SEC Delays Bitcoin ETF Decision Yet Again, Continues Harping the Same Beat

They even rejected the requests made by Gemini Exchange founders, Tyler and Cameron Winklevoss, for the Bitcoin ETF even though Gemini is a …

While the Commodities Futures Trading Commission (CFTC) is relatively more supportive of regulation for the crypto industry, the Securities and Exchange Commission (SEC) is still hesitant in entering the crypto markets. The SEC has delayed its decision on Bitcoin ETFs once again while the CFTC is gearing up to bring the first physically-settled Bitcoin futures to the market this year.

Moving as expected

The US SEC delayed a decision on the future of two Bitcoin ETF products recently, removing any suspicion that it could finally be ready to approve cryptocurrency derivative products in the market. The decision for the VanEck SolidX Bitcoin Trust, the most anticipated Bitcoin ETF and Bitwise Bitcoin ETF Trust, has been delayed till October this year. The agency still wants time to decide whether it should change listing rules to allow the two crypto funds to trade.

SEC Delays Bitcoin ETF Decision Yet Again, Continues Harping the Same Beat

SEC Delays Bitcoin ETF Decision Yet Again, Continues Harping the Same Beat

The disappointment in the Bitcoin community was evident as the coin traded 3.8% lower at $11,418 during the evening trades in New York. The SEC has not made any public comments about its decision, and even Bitwise has decided to stay quiet on the issue, at least for some time.

Why is the SEC taking so long?

Bitcoin ETF proposals have been pouring in for the SEC since last year, and at one point, the agency was looking at over 25 requests. However, the agency has been very cautious in its approach towards cryptocurrencies. They even rejected the requests made by Gemini Exchange founders, Tyler and Cameron Winklevoss, for the Bitcoin ETF even though Gemini is a regulated company in New York.

SEC’s officials have frequently highlighted their concerns over investor protection measures, or the lack thereof, in the crypto sector. The volatility of Bitcoin prices and allegations of price manipulation are other problems facing the industry. The criminal use of Bitcoin and the anonymity of transactions could also be keeping the SEC away from the sector. Jay Clayton, SEC chair, also said that he is worried about manipulation and theft on exchanges.

The difference in the approach of the CFTC and the SEC becomes apparent in this case. The CFTC had approved Bitcoin futures trading on its platform on two exchanges, CME and CBOE earlier and now at least three companies are busy getting appropriate licenses to start delivering physically settled Bitcoin futures. Another government agency, the IRA, has a completely different take on cryptocurrency. While the coins are still operating the legal grey area, the IRA wants users to pay applicable taxes- regular income tax and capital gains taxes, on a user’s holdings.

Viraj ShahViraj Shah

Viraj Shah

Viraj has been writing for FXTimes covering Cryptocurrencies and Forex news for 2 years now. Also known as ‘Sherlock’, Viraj comments on the latest businesses emerging in the blockchain industry. His areas of expertise are Bitcoin and Blockchain. He enjoys covering new startups and busting myths across the industry.

email:viraj@fxtimes.com

Related Posts:

  • No Related Posts

Bridging the Week by Gary DeWaal: August 5 – 9, and August 12, 2019 (Securities or Not; Swap …

Two Traders Charged With Disruptive Trading and Failure to Cooperate by CME Group Exchanges: CME Group Exchanges barred two persons from …
Monday, August 12, 2019

Last week a Canada-based social media company answered charges filed against it by the Securities and Exchange Commission in June 2019 that alleged its 2017 initial sale of digital tokens constituted an unlawful securities offering under US securities laws. The company argued that its digital tokens were not securities but were more akin to virtual currency like bitcoin. In any case, said the company, the SEC never provided it with adequate notice regarding what cryptoassets it might consider to be securities. As a result, the following matters are covered in this week’s edition of Bridging the Week:

  • Canada-Based Social Media Company Kicks Back at SEC for Enforcement Action Alleging Digital Token Sale Constituted Unlawful US Securities Offering ;

  • Swap Dealer Sanctioned $2.5 Million by NFA for Providing Customer Misleading Information Regarding Forward Contract Pricing;

  • Brokerage Company Fined by LME for Failure to Maintain Adequate Risk Management Systems That Did Not Detect Potential Disruptive Trading by Client; and more.

Video Version:

Article Version:

Briefly:

  • Canada-Based Social Media Company Kicks Back at SEC for Enforcement Action Alleging Digital Token Sale Constituted Unlawful US Securities Offering: Last week Kik Interactive Inc. denied it conducted an unregistered security offering in its answer to the June 2019 complaint filed against it by the Securities and Exchange Commission in a federal court in New York City.

In its complaint, the SEC alleged that, from May through September 2017, Kik conducted an initial coin offering of one trillion Kin digital tokens without registering the cryptoassets with the SEC as required by law. According to the SEC, investors who purchased Kin tokens made an investment of money in a common enterprise with Kik and with other investors, and reasonably expected profits through the business and management activities of the company and its agents. The SEC alleged that, through its Kin offering, Kik raised almost US $100 million, including more than US $55 million from US investors. (Click here for background regarding the SEC’s complaint in the article “SEC Kicks Canada-Based ICO Issuer; Claims It Conducted Unregistered Securities Offering to US Persons” in the June 9, 2019 edition of Bridging the Week.)

In its answer, Kik said its Kin token was not an investment contract, but instead was a non-security digital token of the nature of a “community currency” more akin to bitcoin. Kik claimed that the SEC based its allegations on quotes taken out of context, and documents and testimony provided to the SEC that the SEC also misrepresented. Additionally, Kik claimed that the SEC wrongly conflated its pre-token distribution event (“TDE”) token sale to accredited investors in the United States and its subsequent TDE to retail and non-retail persons as a single unlawful event. (“TDE” is the term used by Kik to describe its initial coin offering.)

Kik’s answer provided extensive, specific examples purportedly supporting its claim that the SEC selectively used or misrepresented quotes, documents and testimony, as well as numerous legal arguments as to why Kin tokens were not investment contracts. Principally, Kik argued that it consistently noted that Kin’s success would “involve the efforts of users and content providers other than Kik,” and the price of Kin would depend on ordinary forces of supply and demand and not from Kik’s efforts.

Additionally, Kik posited that even if the SEC now believes that Kin tokens are investment contracts (and thus securities), a prosecution based on such a view violates its due process. This is because, prior to the TDE, the SEC never provided sufficient guidance for Kik to understand that the sale of Kin in its TDE would violate relevant law.

Kik also claimed the its TDE pre-sale to US accredited investors was authorized by applicable SEC rule (click here to access background regarding Reg D) and was a distinct event from the TDE. As a result, it submitted it should receive judgment in its favor at least as to that portion of the SEC’s complaint.

My View: Both the SEC and Kik have diametrically different views regarding the circumstances that led to the issuance of Kin, both during its pre-TDE fund raise and during its TDE. In its answer, Kik requested that triable facts be heard by a jury, and it may likely be that a jury determines the ultimate outcome of the SEC’s enforcement action if it is not resolved earlier through motion practice or settlement.

However, Kik makes a compelling argument regarding the lack of concrete guidance from the SEC regarding its view of the types of cryptoassets whose offer or sale could lead to an SEC enforcement action for violating registration requirements. Kik argues that its prosecution by the SEC without concrete advance guidance deprives it of due process. This is an argument that will likely be addressed further through motion practice.

Although the SEC has issued frequent, thoughtful guidance regarding the qualities of cryptoassets that might implicate securities registration requirements, the guidance has generally been high-level, and solely offered broad considerations as opposed to detailing how such considerations might be applied to specific fact patterns.

For example, during the same week in June 2018 that William Hinman, SEC Director of Corporation Finance, provided useful insight into how the virtual currency ether may once have been a security but is no longer, as well as general views on when sales of a cryptoasset might implicate US securities laws, the Canadian Securities Administrators issued similar guidance but included 14 specific fact patterns derived from actual episodes it has considered, and provided its conclusions as to whether the referenced digital token had characteristics of a security or not. (Click here for details in the article “Anything but Sleep Inducing: SEC Corporation Finance Director Says Ether Not a Security and Canada Issues Guidance on Utility Tokens” in the June 17, 2018 edition of Bridging the Week.)

Similarly, in April 2019, SEC’s Strategic Hub for Innovation and Financial Technology issued guidance on what characteristics a cryptoasset might possess that could make it more likely to be deemed an investment contract, and thus a security, under US securities laws. This guidance included 38 factors to consider. According to SEC Commissioner Hester Peirce, this “Jackson Pollock approach to splashing lots of factors on the canvas without any clear message leaves something to be desired.” (Click here to access background on the FinHub guidance in the article “SEC Staff Outlines Characteristics of Cryptoassets That Could Cause Them to Be Regarded as Securities” in the April 7, 2019 edition of Bridging the Week. Click here for more on Ms. Peirce’s observations in the article “SEC Crypto Guidance Employing Jackson Pollock Techniques Too Cryptic Says Commissioner Hester Peirce” in the May 12, 2019 edition of Bridging the Week.)

Contrast FinHub’s approach with that of the Financial Conduct Authority two weeks ago when the UK regulator issued its own guidance regarding how different types of cryptoassets likely fall within its regulatory perimeter. Rather than just being high-level, in many cases, the FCA provided alternative examples of characteristics of a cryptoasset that are critical to such a determination in the form of “case studies” and provided a clear statement of the FCA’s legal conclusion (e.g., the referenced token was likely regulated or unregulated). (Click here for background in the article “UK Chief Financial Conduct Regulator Provides Final Guidance on Interface Between Cryptoassets and UK Regulatory Perimeter” in the August 4, 2014 edition of Bridging the Week.)

Although the SEC often cites the 1946 Supreme Court decision in SEC v. W.J. Howey to support its high-level views, it is one thing to set forth elements that should be considered, and another to provide practical guidance that practitioners can use to apply Howey to different specific fact patterns involving a relatively new financial asset that does not fit neatly within traditional product boxes and may often change determinative characteristics over time. Due process, let alone fundamental fairness, requires more specific guidance. (Click here to access a copy of the Howey decision.)

More Briefly:

  • Swap Dealer Sanctioned $2.5 Million by NFA for Providing Customer Misleading Information Regarding Forward Contract Pricing: Wells Fargo Bank, NA, agreed to settle charges brought by the National Futures Association that it misled a customer regarding the method of pricing regarding a four-month Canadian Dollar forward contract during 2014 sold to the client. NFA alleged that WFB told the customer that it would set the settlement price for the forward contract at the average price of Canadian dollar spot contracts WFB purchased on August 27, 2014 (the forward contract had a settlement date of December 31, 2014). In fact, WFB priced the forward contract at a higher price WFB thought the client would accept and not at the average price, claimed NFA. NFA also alleged that WFB misled its customer regarding when it actually acquired the spot contracts to complete its transaction with the client. NFA charged that WFB’s actions violated a Commodity Futures Trading Commission rule that requires fair and balanced communications by a swap dealer with a counterparty and thus also an NFA rule that incorporates the CFTC rule by reference. To settle this matter, WFB agreed to pay a fine of US $2.5 million without admitting or denying any of NFA’s allegations. (Click here to access CFTC Rule 23.433 and here for NFA Rule 2-49(a).)

  • Brokerage Company Fined by LME for Failure to Maintain Adequate Risk Management Systems That Did Not Detect Potential Disruptive Trading by Client: ED&F Man Capital Markets Limited (“EMV”) consented to pay a fine of GB £180,000 to resolve a disciplinary action by the London Metal Exchange. LME charged that EMV did not have “appropriate and adequate risk management systems in order to detect, deter, and deal with potential instances of market abuse which could have been routed by its clients to the LME” by direct electronic access. LME brought its charges after identifying suspicious order book trading activity routed to LME by a client of EMV by DEA. In settling with EMV, LME acknowledged that the firm was “open and cooperative” during the course of its investigation and implemented enhancements to its risk management systems and controls. At the end of its published order related to EMV, LME cautioned all members to maintain appropriate and adequate systems to spot, help prevent and address trading conduct that may constitute market abuse.

  • ICE Futures U.S. Proposes No Delay in Hedging Trades Related to Pre-Execution Negotiated Options Cross Trades: ICE Futures U.S. filed proposed rule and guidance amendments with the Commodity Futures Trading Commission that would authorize persons engaging in pre-execution discussions to potentially cross options orders to pre-hedge such transactions in related markets as soon as a transaction is agreed and prior to the execution of such orders. Currently, no trader may hedge any proposed futures or options transaction agreed during pre-execution discussions until after execution. However, the new authority would not be available to an intermediary taking the opposite side of its own customer order. Options orders involving intermediaries and their customers would first have to be executed on IFUS’s electronic market before a hedging order could be entered. IFUS’s proposed pre-execution hedging authority would solely apply to options but not futures transactions. IFUS believes that its proposed rule and guidance amendments would, if adopted, help narrow spreads option traders would be willing to quote to counterparties during pre-execution communications.

  • Forex Dealer Member Sanctioned by NFA for Failing Timely to Adjust Customers Hurt by Ongoing Trading Platform Malfunction: Gain Capital Group LLC, a retail foreign exchange dealer, a forex dealer member and futures commission merchant, agreed to pay a fine of US $50,000 to resolve charges brought by the National Futures Association that it failed timely to assess the widespread impact of a possible execution system malfunction and make appropriate adjustments to harmed customers after it first learned of the malfunction. According to NFA, beginning in June 2017, a few customers detected execution errors in their account, complained to GCG, and in response GCG provided adjustments. However, said NFA, GCG did not timely take steps to assess the extent of the malfunction of the execution platform that caused the errors. Ultimately, acknowledged NFA, GCG conducted a broader inquiry and made adjustments totaling US $167,000 to all adversely impacted customers; it did not seek refunds from positively impacted customers. GCG determined that over 7,400 of its customers were affected by the malfunction which occurred from April 2016 through August 2017. In addition to paying a fine, GCG agreed to undertakings set forth in an unpublished side letter in order to resolve the NFA’s charges; GCG did not admit or deny any of NFA’s allegation. GCG was charged with violating an NFA rule that requires forex dealer members to favorably adjust all customers harmed by circumstances beyond their control unrelated to market price movements. (Click here to access NFA Rule 2-43(a)(1)(i).)

  • FINRA Reminds Members It Is in Their Best Interest to Prepare for Compliance With New SEC Regulation Best Interest by June 202o: The Financial Industry Regulatory Authority issued a Regulatory Notice reminding members of the adoption by the Securities and Exchange Commission of Regulation Best Interest. (Click here for background regarding the SEC’s new rule in the article “SEC Adopts New Regulation to Ensure Retail Customers’ Best Interest Takes Priority Over Broker-Dealer’” in the June 9, 2019 edition of Bridging the Week.) FINRA reminded members that they must comply with Reg BI and relationship summary form requirements by June 30, 2020.

  • Two Traders Charged With Disruptive Trading and Failure to Cooperate by CME Group Exchanges: CME Group Exchanges barred two persons from permanently accessing its markets for engaging in disruptive trading practices and not answering disciplinary charges filed against them. Each person was charged with entering orders without the intent of execution. In addition to access bars, Daesoon Park was assessed a fine of US $60,000 by the New York Mercantile Exchange, US $80,000 to the Commodity Exchange Inc. and required to disgorge profits achieved through purportedly illicit trading on both exchanges. Han Keun Kim was required to pay a fine of US $60,000 to the Chicago Mercantile Exchange.

For further information:

Brokerage Company Fined by LME for Failure to Maintain Adequate Risk Management Systems

Canada-Based Social Media Company Kicks Back at SEC for Enforcement Action Alleging Digital Token Sale Constituted Unlawful US Securities Offering

FINRA Reminds Members It Is in Their Best Interest to Prepare for Compliance With New SEC Regulation Best Interest by June 202o

Forex Dealing Member Sanctioned by NFA for Failing Timely to Adjust Customers Hurt by Ongoing Trading Platform Malfunction:

https://www.nfa.futures.org/basicnet/CaseDocument.aspx?seqnum=4723

https://www.nfa.futures.org/basicnet/CaseDocument.aspx?seqnum=4724

ICE Futures U.S. Proposes No Delay in Hedging Trades Related to Pre-Execution Negotiated Options Cross Trades

Swap Dealer Sanctioned $2.5 Million by NFA for Providing Customer Misleading Information Regarding Forward Contracts Pricing:

https://www.nfa.futures.org/basicnet/CaseDocument.aspx?seqnum=4725

https://www.nfa.futures.org/basicnet/CaseDocument.aspx?seqnum=4726

Two Traders Charged With Disruptive Trading and Failure to Cooperate by CME Group Exchanges:

Related Posts:

  • No Related Posts

US CFTC FinTech specialist returns to private sector following crypto work

“With his vision and the support of the Commission, LabCFTC has established itself as a model for regulatory engagement with emerging technologies …

Daniel Gorfine, the US Commodity Futures Trading Commission’s first Chief Innovation Officer and Director of its FinTech initiative LabCFTC, is departing in mid-August.

Gorfine also served as the Designated Federal Officer of the CFTC’s Technology Advisory Committee. “We are sad to be losing Dan. He is a thought leader in the federal government on financial technology issues,” says CFTC Chairman Heath P. Tarbert.

“With his vision and the support of the Commission, LabCFTC has established itself as a model for regulatory engagement with emerging technologies. I am fully committed to building on the firm foundation Dan has built to further elevate, advance, and modernise how we think about applying a sound, principles-based approach to promising new technologies.”

“As a firm believer in the dynamism and benefits of innovation, markets, and well-calibrated regulation, I am incredibly grateful to Chairman Tarbert, former Chairman Giancarlo, and all of our Commissioners for the opportunity to serve the agency and lead LabCFTC,” says Gorfine, who is returning to the private sector.

“I am proud of the work we have done, inspired by the innovators we have met, and excited for the future of LabCFTC and regulatory innovation offices across the government. I am also very appreciative of having had the chance to work closely with Commissioner Quintenz, our General Counsel, Dan Davis, and the entire LabCFTC team.”

Under Gorfine’s leadership, LabCFTC held innovator office hours across the US and internationally and developed CFTC primers on virtual currencies and smart contracts. It also analysed and sought public feedback on crypto asset markets and mechanics in order to help inform the Commission.

The post US CFTC FinTech specialist returns to private sector following crypto work appeared first on Coin Rivet.

Related Posts:

  • No Related Posts

The CFTC, actual delivery, and fraud: A federal court gives new guidance

For example, the Bitfinex exchange ran afoul of the “actual delivery” requirement back in 2006 and entered in a consent order over a very similar …

Quick Take

  • CFTC sued Monex for $280 million, alleging violation of the Commodities Exchange Act (“CEA”) related to precious metals margin trading
  • Court of Appeals says that there wasn’t actual delivery of the commodity and the CEA applies to fraud claims without any allegation of manipulation
  • Precedent applies to crypto exchanges because bitcoin and other virtual currencies are commodities under the CEA

by Stephen Palley

4 hrs ago · 8 min read

U.S. Commodity Futures Trading Commission v. Monex Credit Company, et al. (9th Cir., №18–55815, July 25, 2019) [SDP]

Link to opinion: http://cdn.ca9.uscourts.gov/datastore/opinions/2019/07/25/18-55815.pdf


Disclaimer: These weekly summaries are provided for educational purposes only by Nelson Rosario and Stephen Palley. They are not legal advice. These are our opinions only, aren’t authorized by any past, present or future client or employer. Also we might change our minds. We contain multitudes. As always, Rosario summaries are “NMR” and Palley summaries are “SDP”.

While Commodities Caselaw Minute doesn’t have quite the same ring to it as Crypto Caselaw Minute, U.S. laws governing commodities and, in particular, commodities futures trading are actually kinda important to understand from a “how does it all work” standpoint. Why? Well, for one thing, the Commodities Futures Trading Commission (“CFTC”) says that Bitcoin (and potentially other virtual currencies) are commodities under the Commodities Exchange Act (“CEA”).

This particular case addresses the Commodities Futures Trading Commission’s scope of power to regulate and enforce violations of the CEA. While the defendant here deals in precious metals, given the fact that Bitcoin is a commodity, the case squarely applies to the CFTC’s jurisdiction over crypto margin trading made available to U.S. customers. That’s why you’re reading about it here in Crypto Caselaw Minute.

First, some background to the law. The CEA is a Depression Era (1936 to be precise) law which has been amended many times and which governs the CFTC and its enforcement power. The CEA originally applied to commodities futures markets. Commodity has a really broad definition under the statute, and (in addition to Bitcoin) includes things as varied as sorghum, tallow, cows, and has a catch-all for ‘and all services, rights, and interests (except motion picture box office receipts, or any index, measure, value or data related to such receipts) in which contracts for future delivery are presently or in the future dealt in.”

The Court explains that under Dodd-Frank, which passed in 2010 in the wake of the 2008 financial crisis, the CEA was “extended to commodity transactions offered on a leveraged or margined basis as if they were futures trades.” There’s an exception for “leveraged retail commodity sales that result in ‘actual delivery’ within 28 days.” If you have actual delivery in 28 days, the CFTC’s jurisdiction isn’t triggered.

Monex Credit Company (“Monex”) is the defendant in this case. It sold precious metals and allowed investors to purchase commodities on margin through a program called “Atlas,” which allowed investors to pay part of the full price, with the rest financed by Monex. The CFTC said this was “an illegal and unregistered leveraged retail commodity transaction market” and sued Monex for $290 million for fraud in precious metals sales.

Monex argued that the CEA does not apply to retail commodities dealers who “actually deliver” the commodities in twenty-eight days. It also said that the CFTC didn’t authority over fraud claims without allegations of manipulation.

The trial court agree with both of Monex’ arguments and dismissed the case. The Court of Appeals disagreed with the trial court and reversed.

The Court explained Atlas as follows: “Once a customer opens an account, she may take open positions in precious metals. But the trading occurs ‘off exchange’ — that is, it does not happen on a regulated exchange or board of trade. Instead, Monex controls the platform, acts as the counterparty to every transaction, and sets the price for every trade.”

One of the risks with trading on margin is that if the value of the asset goes below a certain threshold, the account can be liquidated. Per the Court, “[o]ver the last eight years, Monex has made margin calls in more than 3,000 Atlas accounts and has force-liquidated at least 1,850.” At the same time, “Monex also retains sole discretion to liquidate trading positions without notice to the customer if equity drops too low, and it controls the price for every trade.” Also, commissions and fees came directly out of customer accounts (reducing their equity and thereby increasing liquidation risk).

Monex doesn’t actually “hand over any metals” and customers never actual control a commodity. The metals are kept in third party depositories, and the only way customers can get them is if they pay in full and either have the metals shipped to them or pick them up. “According the CFTC, Monex simply makes a ‘book entry’ when customers make trades — nothing more.”

The CFTC alleges the Atlas is designed for customers to lose money, that it isn’t “safe, secure or profitable,” as advertised, and has that Monex has been violated the CEA since 2011. In fact, it alleges, “Atlas is designed so that when customers lose, Monex gains.” Among other things, it pointed out that as the counterparty to every transaction, Monex benefits from “large price spreads at the customers expense.” In addition, it engaged in high pressure sales tactics while systematically understating the risks associated with trading.

The CFTC sued a number of Monex companies and two principals, alleging four separate CEA violations. The District Court said that three counts failed because Monex fell within the actual delivery exception and that the 4th failed because CFTC alleged only fraud, not fraud AND manipulation.

The Court of Appeals first examined the “actual delivery” exception. Monex argued that actual delivery took place when the commodities were delivered to third party depositories for the buyer’s benefit. The Court disagreed: “actual delivery requires some meaningful degree of possession or control by the customer.” While using a third party depository isn’t fatal to this exception, it didn’t work here because the metals were in a depository chosen by the broker, “never change hands, and are subject to the broker’s exclusive control, and customers have no substantial, non-contingent interest.” The fact that the commodity serves as collateral doesn’t change the analysis, according to the Court.

In short, “actual delivery [] unambiguously requires some degree of possession or control.” Transfer of title to the customer and delivery to a third party depository doesn’t satisfy this when it’s “simply a sham.” In this case, the customers had no contractual right to the metal, which was in Monex’s total control and could be liquidated by it at any time.

Monex’s second angle of attacks was that the CFTC only alleged fraud, not fraud and manipulation. The relevant statutory language prohibits the use of “any manipulative or deceptive device.” The trial court said “or” should be read as conjunctive, meaning “and”. The Court of appeals disagreed — “or” means “or”, it reasoned; “[w]hen the word ‘or’ joins two terms, we apply a disjunctive reading.” Furthermore, this particular part of the CEA “is a mirror image of s 10(b) of the Securities Exchange Act which the Supreme Court has interpreted as a ‘catch-all clause.’” Bottom line — this Court says the CFTC doesn’t have to allege market manipulation under the section of the CEA raised here. Fraud is enough.

What does this all mean? Well, we have seen aggressive enforcement action by the CFTC in relation to Bitcoin and other virtual currencies in the past several years. What “actual delivery” means in connection with bitcoin margin trading has vexed others already. For example, the Bitfinex exchange ran afoul of the “actual delivery” requirement back in 2016 and entered in a consent order over a very similar allegation:

Bitfinex’s retail-financed commodity transactions in bitcoin did not result in actual delivery to the Financing Recipients who traded on Bitfinex’s platform. Bitfinex did not transfer possession and control of any bitcoin to the Financing Recipients, unless and until all liens on the bitcoin were satisfied. Prior to satisfaction of the liens, the Financing Recipients’ bitcoins were held in an omnibus settlement wallet owned and controlled by Bitfinex, and to which Bitfinex held the private keys needed to access the wallet. Bitfinex’s accounting for individual customer interests in the bitcoin held in the omnibus settlement wallet in its own database was insufficient to constitute “actual delivery.” See Retail Commodity Transactions Under Commodity Exchange Act, 78 Fed. Reg. 52,426, 52,428 (Aug. 23, 2013) (“book entry” purporting to show delivery insufficient). Similarly, when Bitfinex changed its model in August 2015 and January 2016, it retained control over the private keys to those wallets, and the Financing Recipients had no contractual relationship with the third party firm that established the wallets.

The CFTC subsequently issued a proposed interpretation regarding the meaning of actual delivery in connection with retail commodity transactions involving virtual currency, supplementing its 2013 guidance referenced in the quote above. As of today, this guidance has not finalized. While this area of law is not entirely settled, we now have more authority from a federal court about what “actual delivery means” and the authority is helpful additional precedent.

Enforcement activity involving fraud in connection with margin trading seems likely to be another continued angle of attack, particularly when one considers the description of the allegedly fraudulent activity CFTC alleges and the similarity to behavior by some who serve or have served U.S. customers. Assuming courts in other federal circuits agree that manipulation is not a requirement, this may lower the threshold for the CFTC to take action over crypto exchanges for past and present violations.

Related Posts:

  • No Related Posts

CFTC Claims Bitcoin Futures from LedgerX are Not Approved

Ethereum World News, a U.S.- and U.K.-centric organization founded in 2017, is a media outlet predicated on providing pertinent, up-to-date, and …

According to a statement obtained by CoinDesk, the CFTC has, in fact, not approved LedgerX to launch Bitcoin (BTC) futures just yet. The outlet wrote in a recent update to yesterday’s article about the exchange’s launch of physically-deliverable BTC futures:

The U.S. Commodities Futures Trading Commission (CFTC) says LedgerX has “not yet been approved by the Commission” to offer physically settled bitcoin futures.

This is notable, as LedgerX purportedly claimed to have the proper registrations to launch such a cryptocurrency vehicle. In June, the firm claimed that the financial regulator had granted it a designated contract markets (DCM) license, giving it the final push it needed to begin preparation for BItcoin futures.

This is a developing story.

Title Image Courtesy of Mink Mingle Via Unsplash