The US Commodity Futures Trading Commission (CFTC) has recently been expanding its role into digital commodities. The latest member of the CFTC Technology Advisory Committee (TAC) is Paul L. Chou, co-founder and CEO of the Bitcoin institutional trading and clearing platform, LedgerX.
The TAC was created in 1999 to advise the Commission on the impact and implications of technological innovations in financial services and the futures markets. Furthermore, the Committee is responsible for the appropriate legislative and regulatory response to increasing use of technology in the markets.
There are currently 21 TAC members, which include representatives from futures exchanges, self-regulatory organizations, financial intermediaries, market participants, and traders. Members are appointed and removed by a vote within the Commission at any time.
In addition to Chou, other prominent members include Goldman Sachs managing director Pierre Lamy, DTCC Data Repository CEO Marisol Collazo, CME Group CCO Bryan Durkin, Credit Suisse managing director Jeffrey Jennings, and FINRA Executive Vice President of Transparency Services Steven A. Joachim.
Chou has degrees in Computer Science and Mathematics from MIT and began his career at Goldman Sachs, designing and working with quantitative trading.
Chou discovered bitcoin in 2011, before co-founding LedgerX in New York during 2013. His mission was to build the first CFTC-regulated exchange and clearinghouse for trading bitcoin options, a goal no company has yet achieved. Early investors in the exchange include Google Ventures and Lightspeed Venture Partners.
"I am fortunate to have the opportunity to serve on the CFTC's Technology Advisory Committee. The CFTC has taken the lead with this emerging asset class to develop a regulatory framework for Bitcoin derivatives. The inclusion of blockchain as a topic for the upcoming TAC meeting is a positive development for the ecosystem."
- Paul L. Chou, LedgerX CEO
The entrepreneurs appointment is just in time for an upcoming TAC public meeting, that will take place in Washington DC on Jan 26. One of the three key areas being discussed is blockchain technology, and the potential application of distributed ledger technology to the derivatives market. As a representative member, Chou’s primary concern will be to convey the views and interests of the organization he represents.
The recent appointment may not come as a surprise, as LedgerX’s management team includes some CFTC alumni. Former Commissioner and Chairman of the CFTC, James Newsome, who was also President and CEO of the New York Mercantile Exchange (NYMEX), is an independent director of LedgerX. In addition, former CFTC Commissioner, Mark Wetjen, is on the board of the LedgerX holding company, Ledger Holdings Inc.
When Wetjen was the CFTC Commissioner, back in 2014, there were several platforms registered to list Bitcoin-denominated contracts. “There are a number of merchant businesses who now accept Bitcoin as payment for goods they sell. For many merchants, fluctuations in the value of Bitcoin have created a demand for a derivatives market that would allow for hedging against those fluctuations,” Wetjen stated at the time.
“Bitcoin raises many important issues for law enforcement agencies, tax authorities, and other regulators. The CFTC’s jurisdiction is implicated when it is used in a derivatives contract in our markets.”
- Timothy Massad, CFTC Chairman
The number of registered platforms has since dwindled. While there are many Bitcoin companies operating operating under the jurisdiction of the US Securities and Exchange Commission (SEC) or the Financial Crimes Enforcement Network (FinCen), few now operate under the CFTC's jurisdiction.
LedgerX and TeraExchange appear to be the only platforms with temporary approval to operate a Swap Execution Facility (SEF), the first step in obtaining a derivatives clearing organization license (DCO) to operate a federally regulated bitcoin derivatives exchange and clearing house.
With so few bitcoin participants under CFTC regulation, actions against derivatives exchanges didn’t arise until Sept 2015, when the Commission reported enforcement actions against two trading platforms.
On Sept 17, the Commission brought the first action against an unregistered bitcoin options trading platform, Coinflip Inc. trading as Derivabit, and its CEO Francisco Riordan. With this first landmark move, the Commission also declared virtual currencies a commodity covered by the Commodity Exchange Act (CEA).
Subsequently, on Sept 24 the CFTC sanctioned the first bitcoin derivatives platform, TeraExchange, on the grounds that its inaugural transaction was a pre-arranged “wash” trade. TeraExchange had previously received temporary SEF approval, in Sept 2014, and executed the illegal transaction in Oct 2014.
“We did not object to a bitcoin swap being traded as long as the contract—which was based on an index of bitcoin exchanges-- was not susceptible to manipulation, and the platform was duly registered.”
- Timothy Massad, CFTC Chairman
Even with a small number of players under its jurisdiction, the CFTC has been keeping an eye on bitcoin and the blockchain for quite some time. In the December 2014 testimony before the U.S. Senate Committee on Agriculture, Nutrition & Forestry, Chairman Timothy Massad assured the committee that the CFTC would “continue to respond to market developments such as new products,” naming bitcoin and virtual currencies as examples.
Massad then delivered a keynote speech before the World Federation of Exchanges Annual Meeting in Oct 2015, where he stated that the agency has “actually taken a number of steps regarding Bitcoin.” He added that “bitcoin also raises interesting possibilities with respect to the application of blockchain technology in financial markets”
With a bitcoin industry representative representative on the TAC, the CFTC will continue to keep an eye on bitcoin and blockchain technology.