Various government agencies, departments, and courts have classified bitcoin differently. China Central Bank banned the handling of bitcoins by financial institutions in China in early 2014. In Russia, though cryptocurrencies are legal, it is illegal to actually purchase goods with any currency other than the Russian ruble. Regulations and bans that apply to bitcoin probably extend to similar cryptocurrency systems.
On December 1, 2017, the CFTC issued a statement concerning the launch of bitcoin futures contracts on three CFTC-regulated futures exchanges – the CME, the CFE and the Cantor Exchange, cautioning that “market participants should take note that the relatively nascent underlying cash markets and exchanges for bitcoin remain largely unregulated markets over which the CFTC has limited statutory authority. There are concerns about the price volatility and trading practices of participants in these markets. We
Still elsewhere, the Commodity Futures Trading Commission, in a footnote, quoted me saying "Just because you mumble the word 'blockchain' doesn't make otherwise illegal things legal," which I hope is now an official CFTC position. And here is Tyler Cowen on bitcoin volatility and Siegel's paradox: "Volatility is a feature of Bitcoin, not a bug, and that is in part for reasons that have nothing to do with speculation or bubbliness, but rather follow from the contours of the utility function." And: "No, a Guy Didn't Scam $1 Million by Selling Chuck E. Cheese Tokens as Bitcoins."
So far, these derivatives market have only been a niche occupied by crypto enthusiasts. That is until one of the newcomers, Crypto Facilities, and an incumbent in the derivatives market have joined forces: Crypto Facilities and the CME Group. The CME Group (controlling, for example, the Chicago Mercantile Exchange that has been around for more than a century) is a large-scale business that is officially regulated and audited by the US financial authorities. It settles its contracts in fiat money rather than cryptocurrency, thus enabling non-crypto experts to speculate on Bitcoin.
Each Fund intends to distribute its net investment income and capital gains to shareholders at least annually to qualify for treatment as a RIC under the Code. Under current law, provided a Fund is not treated as a “personal holding company” for U.S. federal income tax purposes, the Fund is permitted to treat on its tax return as dividends paid the portion of redemption proceeds paid to redeeming shareholders that represents the redeeming shareholders’ portion of the Fund’s accumulated earnings and profits. This practice, called tax “equalization,” reduces the amount of income and/or gains that a Fund is required to distribute as dividends to non-redeeming shareholders. Tax equalization is not available to a Fund treated as a personal holding company. The amount of any undistributed income and/or gains is reflected in the value of a Fund’s Shares. The total return on a shareholder’s investment will generally not be reduced as a result of a Fund’s use of this practice.
On September 17, 2015, the CFTC provided clarity regarding the regulatory treatment of bitcoin in the Coinflip civil enforcement case. There the CFTC determined that bitcoin and other virtual currencies are regulated as commodities under the CEA. Based on this determination, the CFTC applied CEA provisions and CFTC regulations that apply to a bitcoin derivatives trading platform. Also of significance, the CFTC took the position that bitcoin is not encompassed by the definition of currency under the CEA and CFTC regulations. The CFTC defined bitcoin and other “virtual currencies” as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction. Bitcoin and other virtual currencies are distinct from ‘real’ currencies, which are the coin and paper money of the United States or another country that are designated as legal tender, circulate, and are customarily used and accepted as a medium of exchange in the country of issuance.” On July 6, 2017, the CFTC granted LedgerX, LLC an order of registration as a Swap Execution Facility for digital assets and on July 24, 2017, the CFTC approved Ledger X, LLC as the first derivatives clearing organization for digital currency. On September 21, 2017, the CFTC filed a civil enforcement action in federal court against a New York corporation and its principal, charging them with fraud, misappropriation, and issuing false account statements in connection with a Ponzi scheme involving investments in bitcoin, which the CFTC asserted is a commodity subject to its jurisdiction.
All other procedures set forth in the Authorized Participant Agreement must be followed in order to receive the next determined NAV. The requisite Fund Securities and the Balancing Amount (minus a redemption Transaction Fee or additional charges for requested cash redemptions) or the Cash Redemption Amount, as applicable and at the discretion of the Advisor, will be transferred by the second (2nd) NSCC Business Day following the date on which such request for redemption is deemed received. Cash-only redemption orders and Global Fund orders may not be placed through the Clearing Process.
• Intellectual property rights claims may adversely affect the operation of the Bitcoin Network. Third parties may assert intellectual property rights claims relating to the operation of the Bitcoin Network. Regardless of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in the Bitcoin Network’s long-term viability or the ability of end-users to hold and transfer bitcoin may adversely affect the price of bitcoin and adversely affect the price of the bitcoin futures contracts held by the Fund.
Under current law, income of a RIC that would be treated as UBTI if earned directly by a tax-exempt entity generally will not be attributed as UBTI to a tax-exempt entity that is a shareholder in the RIC. Notwithstanding this “blocking” effect, a tax-exempt shareholder could realize UBTI by virtue of its investment in a Fund if Shares in a Fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code section 514(b).
Trader A is a producer of pork bellies. In order to insure herself against a price drop in pork bellies in the future, she enters a futures contract with Trader B. Trader B uses these pork bellies to manufacture sliced breakfast bacon. Thus, he is not worried that prices might fall in the future – his worry is that prices will go up. Both traders agree that Trader A will sell a metric ton of pork bellies for 1,000 USD 3 months from now. This increases security for both of their businesses. Because a futures contract is a binding contract between two parties, neither party can drop out of the contract: Even if the price for pork bellies is 1,200 USD at the time of execution, trader A is still contractually obliged to sell for 1,000 USD.