CFTC proclaims authority in Bitcoin space

Seal of the United States Commodity Futures Trading Commission (CFTC)

Late last year, the Commodity Futures Trading Commission (CFTC) Chairman Timothy Massad said that digital currency-based derivatives contracts represent an area within the commission’s responsibilities, and now, confirming that view, the CFTC has taken action, as reported by Skadden Arps Slate Meagher & Flom LLP on Lexology.

The Commodity Exchange Act (CEA) grants the CFTC, with few exceptions, authority over the trading of futures, options and swaps on “commodities.” The CEA broadly defines “commodity” as “goods and articles … and all services, rights and interests ….”

The CFTC, after finding for the first time that “Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities,” issued a settlement order in an enforcement action on September 17.

The action, which the CFTC describes as the first against an unregistered Bitcoin options trading platform, involved charging Coinflip, Inc. and its CEO and founder with failures to conform to CFTC or CEA regulations for running a business for processing or trading “commodity options.”

The CFTC Order, among other findings, found that Coinflip operated a business for the trading of swaps without registering as a swap execution company or a designated contract market from at least March 2014 through July 2014.

Within a week of going after Coinflip, the CFTC again brought and settled Bitcoin-related charges, on this occasion, against TeraExchange LLC (Tera), a provisionally registered SEF, for not enforcing the commission’s ban on wash trading and prearranged trading.

A US dollar-Bitcoin swap transaction, from October 2014 between the only two market players then sanctioned to trade on Tera SEF, was at issue.

The CFTC’s focus was on Tera employees, who facilitated the suspected prearranged wash trade and supposedly suggested a transaction would be used to test the SEF systems and would be straightaway unwound at the same volume and price.

Following the execution of the transaction, Tera said in a press release that the swap “was the first Bitcoin derivative transaction to be executed on a regulated exchange.” The company failed to disclose that the Bitcoin swap transaction did not signify real liquidity.

Skadden Arps Slate Meagher & Flom LLP wrote, “Although the Tera action sends a message to any SEF that the CFTC expects SEFs to enforce SEF rules against illegal trading practices, this CFTC action is yet another signal to the Bitcoin industry that the CFTC is poised to regulate Bitcoin derivatives.”

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