On October 16, 2018, Commissioner Brian Quintenz of the Commodity Futures Trading Commission (“CFTC”) shared his views on smart contract regulation by the CFTC. In his speech at the 38th Annual GITEX Technology Week Conference, in discussing a hypothetical where code in a smart contract was specifically designed to enable a type of activity regulated by the CFTC, and no effort was made to preclude its availability to U.S. persons, Quintenz, suggested that the CFTC could prosecute developers of smart contract code if such developers could have reasonably foreseen uses that violate CFTC regulations.
Quintenz began by discussing the dynamics involved in applying the CFTC’s existing regulatory framework to products of new technologies. Within this regulatory landscape, Quintenz noted that smart contracts powered by the blockchain are of particular concern. For purposes of his discussion, he defined a “smart contract” as a “computer code containing all terms of the contract and is self-enforcing – meaning the software can execute the terms of the contract without additional input from the parties.”
Notably, Quintenz clarified that smart contracts have countless potential forms and applications, many of which are outside of the CFTC’s jurisdiction. However, regarding smart contracts that fall within the CFTC’s jurisdiction, he stated that the CFTC could hold the code developers accountable for certain violations of CFTC regulations resulting from the use of their smart contract protocol.
Quintenz acknowledged the argument that developers of smart contract code merely created the underlying protocol and have no control over how individual users create and enter into smart contracts. Such developers may argue that if a particular smart contract violates CFTC rules, its individual users – not the code developers – should be held liable.
Countering this argument, Quintenz explained that the more appropriate question is whether smart contract code developers “could reasonably foresee, at the time they created the code, that it would likely be used by U.S. persons in a manner violative of CFTC regulations.” If so, he suggested, the CFTC could hold smart contract code developers liable for aiding and abetting violations of CFTC regulations. He further noted that prosecuting individual users is an “unsatisfactory, ineffective course of action” from a practical standpoint because the blockchain is an anonymized, global network. Quintenz encouraged developers to engage with the CFTC and work together to fit such new technological innovations into the current legal framework or to rethink its existing regulations.
While Quintenz’s remarks represent his own views and not the official views of the CFTC, they show a line of analysis where it may be possible for developers of smart contract code to be held accountable for uses of their blockchain-based technology, even by unrelated third parties, in ways that raise CFTC regulatory concerns.