August 21, 2018
by Katherine Cooper

In case the intrepid and hardy souls bravely blazing entrepreneurial paths in the New World of virtual currencies do not have enough regulatory hazards to navigate, one few seem to have considered to date is the possible application of the Model State Commodity Code (“Model Code”).[1]  Depending on how its thirty-three year old provisions are interpreted, the Model Code’s prohibition on the sale of commodities for speculative or investments may possibly be applied to some virtual currency businesses.

The Model Code was adopted by the North American Securities Administrators Association (“NASAA”)[2] in 1985 as a model law to be adopted by the states.  NASAA’s adoption of the Model Code followed the passage of the Futures Trading Act of 1982[3] which made clear that the states had jurisdiction over commodities transactions not regulated by the Commodity Exchange Act (“CEA”) to plug perceived gaps in federal efforts to combat commodity fraud.[4]  The Bullion Reserve of North America (“Bullion Reserve”) and International Gold Bullion Exchange (“IGBE”) scams of 1983 brought home the need for additional anti-fraud authority for commodities dealings.[5]  Some 50,000 customers lost approximately $100 million when it turned out that there was little or no gold in the Bullion Reserve and IGBE vaults.[6] 

The Model Code has been adopted in one form or another by twenty-two states.[7]  Because many states tinkered with the language and did not adopt the Model Code verbatim, however, considerable differences exist between the adopting states.[8]

To combat not only past fraudulent commodity schemes but also new and novel scams to be developed in the future,[9] the Model Code provides for a broad, outright prohibition on the sale of “any commodity under any commodity contract.”[10]  The definitions of the terms “commodity” and “commodity contract” together with two sets of exemptions – one exempting regulated persons and another exempting certain kinds of transactions less likely to be part of a fraudulent scheme – pare back the Model Code’s broad prohibition to allow what was thought of at the time to be legitimate commodity businesses.

The definition of the term “commodity contract,” for instance, narrows the scope of the Model Code’s broad prohibition by limiting the term to the purchase or sale of a commodity “primarily for speculation or investment purposes and not for use or consumption by the purchaser.”  “[I]n the absence of evidence to the contrary,” however, a “commodity contract” should “be presumed to be offered or sold for speculation or investment purposes.”  Another limiting aspect of the definition of “commodity contract” is that it excludes transactions where delivery of the “total amount of each commodity to be purchased” is made within twenty-eight days to the buyer.  The drafters of the Model Code saw such “cash-and-carry” commodity transactions as less vulnerable to fraud because the buyer receives actual delivery in a fairly short timeframe and is not reliant on the seller being able to produce the commodity at some distant time in the future.[11]

The Model Code’s list of exempt persons who are exempt from the ban on offering to sell “commodity contracts” further restricts the broad prohibition.  The list includes CFTC-registered futures brokers, SEC-registered broker-dealers, members of futures exchanges, federal- or state-chartered banking institutions, or “a person registered as a commodity broker-dealer or commodity sales representative” under the regulatory scheme proposed in Part III of the Model Code.[12]

Finally, the Model Code’s list of exempt transactions further reduces its broad prohibition, although none of the exempt transactions appear relevant to virtual currency businesses.[13]  The Model Code provides for temporary or permanent injunctive relief, civil penalties, and disgorgement while also making willful violations of the code a felony.[14]

The possible issue for virtual currency businesses is that the Model Code’s definition of the term “commodity” may encompass virtual currencies.  The Model Code defines the term “commodity” to include, in addition to agricultural items, metals, minerals, gems, fuel, and foreign currency, “all other goods, articles, products, or items.”[15]  If a  virtual currency is deemed to be a “good, article, product, or item,” then the Model Code’s broad prohibition would seem to apply if the purchase is not for immediate “consumption,” i.e., use, unless one of the narrowing aspects of the definition of “commodity contract” applies, or the virtual currency is sold by one of the exempt-regulated institutions.

As few regulated institutions are dealing in  virtual currencies, the most likely way to avoid the Model Code’s broad prohibition would be to deliver the full amount to the buyer within twenty-eight days to fall under the “cash-and-carry” exception.  But absent the transfer of the full amount of the  virtual currency to a wallet that the buyer personally controls, it is unclear whether other delivery arrangements would qualify.  For instance, would the seller’s mere crediting  virtual currency to an account that the seller maintains for the buyer qualify for the “cash-and-carry” exception?  Bullion Reserve and IGBE, for example, did just that, even going so far as to issue customers certificates representing title to gold in their vaults, when there was no gold in the vaults.

The CFTC’s pending proposed interpretation of the term “actual delivery” in the context of leveraged sales of virtual currency[16] under the CEA’s retail commodity transactions provisions[17] does not appear to be helpful.  The retail commodity transactions provisions were added to the CEA by Section 742 of the Dodd-Frank Act.[18]  In doing so, Congress borrowed from the Model Code the notion of exempting “cash-and-carry” commodity transactions from its blanket prohibition on the sale of leveraged commodity transactions to retail customers.[19]

For “actual delivery” to occur, under the examples the CFTC provides in its proposed interpretation, the entire amount of the virtual currency purchased must move within twenty-eight days on the public blockchain from (i) the seller’s wallet to the buyer’s wallet; or (ii) from the seller’s wallet to a wallet held for the benefit of the buyer, but only if the wallet held for the benefit of the buyer is not controlled or operated by the seller or one of its affiliates.[20]

The CFTC’s proposed examples of where “actual delivery” does not occur is where only a book entry is made on the seller’s books and records, even if the agreement between the seller and buyer “purports to create an enforceable obligation to deliver the commodity to the purchaser.”[21]

Of course, the CFTC’s proposed interpretation is (i) still just a proposal; and (ii) not legally controlling on the question of what constitutes “actual delivery” of a virtual currency under the Model Code.[22]  Also, the considerable variability of the text among the states that have adopted the Model Code must be taken into account.  But given the common origin and rationale of the two provisions, it is not inconceivable that a state agency administering the Model Code in its state could argue that a virtual currency business providing services to residents of its state does not qualify for the “cash-and-carry” exception where the business (i) sells virtual currency to its customers, (ii) holds the virtual currency sold to its customers in accounts the business carries for those customers, and (iii) the sale of the virtual currency is for speculative or investment purposes.

Such a possible interpretation raises many questions.  If a virtual currency business is registered as a money transmitter in a Model Code state that has amended its money transmitter law to expressly include various virtual currency business activities, must it also register as a commodity broker-dealer if that state has adopted Part III of the Model Code?  What if the Model Code state has not created a commodity broker-dealer registration regime?  Georgia, for instance, has adopted the Model Code[23] without creating a regulated commodity broker-dealer regime,[24] and has placed various virtual currency business activities under the regulation of its money transmitter laws.[25]

Operators of various virtual currency businesses may consider consulting with experienced counsel to help them navigate this complex legal and regulatory landscape.


[1] Model State Commodity Code §§ 1.01 – 3.08 (North Am. Sec. Adm’n Assoc. 1997), reprinted in Model State Commodity Code, NASAA Rep. (CCH) ¶¶ 4401-48, at 3201 – 25 (Nov. 18, 1997) (1997 version includes technical amendments adopted October 5, 1985, April 29, 1989, and November 18, 1997).

[2] NASAA is a voluntary association whose membership consists of 67 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico dedicated to investor protection.

[3] Pub. L. No. 97-444, 96 Stat. 2294 (1982) (adding Section 12(e) to the CEA).

[4] CEA § 12(e)(2); 7 U.S.C. § 16(e)(2).

[5] J. Allen, Kicking the Bucket Shop: The Model State Commodity Code as the Latest Weapon in the State Administrator’s Anti-Fraud Arsenal, 42 W&L L. Rev. 889, 892 n.16 (1985).  Available at:  

[6] Id.

[7] California, Colorado, Georgia, Idaho, Indiana, Iowa, Kansas, Maine, Mississippi, Missouri, Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, South Carolina, and Washington have adopted the Model Code as a separate statutory section.  Arizona, Montana, and Utah enacted the Model Code as part of their securities statutes.  See Testimony of Philip A. Feigin Before the U.S. House of Representatives Committee on Agriculture, Subcommittee on General Farm Commodities and Risk Management at p. 4 (June 4, 2009).  Available at:

[8] New Mexico’s version of the Model Code, for instance, prohibits only leveraged or margined commodity transactions and not all purchases and sales of a “commodity” through a “commodity contract” as the Model Code’s Section 1.02 does:

no person shall offer to enter into, enter into or confirm the execution of any transaction for the delivery of any commodity under a commodity contract commonly known as a margin account, margin contract, leverage account or leverage contract, or under any contract, account, arrangement, scheme or device that serves the same function or functions or is marketed or managed in substantially the same manner as such account or contract.

NM Stat. § 58-13A-3.  Available at:

[9] J. Allen at 894-95.

[10] Model Code § 1.02.

[11] Model Code § 1.01(e).

[12] Model Code § 1.03.

[13] The main exempt transaction is one involving the sale of precious metals where the buyer receives physical delivery of the precious metal purchased at one of a list of trusted depositories independent of the seller.  See Model Code § 1.04(a)(2).

[14] See Model Code §§ 2.01 – 2.04.

[15] Model Code § 1.01(d).

[16] Retail Commodity Transactions Involving Virtual Currency, 82 Fed. Reg. 60335 (CFTC Dec. 20, 2017).  Available at:

[17] CEA § 2(c)(2)(D); 7 U.S.C. § 2(c)(2)(D).

[18] P. Law. 111-203, 124 Stat. 1376, 1732 (July 21, 2010).

[19] See 82 Fed. Reg. at 60339; see also Retail Commodity Transactions Under Commodity Exchange Act, 78 Fed. Reg. 52426, 52428 n.25 (CFTC Aug. 23, 2013).

[20] 82 Fed. Reg. at 60340.

[21] Id.

[22] In addition, one federal district court has rejected the CFTC’s broad construction of its own interpretation of “actual delivery.”  In CFTC v. Monex Credit Co., 311 F. Supp. 3d 1173, 1181 (C.D. Cal. 2018), the court found that delivery of precious metal by the seller to an independent depository did constitute “actual delivery,” even though the seller’s lien interests gave the seller the authority to liquidate the buyer’s metal.  The decision is currently on appeal to the Ninth Circuit.

[23] See O.C.G.A. Chapter 5A, Title 10.

[24] See O.C.G.A. § 10-5A-3(1)-(7) (not including the Model Code’s § 1.03(g) providing for the state registered commodity broker-dealer exempt person category).

[25] On April 26, 2016, Georgia Governor Nathan Deal signed into law House Bill 811 authorizing the Georgia Department of Banking and Finance to enact rules and regulations to apply to persons engaged in money transmission involving virtual currency.  Section 1-6 of HB 811 added a definition of virtual currency to the statutory provisions governing money transmission (see O.C.G.A. § 7-1-680(26) as amended) and Section 1-7 expressly authorized the Department to promulgate regulations.

About Blockchain Law Center

Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking.  This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.