The Commodity Futures Trading Commission (CFTC) was one of the more vocal US government entities on the subject of bitcoin in 2014, holding a hearing to discuss its role in options and futures, claiming regulatory oversight over the derivatives market and speculating on how it might intervene in the digital currency ecosystem.
But while the CFTC and Wetjen in particular have been open with their views on bitcoin, the organisation as a whole has been less clear on how it will proceed with providing more clarity to bitcoin businesses going forward.
Outstanding questions include how bitcoin fits under existing definitions of commodities, what would inspire the agency to investigate potential market manipulation and how it views activities in the global bitcoin derivatives market.
During a new interview with CoinDesk, Wetjen opened up about these issues and more, although he suggested that the agency itself currently has no way forward on any of these concerns. Rather, it is the bitcoin industry that will decide when and how further action will occur.
“It depends on whether there is anything bitcoin-related for the CFTC to consider. At the moment, there's nothing before the CFTC itself to decide upon.”
He suggested that the CFTC would consider platforms and contracts that incorporate bitcoin to examine how they fall under the Commodity Exchange Act (CEA), but noted that the agency can only react to proposals it has received. To date, the CFTC has approved only one bitcoin derivative, that issued by New Jersey-based swap execution facility TeraExchange.
The interview, however, follows a year when bitcoin derivatives and other forms of advanced financial trading were more widely embraced by the industry globally as a way to hedge against volatility, thereby helping to stabilize the price of bitcoin.
Wetjen is one of four CFTC commissioners appointed directly by the US president and Senate, and accountable to organisation chairman Timothy Massad.
‘No choice’ but to examine bitcoin
While Wetjen admitted he has been personally excited to learn more about the technology underlying bitcoin, he said the agency itself had “no choice” but to focus on the subject last year.
He explained that, when faced with TeraExchange’s filing for its now-approved derivatives contract, the organisation had to respond appropriately.
“In that respect, the issue was forced upon us in some ways,” he said.
However, Wetjen said that the 9th October hearing that addressed bitcoin was more of a passion project given his fascination with digital currency.
“I had an interest in this emerging technology and I believed it was important to have a public discussion about the technology and how it might impact our work at the Commission. As a vehicle for that discussion, I used an advisory committee that I sponsor,” he explained.
In this instance, the hearing also turned out to interest others. More than 5,000 people logged on to view the webcast, a figure that was said to be the largest the organisation has had for any of its meetings.
The role of market manipulation
Of note, is that, while the CFTC has stated that bitcoin is a commodity, the agency has yet to define precisely what type of commodity it is.
As noted by New York Law School professor Houman Shadab, author of one of the more comprehensive papers addressing bitcoin and the derivatives market, the CEA classifies commodities into three categories: agricultural commodities, such as soybean and wheat; excluded commodities, such as prices and price indices; and exempt commodities, a catch-all term that includes precious metals.
Wetjen indicated that while bitcoin has attributes of both excluded and exempt commodities, the CFTC has not yet had the opportunity to provide a definitive answer.
Still, he outlined how he thinks such a decision could come to pass, stating:
“I believe what might precipitate more serious consideration of the issue is if someone from the market were attempting to manipulate the bitcoin cash market to benefit a position that they have in a bitcoin-derivative position. CFTC staff would be responsible for investigating and determining whether that activity constitutes a violation of the CEA.”
“At that point, staff would begin a more analytical approach to determine where bitcoin fits into our statute’s commodity definition,” he explained.
Bitcoin under the CEA
Barring such an instigating event, Wetjen emphasized how bitcoin is currently captured under the CEA due to the broad nature of the document. In particular, he noted a passage he believes best provides evidence that bitcoin falls under its mandate.
"One of those component parts provides that a commodity includes any ‘rights or interests in which a contract for future delivery is or will be dealt in,’ and it's that part of the definition that I think best captures something like bitcoin," he said.
Still, he stressed the limited the nature that such an interpretation affects the CFTC, stressing that the CEA grants the commission the authority only to regulate contracts for sale of a commodity at a future date that are then traded on regulated exchanges.
The CFTC, he said, does not have extensive oversight over bitcoin exchanges that do not offer derivatives contracts.
“Where market participants are simply buying and selling bitcoin on an exchange, we wouldn't have oversight responsibilities for those exchanges,” he added.
Here again, the subject of market manipulation, and how it could inspire the CFTC to further examine bitcoin, was reiterated. Wetjen, for example, said that the CFTC does have anti-manipulation and fraud authority in the cash markets.
"In an instance where there are manipulative or fraudulent activities in the cash market, that is the type of case where the definition of a commodity comes into play and we can use that authority to prosecute bad behavior in the cash market," Wetjen clarified.
No intention to 'skew market'
Wetjen also speculated on the role the CFTC could play in helping to shape an industry that is still in its early stages.
For example, he suggested that he doesn’t believe that regulation will encourage already-regulated companies, such as TeraExchange, to move quickly in the market, thereby potentially threatening any startups.
“I don't really look at it that way. If someone wants to hedge their bitcoin exposure, and if they're US persons, then they need to do that on a regulated, licensed exchange, such as a swaps execution facility, designated contract market or a foreign board of trade,” he said, adding:
”We're not trying to skew the market. We're trying to make sure that our statutory mandate is being met and that the public is being protected accordingly.”
However, he issued a somewhat stern warning to US bitcoin merchants that may already be using derivatives platforms that aren't yet registered with the CFTC.
"If they are a US person, trading a derivative contract and the derivative contract is listed by a company that is not licensed by the CFTC, then they should be concerned. Depending on the facts, there could be a violation of our rules," he said.
Further action 'far off'
Generally positive about the ecosystem as a whole, Wetjen speculated that his agency won’t likely be bringing any added attention to digital currencies anytime soon.
When asked how it would move forward on the subject in 2015, Wetjen reiterated that this is dependant on the bitcoin market itself.
"Looking out over the first quarter of next year, I, for one, don't see compelling reasons to host another meeting, but things could change," he said.
For now, this means the CFTC may be simply interested observer of the bitcoin market even as larger questions linger, a role that Wetjen suggested perhaps best defines himself at the moment.
“There are plenty of other use cases for the underlying technology beyond or apart from the need for hedging against changes in the value of bitcoin. The other potential uses of the bitcoin technology are as interesting to me as the role we have as an agency.”
Mark Wetjen image via the CFTC; US capitol via Shutterstock