Signs of Progress: Working to Define the Utility Token as a Commodity
Despite the parade of litigation that cost American companies over $400 million during the Biden Administration’s “regulation by enforcement regime”, tokens are not securities. This week was another step toward a workable and transparent framework that would give market participants predicability, and encourage responsible innovation in the U.S. I was proud to present among peers of the CFTC Global Markets Advisory Committee, on behalf of the Digital Asset Markets Subcommittee, an outline of our recommended principles that would unambiguously define utility tokens and ensure that utility tokens are subject to the CFTC’s exclusive jurisdiction as a commodity.
Over the past year, the utility token working group of the GMAC’s Digital Market Asset Subcommittee assembled subject matter experts from traditional and digital asset industries and concluded that U.S. digital asset market participants deserve to know who their regulator is and which regulatory regime applies. At present, there is little clarity on which digital assets are considered to be commodities by the CFTC. This lack of clarity is undermining responsible innovation for digital assets in the U.S.; much of the industry’s understanding comes from ad hoc CFTC and SEC enforcement actions, which is to say that in many cases, market participants learn how a digital asset is classified only after there is already an alleged rule violation.
Together, these recommendations are an attempt to provide much-needed clarity to digital asset markets in the United States, and to allow for proactive compliance with applicable rules well before any given conduct leads to an investigation or enforcement. We recognize that new legislation could further clarify jurisdictional boundaries and regulatory responsibilities. However, these recommendations are designed to deliver clarity to market participants and entrepreneurs under the existing legislative framework in the United States.
Recommendation 1: Utility Token Definition and Safe Harbor
The working group proposed a definition of “Utility Token” based on six elements that, if satisfied, would assist market participants in determining whether a digital asset is subject to the CFTC’s jurisdiction as a commodity:
The digital asset, whether in a primary or secondary sale, must convey an immediately available, non-incidental consumptive use to the buyer, whether that consumptive use is a tangible or intangible product, service, discount, special access or other benefit (collectively referred to as “utility”), which may include certain governance and voting abilities, nascent products and services not yet in existence or the ability to access or use of any of the foregoing in the future.
Recommendation 2: Publication on CFTC Website
The definition of Utility Token set forth above should be published as a brochure, primer or other document on the CFTC’s Digital Asset information page on the CFTC website.
Recommendation 3: Incorporation of the Utility Token Definition in Future Rule Making
To the extent the CFTC undertakes rulemaking related to Utility Tokens, the working group recommends that it adopt this common definition and the criteria it sets forth.
Recommendation 4: Self Certification Process for Utility Tokens
The CFTC should have 10 business days to review a token self-submission before it is deemed certified, unless the CFTC notifies the market participant that it intends to issue a stay of the certification. In issuing a stay, the CFTC may notify the market participant that the digital asset presents novel or complex issues that require additional time to analyze, and the CFTC will have an additional 90 days to conduct the review. The CFTC would also be required to provide a 30-day comment period within the 90-day stay period in which the public may comment on the digital asset submission.
The CFTC should consider a formal consultation with the SEC. In particular, the agencies should consider reactivating the CFTC-SEC Joint Advisory Committee on Emerging Regulatory Issues.
A formal committee could encourage dialogue and coordination between the SEC and CFTC as they address jurisdictional issues related to digital assets, and utility tokens in particular.
Recommendation 5: Publication of an Official Approved List of Utility Tokens
A list of the Utility Tokens that have been duly self-certified or that the CFTC otherwise deems to have satisfied the Utility Token Safe Harbor should be published on the CFTC’s Digital Asset information page on the CFTC website. This will help deliver transparency and regulatory predictability to industry participants.
This session was a starting point in the discussion with more work to be done. While the recommendations provide a framework that, if achieved, would clearly result in a utility token being considered a (non-security) commodity under U.S. law, it is important to note that tokens falling outside of this utility framework in many (perhaps most) cases will still be commodities. The CFTC must continue to leverage its statutory authority to rigorously police commodity markets, including digital asset commodities, in cases of fraud, manipulation and abuse.
The future of digital asset legislation is being shaped as we speak. Do you have something to add? I would be happy to ensure your view is represented.
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Chris Perkins serves as Managing Partner and President of CoinFund, driving day-to-day excellence and enterprise scale by bridging the gap between cryptocurrency native investing and traditional finance.
He also advocates for the interests of the crypto ecosystem through his appointment to the CFTC’s Global Markets Advisory Committee and its Digital Asset Markets Subcommittee. He has also testified before Congress on crypto market structure design.
Chris is the co-inventor of the Composite Ether Staking Rate (CESR), which is the first interest rate benchmark of its kind in the crypto industry.
Prior to joining CoinFund, Chris served as Global Co-Head of Futures, Clearing and Foreign Exchange Prime Brokerage (FXPB) businesses at Citi. In this capacity, he was responsible for delivering leading listed derivative electronic and voice execution, comprehensive central clearing and #1 ranked OTC Clearing and FXPB services to top institutional clients.
Prior to joining Citi in 2008, Chris served as the U.S. Head of Derivatives Intermediation at Lehman Brothers. An Iraq war veteran, Chris served in the U.S. Marine Corps for nine years achieving the rank of Captain. Chris is the co-founder of Veterans in Digital Assets (VIDA) and Veterans on Wall Street (VOWS) (www.veteransonwallstreet.com), two international initiatives focused on veterans’ employment and empowerment. He has a Bachelor of Science degree from the U.S. Naval Academy, with distinction, and a Master of Arts degree in National Security Studies from Georgetown University. He is a member of the Economic Club of New York.
