very real purpose of 

furthering the widespread adoption of a digital commodity that in all 

likelihood has enormous innovative potential. In addition to derivatives that 

reference Bitcoin, block chain enabled smart derivative contracts may 

potentially provide broader innovations that lead to fundamental 

improvements in the way derivatives are traded and markets are organized.

Accordingly, the CFTC should approach regulating Bitcoin and block chain 

derivatives in a way that that is sensitive to the potential of Bitcoin and 

other distributed ledger technologies.

 1 Section II is derived from the broader analysis of financial regulation as applied to 

Bitcoin found in Jerry Brito, Houman B. Shadab, and Andrea Castillo, Bitcoin Financial 

Regulation: Securities, Derivatives, Prediction Markets, and Gambling, Columbia Science 

and Technology Law Review (2014), available at http://ssrn.com/abstract=2423461. 2 CEA, 7 USC §1 et seq.

3 CFTC, Mission and Responsibilities. 

http://www.cftc.gov/About/MissionResponsibilities/index.htm 4 Futures contract, CFTC Glossary, U.S. Commodity Futures Trading Commission 

Education Center, accessed March 27, 2014, 

http://www.cftc.gov/consumerprotection/educationcenter/cftcglossary/; John C. Hull, 

Options, Futures, and Other Derivatives 6 (6th ed. 2006). 5 Hull, supra note 4, at 23-25; CME Group, A Trader’s Guide to Futures, 13-14, 

http://www.cmegroup.com/content/dam/cmegroup/education/files/a-traders-guide-tofutures.pdf. Under some circumstances, a non-standardized contract may be categorized as 

a futures contract. See In re Bybee, 945 F.2d 309, 312-13 (9th Cir. 1991). 6 Futures contract, CFTC Glossary, U.S. Commodity Futures Trading Commission 

Education Center, accessed March 27, 2014, 
17

 

http://www.cftc.gov/consumerprotection/educationcenter/cftcglossary/. 7 7 U.S.C. § 1a(9). Two interests that fall outside of the definition of commodity 

include onions and motion picture box office receipts. Id. 8 CEA Section 1a(9); CFTC Glossary, Agricultural Commodity. 9 See CEA Section 1a(19), 7 U.S.C. § 1a(19) (defining “excluded commodity” to 

include a wide range of financial interests). 10 CEA Section 1a(20); CFTC Glossary, Exempt Commodity; CFTC Glossary, 

Weather Derivative (definitive “weather derivative” as “A derivative whose payoff is based 

on a specified weather event, for example, the average temperature in Chicago in 

January”). 11 77 Fed. Reg. 48227, 48232-48233 (Aug. 13, 2012) (defining nonfinancial 

commodities as consisting of (1) exempt commodities or agricultural commodities that are 

physically deliverable; and (2) intangible commodities whose ownership can be transferred 

and are consumable),

http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-

18003a.pdf. 12 Id. 13 CEA § 6(a); 7 U.S.C. § 6. 14 CEA § 5(b-x), 7 USC § 7(d). A designated contract market is defined as “a board of 

trade or exchange designated by the CFTC to trade futures, swaps, and/or options under the 

CEA. A contract market can allow both institutional and retail participants and can list for

trading contracts on any commodity, provided that each contract is not readily susceptible 

to manipulation.” Commodity Market, CFTC Glossary. 

http://www.cftc.gov/consumerprotection/educationcenter/cftcglossary/glossary_co; Core 

Principles and Other Requirements for Designated Contract Markets 77 Fed. Reg. 36612 

(CFTC June 19, 2012), 

http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-

12746a.pdf. 15 See also 7 U.S.C. 6g(e) (requiring exchanges to publicly disclose daily trading 

volume).

16 A similar regulatory framework applies to derivatives clearing organizations. 7 USC 

§ 7a-1(c)(2). Retail investors routinely transact in off-exchange commodity transactions 

through the retail foreign exchange market. This is permitted so long as the retail investor’s 

counterparty is a regulated by the CFTC as an FCM or a retail foreign exchange dealer, or 

by another financial regulator such as the Securities and Exchange Commission. See CEA 

§ 2(c)(2)(D) (regulating leveraged or margined retail commodity transactions); CFTC, 

Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries, 75 

Fed. Reg. 55410 (Sept. 10, 2010), 

http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-

21729a.pdf. 17 CEA 1a(28); 7 USC 1a(28) (defining futures commission merchant). 18 7 U.S.C. 1a(31) (defining introducing broker). 19 7 U.S.C. 1a(11) (defining commodity pool operator); Harmonization of Compliance 

Obligations for Registered Investment Companies Required to Register as Commodity 

Pool Operators, 78 Fed. Reg. 52308 (CFTC Aug. 22, 2013). 20 7 U.S.C. 1a(12) (defining commodity trading advisor); CFTC v. Equity Financial 

Group LLP, 572 F.3d 150 (3d Cir. 2009). 21 7 U.S.C. 6d(a)(1) (futures commission merchant registration requirements); 7 U.S.C.

6d(a)(2) (FCM customer funds segregation duties); 78 Fed. Reg. 68506, Enhancing 

Protections Afforded Customers and Customer Funds Held by Futures Commission 

Merchants and Derivatives Clearing Organizations, Nov. 14, 2013 

http://www.gpo.gov/fdsys/pkg/FR-2013-11-14/pdf/2013-26665.pdf; 7 U.S.C. 6d(c) 
18

 

(requiring FCMs and introducing brokers to implement conflicts-of-interest systems); 7 

U.S.C. 6g (reporting and recordkeeping requirements for futures commission merchants, 

introducing brokers, and floor brokers and traders); 7 U.S.C. 6f(c)(2) (risk assessment 

recordkeeping requirements for futures commission merchants); 7 U.S.C. 6d(g) 

(introducing broker registration requirement); CFTC, Minimum Net Capital Requirements 

for Futures Commission Merchants and Introducing Brokers, 

http://www.cftc.gov/IndustryOversight/Intermediaries/FCMs/fcmibminimumnetcapital; 7 

U.S.C. 6m(1) (registration requirements for CTAs and CPOs); 7 U.S.C. 6o(1) (prohibiting 

fraud by commodity trading advisers and commodity pool operators); 77 Fed. Reg. 20127-

20215 (CFTC Apr. 3 2012) (obligations of futures commission merchants); 7 U.S.C.

6n(3)(A) (recordkeeping requirements for commodity trading advisers and commodity pool 

operators); 77 Fed. Reg. 11252 (CFTC Feb. 24 2012) (compliance obligations for 

commodity pool operators and commodity trading advisers). 22 Old Kharif, Bitcoin 2.0 Shows Technology Evolving Beyond Use as Money, 

Bloomberg, March 28, 2014. 23 77 Fed. Reg. 48227, 48233 (Aug. 13, 2012), 

http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-

18003a.pdf 24 CEA Section 1a(20); CFTC Glossary, Exempt Commodity. 25 Financial Crimes Enforcement Network, Application of FinCEN's Regulations to 

Persons Administering, Exchanging, or Using Virtual Currencies, March 18, 2013, 

http://www.fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html; Internal 

Revenue Service Notice 2014-21, available at http://www.irs.gov/pub/irs-drop/n-14-21.pdf. 26 If bitcoins are classified as currency-like excluded financial commodities, they may 

ultimately be subject to the Treasury Department’s exemption from clearing and trading 

applicable to foreign exchange swaps and forwards. In addition, excluded commodity 

bitcoins sold to retail investors would likely be regulated like retail foreign exchange 

transactions. However, if bitcoins are classified as exempt nonfinancial commodities, they 

may be completely exempt from swaps regulation if they also qualify as a forward contract 

intended for physical delivery. 7 U.S.C. § 1a(47)(B)(ii). 27 Forward Contract, CFTC Glossary, U.S. Commodity Futures Trading Commission 

Education Center, accessed March 27, 2014, 

http://www.cftc.gov/consumerprotection/educationcenter/cftcglossary/; Hull, supra note 4, 

at 3-4.

28 Ronald H. Filler & Jerry W. Markham, REGULATION OF DERIVATIVE FINANCIAL 

INSTRUMENTS (SWAPS, OPTIONS AND FUTURES) 1-2 (2014). 29 CEA § 1a(27) (excluding sales “of any cash commodity for deferred shipment or 

delivery” from the term “future delivery”); U.S. Commodity Futures Trading Com'n V. 

Reed, 481 F. Supp. 2D 1190 (D. Colo. 2007) (“The CFTC's exclusive jurisdiction does not 

extend to transactions involving the sale or physical delivery of the actual commodity, 

which are referred to as ‘cash forwards’ or ‘spot’ transactions.”). 30 CFTC v. Erskine, et al., 513 F.3d 309 (2008). 31 CFTC v. Co Pertro Marketing Group, Inc., 680 F.2d 573, 577-78 (9th Cir. 1982). 32 Erskine, 5143 F.3d at 317 (“[T]he CEA was aimed at manipulation, speculation, and 

other abuses that could arise from the trading in futures contracts and options, as 

distinguished from the commodity itself.”). 33 Id. at 578 (noting that wheat has “inherent value” for farmers, operators of grain 

elevator storage companies, and flour millers).

34 Forward contract, CFTC Glossary, U.S. Commodity Futures Trading Commission 

Education Center, accessed March 27, 2014, 

http://www.cftc.gov/consumerprotection/educationcenter/cftcglossary/. See also CFTC v. 
19

 

Erskin, 512 F.3d 309 (6th Cir. 2008) (defining and distinguishing futures and forwards 

contracts); In re National Gas Distributors, 556 F.3d 247 (9th Cir 2009); CFTC v. Hanover 

Trading Corp., 34 F. Supp. 2d 203 (S.D.N.Y 1999) (contracts where no delivery was 

contemplated were futures). 35 77 Fed. Reg. 48227, 48228 (Aug. 13, 2012),

http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-

18003a.pdf. For the purposes of being excluded from the statutory definition of “swap,” the 

CEA defines a forward contract as “any sale of a nonfinancial commodity or security for 

deferred shipment or delivery, so long as the transaction is intended to be physically 

settled.” 7 U.S.C. § 1a(47)(B)(ii). 36 Id. at 48232-33. Accordingly, to the extent the CFTC considers bitcoins intangible 

because they are digital, that property should not preclude bitcoins from being recognized 

as physically deliverable pursuant to bona fide forward contracts. 37 CFTC v. Co Pertro Marketing Group, Inc., 680 F.2d 573, 578-79 (9th Cir. 1982). 38 Id. at 579-581. 39 In re Grain Land Cooperative, 978 F.Supp. 1267, 1273-74 (D.Minn.1997). 40 Id. 41 CFTC v. Zelener, 373 F.3d 861, 865-66 (7th Cir. 2004); CFTC v. Giovanni Fleury, 

et al., No. 10-15041 (11th Cir. June 27, 2012). 42 Zelener, 373 F.3d at 865 (emphasis in original). 43 Id. at 867. Zelener’s classification of the contracts as forwards has not been 

disturbed by subsequent amendments to the CEA that expanded the CFTC’s authority over 

retail forex transactions. See Secure Leverage Grp., Inc. v. Bodenstein (In re Peregrine Fin. 

Grp., Inc.), 510 B.R. 190, 196 (Bankr. N.D. Ill. 2014) (“Congress did not reject the holding 

in Zelener that retail forex transactions are spot contracts”). 44 Id. at 866-867. Pursuant to the Dodd-Frank Act, on December 2, 2011 the CFTC 

clarified the meaning of “actual delivery” solely for the purposes of retail commodity 

transactions. See Retail Commodity Transactions Under Commodity Exchange Act, 78 

Fed. Reg. 52426, Aug. 23, 2013, 

http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2013-

20617a.pdf. 45 Id. at 864-868. Indeed, the definition of “commodity contract” does not include 

uncleared commodity transactions. See 7 U.S.C. Section 2(c)(2)(D)(iii); 11 U.S.C. Section 

761(4)(F)(ii). 46 CFTC v. Erskine, et al., 513 F.3d 309, 322-23 (6th Cir. 2008). 47 Id. at 322. 48 Id. at 321. 49 Id. at 325-326. 50 Id. at 322. 51 Zelener, 373 F.3d at 865; Erskine, 513 F.3d at 322. 52 Hull, supra note 4, at 149. 53 7 U.S.C. 1a(25). 54 Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap 

Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping;, 77 Fed. 

Reg. 48,208 (August 13, 2012). Under the CEA, forward contracts (for nonfinancial 

commodities) are excluded from the definition of “swap.” CEA section 1a(47)(B)(ii), 7 

U.S.C. 1a(47)(B)(ii) (excluding from the definition of swap “any sale of a nonfinancial 

commodity or security for deferred shipment or delivery, so long as the transaction is 

intended to be physically settled”). 55 CEA Section 2(h)(1)(A). The CFTC, either upon application by a clearinghouse or 

on its own initiative, may require a category of swaps to be cleared. CEA 2(h)(2). 56 CEA Section 2(h)(8). See also Core Principles and Other Requirements for Swap 
20

 

Execution Facilities, 78 Fed. Reg. 33476 (June 4, 2013), 

http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2013-

12242a.pdf. The process of making a swap available to trade is subject to regulation. See 

CFTC, Process for a Designated Contract Market or Swap Execution Facility To Make a 

Swap Available to Trade, Swap Transaction Compliance and Implementation Schedule, 

and Trade Execution Requirement Under the Commodity Exchange Act, 78 Fed. Reg. 

33606 (June 4, 2013), 

http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2013-

12250a.pdf. 57 Proposed Rule, 76 FR 23732 (April 28, 2011), Margin Requirements for Uncleared 

Swaps for Swap Dealers and Major Swap Participants, 

http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-9598a.pdf; 

Protection of Collateral of Counterparties to Uncleared Swaps; Treatment of Securities in a 

Portfolio Margining Account in a Commodity Broker Bankruptcy, 78 FR 66621 (Nov. 6, 

2013), http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2013-

26479a.pdf 58 CEA Section 1a(50), 7 U.S.C. 1a(50). 59 Core Principles and Other Requirements for Swap Execution Facilities, 78 Fed. Reg. 

33476, June 4, 2013 

http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2013-

12242a.pdf. 60 For a discussion of the different types of swaps trading platforms see IOSCO, 

Report on Trading of OTC Derivatives 29-33 (2011), 

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD345.pdf. 61 CEA Section 2(e). 62 Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap 

Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant;” 

Final Rules, 77 Fed. Reg. 30,596 May 23, 2012). 63 76 Fed. Reg. 43,851 (July 22, 2011) (large trader reporting). 64 CEA Section 2(h)(7)(A), CFTC Rule 50.50. See also 77 Fed. Reg. 42,560, 42,590 

(July 19, 2012). End-users must comply with certain reporting requirements. Id. 64 Melissa Jurgens, Clearing Exemption for Swaps Between Certain Affiliated Entities, 

17 CFR Part 50, RIN 3038-AD47 (April 1, 2013) 

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister040113.

pdf. 65 CFTC Regulations §180.1-180.2; see also 76 Fed. Reg. 41,398 (July 14, 2011). 66 Sauntia S. Warfield, Clearing Requirement Determination Under Section 2(h) of the 

CEA, 17 CFR Parts 39 and 50, RIN 3038-AD86 (November 29, 2012) 

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister112812.

pdf.

67 Id. at 13. 68 CEA 1a(47)(E). 69 77 Fed. Reg. 69,694 (Nov. 20, 2012). 70 Id. 71 IOSCO, Report on Trading of OTC Derivatives 22-29 (2011), 

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD345.pdf. 72 There may be some ambiguity as to whether the intent to or actual exchange of 

physical currencies is required to qualify as an exempt FX swap or forward. See Andrew 

Kross, Foreign Exchange Forwards (a/k/a "Currency" or "FX" Forwards) as Swaps: The 

Half-Time Report (Mutual Funds, Hedge Funds, ETFs and Fund Advisers - THIS IS 

IMPORTANT), The Swap Report, Aug. 7, 2012, 

http://www.theswapreport.com/2012/08/articles/dodd-frank-reforms-1/foreign-exchange-
21

 

forwards-aka-currency-or-fx-forwards-as-swaps-the-halftime-report-mutual-funds-hedgefunds-etfs-and-fund-advisers-this-is-important/. 73 7 U.S.C. § 1a(47)(B)(ii). 74 See 17 CFR 50.50(c)(i)(F) (recognizing that “a swap is used to hedge or mitigate 

commercial risk if” such swap reduces “risks in the conduct and management of a 

commercial enterprise” from “[a]ny fluctuation in interest, currency, or foreign exchange 

rate exposures arising from a person's current or anticipated assets or liabilities”). 75 Hull, supra note 4, at 6. 76 CEA Section 1a(47)(A)(i), 7 U.S.C. 1a(47)(A)(i). The definition of “swap” excludes 

options on futures (which must be traded on a designated contract market). CEA section 

1a(47)(B)(i), 7 U.S.C. 1a(47)(B)(i). Options on securities are regulated by the securities 

laws.77 Commodity Options, 77 Fed. Reg. 25320, 25325 (April 27, 2012), (“commodity 

options will be permitted to transact subject to the same rules applicable to any other 

swap”), 17 CFR Parts 3, 32, and 33, 77 F.R. 82 (April 27, 2012), 

http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-9888a.pdf. 

See also Commodity Options, Final Rule and Interim Final Rule, 77 Fed. Reg. 25320 

(CFTC Apr. 27 2012) (regulating commodity options dealers). 78 Commodity Options, 77 Fed. Reg. at 25326,

http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-9888a.pdf. 

These exempt “trade options” are still subject to CFTC rules regarding recordkeeping, 

reporting, anti-fraud, and anti-manipulation. Id. at 25326-25328. Other exempt commodity 

options include those embedded in forward contracts. See CFTC Division of Market 

Oversight Responds to Frequently Asked Questions Regarding Commodity Options, 

(September 30, 2012),

https://forms.cftc.gov/_layouts/TradeOptions/Docs/TradeOptionsFAQ.pdf. 79 Jon Matonis, Inching Towards Bitcoin Derivatives, Coindesk, May 27, 2014. 80 The ICBIT.se website FAQ directs to a Bitcointalk forum post. See: Super T, 

*Unofficial* ICBIT (BTC Futures Trading) – Help & FAQ’s, Bitcointalk.org forum post, 

April 1, 2013, accessed February 11, 2014, 

https://bitcointalk.org/index.php?topic=164255.0.t 81 See https://icbit.se/BUJ4. 82 About ICBIT Derivatives Market, https://icbit.se/futures. 83 See https://bitcointalk.org/index.php?topic=164255.msg1717099#msg1717099 84 OKCoin.com, Two Months In, Sept . 26, 2014. 85 BTC Oracle, FAQ, http://btcoracle.com/faq.php. 86 Tera Exchange, http://www.teraexchange.com/bitcoin.html. 87 See TeraExchange - 40.2 Filing - 2014-25 Listing of USD-Bitcoin Swap 

(2014.09.11), available at http://www.teraexchange.com/news/TeraExchange%20-

%2040.2%20Filing%20-%202014-25%20Listing%20of%20USDBitcoin%20Swap%282014.09.11%29.pdf. 88 See Bitfinex, Features, TR Swap, https://www.bitfinex.com/pages/features#swap . 89 See, e.g., Ruth Reader, SolidX Raises $3M to grow its Bitcoin swaps business, Tech 

Crunch, Oct. 6, 2014. 90 Danny Bradbury, BTC.SX revives bitcoin margin trades, CoinDesk, May 23, 2013, 

http://www.coindesk.com/btc-sx-revives-bitcoin-margin-trades/ 91 FAQ, BTC.sx support, accessed March 26, 2014, https://btc.sx/about/faq. 92 For example, let’s say a user wanted to bet 1/100th of a Bitcoin that the price of 

Bitcoin will increase over the next day. To take this position, the user must have the proper 

deposit amount in their BTC.sx wallet to cover the trade and function as a de facto 

guaranteed stop loss order. Let’s say this deposit amount is 1.5 BTC in this example. The 

user communicates to BTC.sx that she wants to bet 0.01 BTC on this position and BTC.sx
22

 

places 1 BTC, or 100 times the position, on this bet. If the user wins the bet, she will make 

a handsome profit because most of her earnings are based on BTC.sx’s 1BTC bet rather 

than her 0.01 BTC bet. If, the other hand, the user loses the bet, her losses will be 

liquidated from her 1.5 BTC deposit. This allows both BTC.sx and each user to minimize 

risk with guaranteed stop loss orders while increasing possible returns with margin trading. 

See: Joe Lee, Bitcoin Trading Platform BTC.sx Launches Private Beta: Offering Long and 

Short Leveraged Bitcoin Position Trading, PRNewswire, May 15, 2013, 

http://www.prnewswire.com/news-releases/bitcoin-trading-platform-btcsx-launchesprivate-beta-offering-long-and-short-leveraged-bitcoin-position-trading-207556691.html. 93 Danny Bradbury, Trading Site BTC.sx Receives 500 Bitcoins in Seedcoin Funding 

Round, Coindesk, April 1, 2014. 94 George Samman, The World’s First Bitcoin Derivatives Platform Surpasses 

US$35M in Trades, PRWeb, January 21, 2014, 

http://www.prweb.com/releases/Bitcoin/Trading/prweb11494016.htm. 95 Alec Liu, Smart Oracles: Building Business Logic With Smart Contracts, July 16, 

2014, https://ripple.com/blog/smart-oracles-building-business-logic-with-smart-contracts/. 96 This latter point was made by Adam Luwin in an October 4, 2014 blog post, 

Bitcoin’s Killer Apps, available at http://blog.chain.com/post/99177371581/bitcoins-killerapps.