CFTC Commissioner Warns Smart Contract Developers Of Upcoming Regulation

  • U.S. CFTC Commissioner Brian Quintenz recently gave a talk about how blockchains, smart contracts, and prediction markets will be regulated.
  • The discussion hints at possible issues for Augur, the decentralized prediction market built on Ethereum.

Yesterday (October 16, 2018), U.S. CFTC Commissioner Brian Quintenz spoke at the 38th Annual GITEX Technology Week Conference in Dubai. During his talk, he discussed the complicated relationship between the Commodities Futures Trading Commission (CFTC) and smart contracts.

Blockchain technology is presenting new challenges for regulators, and this talk shows us how the CFTC is approaching the problem. A transcript of the full talk can be found here, and goes into detail on how the CFTC will be regulating prediction markets like Augur.

Quintenz started out by discussing the problems with regulating smart contracts. Unlike traditional markets, there aren’t cut and dry laws that govern smart contract legality. Furthermore - there’s a difference in ownership. Traditional CFTC regulations interact with exchanges, swap dealers, futures commission merchants, clearinghouses, and fund managers. With smart contracts, it’s not clear who the responsible parties are. Is it the core developers, the users, or the miners?

His comments hint that the miners and users can not be responsible, since they are anonymous to the network. This doesn’t necessarily mean however, that anonymity helps their case:

“Depending upon the facts and circumstances, this activity could present regulatory issues. It could look like providing investment advice, or, given the anonymity of the predictions, could be used nefariously to facilitate insider trading.“

Brian Quintenz, CFTC Commissioner

To illustrate the complex nature of this situation, Quintenz gave an example of a prediction market built on smart contracts. He didn't mention it explicitly, but he is almost definitely talking about Augur, the decentralized prediction market built on Ethereum.

Regulating Augur

Augur presents many issues for regulators, especially after assassination markets started popping up. Quintenz explained how the CFTC will definitely regulate these kinds of predictions:

“Event contracts based upon war, terrorism, assassination, or other similar incidents may be contrary to the public interest – in which case, the CFTC can prohibit an exchange from offering the contract.”

Brian Quintenz, CFTC Commissioner

Another issue with regulating smart contracts is that they’re aren’t technically financial products. Augur could claim that they’re only publishing code, and how users interpret it is up to them. Quintenz however, doesn't buy this argument

if the contract is a product within the CFTC’s jurisdiction, then regardless of whether it is executed via a written ISDA confirmation or software code, it is subject to CFTC regulation.

Quintenz concludes that the core developers could be held responsible for the products on their platform - particularly if the platform allows U.S. users, or doesn’t prevent U.S. citizens from participating: “I think a strong case could be made that the code developers aided and abetted violations of CFTC regulations. As such, the CFTC could prosecute those individuals for wrongdoing.”

It’s worth mentioning that this is not the CFTC's final legal decision. The lines above are only quotes from a talk given at a conference by a member of the CFTC. Although this doesn’t mean that smart contracts will be investigated, it hints at the direction in which regulators are heading.

Brazil’s Securities Watchdog Blocks Binance From Offering Derivatives

  • Brazil's SEC has blocked Binance from offering derivatives products in the country.
  • Brazilian regulators ruled that derivative contracts are securities, regardless of whether they involve crypto-assets. 

Brazil’s equivalent of the U.S. Securities and Exchange Commission, the Comissão de Valores Mobiliários (CVM), has blocked leading cryptocurrency exchange Binance from offering derivative products in the country. 

According to an order published July 6, reported on by local news outlet Portal do Bitcoin, Brazilian regulators claimed derivative contracts are securities, regardless of whether the underlying assets are cryptocurrencies. 

The order reads, 

It remains evident that there are indications that the company BINANCE FUTURES, through the page '"" on the world wide web, captures customers residing in Brazil with a public offering of derivative intermediation services.

The order continued, adding that Binance “does not hold authorization” to act as an intermediary for securities in the country. 

The CVM determined that Binance must immediately suspend the “broadcasting of any public offering of securities intermediation services,” including derivatives products or else face a daily fine of R $1,000 ($186). 

The order fails to clarify whether Binance’s spot trading services will continue to be allowed to operate in Brazil, as opposed to only banning their derivative offerings. 

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