August 10, 2021

Crypto-Products Exchange Settles CFTC and FinCEN Violations

A derivatives exchange specializing in the trading of products based on virtual currencies settled CFTC and FinCEN charges for operating as an unregistered futures commission merchant ("FCM") and for Bank Secrecy Act violations as part of a global settlement. As previously covered, the CFTC filed charges in October 2020, against five legal entities comprising the exchange (collectively, the "company"), alleging multiple CEA-related and money laundering violations.

In the Consent Order, the CFTC found that the company:

  • executed futures transactions on an unregistered board of trade, in violation of Section 4(a) of the CEA;

  • conducted non-compliant commodity option transactions, in violation of Section 4c(b) of the CEA and CFTC Rule 32.2 ("Commodity option transactions; general authorization");

  • failed to register as an FCM, in violation of Section 4d ("Dealing by unregistered futures commission merchants or introducing brokers prohibited . . . ") of the CEA;

  • failed to register as a swap execution facility or as a designated contract market, in violation of Section 5h(a)(1) of the CEA and CFTC Rule 37.3(a)(1);

  • failed to diligently supervise its partners, officers, employees and agents who handled commodity interest accounts, in violation of CFTC Rule 166.3 ("Supervision"); and

  • failed to implement a Customer Identification Program, Know-Your-Customer policies and an AML program, in violation of CFTC Rule 42.2 ("Compliance with Bank Secrecy Act").

To settle the charges, the company agreed to (i) a permanent injunction and (ii) a $100 million civil monetary penalty, of which $50 million is to be paid to the CFTC, and $50 million pursuant to a FinCEN Assessment of Civil Money Penalty.

In the related action, FinCEN determined that the company violated the Bank Secrecy Act by failing to (i) implement an AML program and a Customer Identification Program and (ii) file suspicious activity reports for transactions with darknet marketplaces and originating in high-risk jurisdictions.

CFTC Commissioner Dan M. Berkovitz stated that the agency's actions reinforce the fact that registration, exchange-trading and AML requirements apply to derivatives trading cryptocurrencies.