CFTC Requests Public Comment on Ether and Ethereum Network | Practical Law

CFTC Requests Public Comment on Ether and Ethereum Network | Practical Law

The CFTC issued a request for input (RFI) seeking public comment and feedback on the technology, mechanics, and markets for virtual currencies other than bitcoin, specifically Ether and its use on the Ethereum network.

CFTC Requests Public Comment on Ether and Ethereum Network

Practical Law Legal Update w-018-0686 (Approx. 4 pages)

CFTC Requests Public Comment on Ether and Ethereum Network

by Practical Law Finance
Published on 13 Dec 2018 • USA (National/Federal)
The CFTC issued a request for input (RFI) seeking public comment and feedback on the technology, mechanics, and markets for virtual currencies other than bitcoin, specifically Ether and its use on the Ethereum network.
On December 11, 2018, the CFTC issued a request for input (RFI) seeking public comment and feedback on the technology, mechanics, and markets for virtual currencies other than bitcoin, specifically Ether and its use on the Ethereum network.
Ether is a virtual currency that was launched on the Ethereum network in 2015 and, according to the CFTC, has generally been one of the top three virtual currencies by market capitalization. The CFTC is hoping to better understand Ether and its unique attributes as an emerging virtual currency, particularly as it compares to bitcoin, in connection with the CFTC's oversight of the derivatives markets and regulatory policy development.
The CFTC is seeking feedback on a series of specific questions relating to Ether and the Ethereum network, but states in the RFI that it is open to any relevant comments on related topics that are not specifically mentioned.
The specific topics for comment include:
  • The purpose and functionality of Ether and the Ethereum network, especially as compared to bitcoin, including:
    • how the Ethereum network is currently being used by the developer community;
    • how the Ethereum network is currently being used by market participants;
    • whether there are any commercial enterprises that are using Ether to power economic transactions, and if so, how it is being recorded; and
    • how many confirmations on the Ethereum blockchain are sufficient to wait to ensure that the transaction will not end up on an invalid block.
  • The similarities and differences between the underlying technology of Ether and the Ethereum network and the underlying technology of bitcoin, including:
    • whether the Ethereum network faces scalability challenges;
    • whether a proof-of-stake consensus mechanism has been tested or validated at scale;
    • whether there is potential fragmentation within the Ether market due to disagreements within the Ether community over the proposed transition to a proof-of-stake consensus model from the proof-of-work consensus mechanism; and
    • whether the Ethereum network is capable of supporting the continued development and increasing use of smart contracts.
  • The similarities and differences between the governance of the Ethereum network and the governance of the bitcoin network.
  • Considerations relating to the markets, oversight, and regulation of Ether and the Ethereum network, including:
    • whether there are protections to prevent individuals from intentionally disrupting the normal function of the Ethereum network;
    • whether there are impediments or risks in the reliable conversion of Ether to legal tender and whether those impediments or risks impact regulatory considerations;
    • whether, due to the evolving nature of the Ether cash markets underlying potential Ether derivatives contracts, there are sufficient commercial risk-management practices for a derivatives contract on Ether;
    • whether there may be potential impacts on Ether or the Ethereum network resulting from the listing or trading of derivatives contracts on Ether;
    • whether there has been any trader conduct in the international Ether market that may raise market risks and should be monitored by regulators; and
    • what factors should be considered regarding the CFTC's ability to monitor trading in derivatives contracts on Ether and the underlying Ether cash markets.
  • Considerations relating to cybersecurity and custody of Ether and the Ethereum network, including:
    • whether there are security issues particular to the Ethereum network or Ethereum-supported smart contracts;
    • whether there are best practices for the security of Ethereum wallets; and
    • whether there are best practices for conducting an independent audit of Ether deposits.
According to the CFTC, the information received as a result of the RFI will help to "better inform the work of the Commission, including the evaluation of potential derivative contracts."
The CFTC noted in the RFI that in June 2018, the Director of the SEC's Division of Corporate Finance, Bill Hinman, delivered a speech in which he opined that based on his understanding of bitcoin and Ether, none of the offers and resales of bitcoin nor the offers and sales of Ether constitute securities transactions (see Legal Update, SEC Director, Division of Corporation Finance, Discusses ICOs and Digital Assets). The CFTC is seeking to inform its own understanding of Ether in their evaluation of how to approach its potential regulation.
In October 2017, the CFTC issued a primer on virtual currencies that set out the CFTC's position regarding its oversight of these instruments and provided an educational overview of virtual currencies such as bitcoin (see Legal Update, LabCFTC Issues Primer on CFTC Regulation of Virtual Currencies).
The CFTC also issued a press release on the RFI.
Public comment must be received by February 15, 2019.