CFTC Commissioner Quintenz Speaks on Smart Contract Regulation

On October 16, 2018, Commodity Futures Trading Commission (CFTC) Commissioner Brian Quintenz gave a wide-ranging speech at the GITEX Technology Week Conference in Dubai addressing a number of key issues faced by the CFTC in considering how to regulate smart contracts.  While he acknowledged that there are still many questions to be answered in respect of smart contract regulation, Commissioner Quintenz expressed a number of important views that should make market participants pause before assuming that activity in smart contracts will avoid CFTC scrutiny.

Commissioner Quintenz explained that, in his view, the first step the CFTC should take when considering a smart contract is to understand the basic nature of the contract and whether it is within the CFTC’s jurisdiction.  For example, is the contract a product that must be traded on an exchange?  Does the protocol itself perform the functions of an exchange, which may trigger registration requirements?  While the answers will of course be different for every smart contract, Commissioner Quintenz made clear that he believes existing CFTC regulations can and should be applied to such contracts where appropriate.

Another question Commissioner Quintenz addressed is the question of who is responsible for ensuring that certain smart contract-based activities comply with the law.  He explained that it is not only users of smart contracts who may be subject to CFTC regulation, but also those who develop smart contracts.  The key issue here, Commissioner Quintenz believes, is whether smart contract code developers, when creating the code, could reasonably foresee that it would likely be used by U.S. persons in a way that would violate CFTC regulations.  If this were the case, he believes the CFTC would have the ability to prosecute those individuals for aiding and abetting violations of CFTC regulations.  Commissioner Quintenz acknowledged the fact that individual users may continue to use the software to execute their own contracts that are in violation of the CFTC’s regulations following a CFTC enforcement action against the purveyor of the underlying code.  However, Commissioner Quintenz noted that pursuing enforcement actions against individual users could prove inefficient and ineffective, which represents another regulatory challenge for the CFTC. 

The central theme of Commissioner Quintenz’s speech, however, was to encourage those engaging in smart contracts (either as developers, users or otherwise) to engage with the CFTC whenever there is even a question of whether CFTC regulations may be implicated.  It is clear that he wants the CFTC to stay abreast of developments, and recognizes that their best bet to do so is with proactive engagement from the industry.  Indeed, he specifically encouraged developers of smart contract code to engage with the CFTC through its LabCFTC initiative to determine if or how the code’s product may fit within the CFTC’s regulatory framework.  And he also raised the possibility of rethinking the CFTC’s regulations or approach to enforcement given these relevant and promising technological developments.  Whether that will ultimately happen, and/or whether the CFTC will instead seek to shape the industry primarily through enforcement, is one of the key questions facing the industry, and Commissioner Quintenz recognizes that it is a question that remains unanswered.