Commodities Futures Trading Commission (CFTC) Commissioner Brian Quintez made a speech that was largely about blockchain smart contracts on 16 October 2018. Quintez concludes that prediction markets powered by blockchain smart contracts, such as Augur which is the #52 cryptocurrency with a market cap of USD 139 million, are under CFTC jurisdiction and can be classified as binary options.
Specifically, Quintez says “Let’s apply the general analytical framework I’ve described above to our earlier example of the “prediction market.” In this hypothetical, after performing a facts and circumstances analysis, the CFTC has determined that the smart contracts executed on the blockchain are binary options, which are within its jurisdiction. Binary options are a type of option whose payoff is either a fixed amount or zero. For example, there could be a binary option that pays $100 if the price of gold is above $1,200 per ounce on a specified date or zero otherwise.
Moreover, the contracts in our scenario likely qualify as event contracts that are based upon the occurrence or non-occurrence of an event (as opposed to a price of a commodity). Event contracts have a unique spot in CFTC jurisprudence because of the public policy concerns they raise. For example, 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”.
Indeed, the Augur prediction market has already been in the spotlight due to assassination bets being created. This opens up the possibility that any sort of bet can be created on Augur, no matter how immoral it is, especially since Augur burned the kill switch for the platform, making it decentralized and unstoppable. Clearly, the CFTC would consider immoral bets on Augur contrary to the public interest, and therefore illegal.
Quintez further explains who is responsible when smart contract powered prediction markets violate the law. “I think the appropriate question is whether these 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. In this particular hypothetical, the code was specifically designed to enable the precise type of activity regulated by the CFTC, and no effort was made to preclude its availability to U.S. persons. Under these facts, 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”. This brings up the possibility that programmers who create blockchain prediction markets, such as the Augur developers, could end up in a legal battle with the United States government.
Quintez compares blockchain prediction market developers to someone who lends their keys to a bank robber. As a secondary layer of enforcement, Quintez speculates that the CFTC could sue individuals who use prediction markets, but he admits this would probably be ineffective due to the decentralized, anonymous, and global nature of blockchain prediction markets.
Apparently, LabCFTC has been created to engage with blockchain developers, to prevent blockchain platforms that violate the law from being created in the first place. However, Quintez says if engagement does not occur, then enforcement is the only option.
A final important note in Quintez’s speech is he does not consider code to be law, contrary to the thinking of many blockchain and crypto users who consider code to be a form of law. Quintez says “I have heard some say that “the code is law,” meaning that if the software code permits it, an action is allowed. I disagree with this fundamental premise. Case law, statutes, and regulations are the law. They apply to the code, just as they apply to other activities, contracts, or agreements”.
Essentially, just because something is coded into a blockchain or crypto platform, that does not make it law, and the laws of the land are definitely superior, at least in the CFTC’s opinion.
Quintez ends the speech on a somewhat positive note, saying “Smart contract applications on blockchain networks hold great promise. They have the potential to open up new markets and create efficiencies in existing ones. At the same time, they also raise novel issues of accountability that users and policymakers alike must consider”.
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