SEF Sanctioned for Wash Trading in Bitcoin Swap
Commentary by Bob Zwirb
The CFTC simultaneously filed and settled charges that a provisionally registered Swap Execution Facility ("SEF") failed to enforce CFTC prohibitions on wash trading and prearranged trading on the SEF's platform in violation of CEA Section 5h(f)(2).
The CFTC found that the SEF:
- offered a non-deliverable forward contract based on the relative value of the U.S. Dollar and Bitcoin for trading;
- arranged for two market participants to enter into transactions, telling one that the trade would be "to test the pipes by doing a round-trip trade with the same price in, same price out, (i.e. no P/L [profit/loss] consequences) no custodian required";
- issued a press release and statements at a meeting of the CFTC's Global Markets Advisory Committee announcing the transactions, which "created the impression of actual trading interest in the Bitcoin swap"; and
- failed to indicate that the transactions were "pre-arranged wash sales" executed for the purpose of testing the company's systems.
The CFTC ordered that the accused company cease and desist from violating CEA Section 5h(f)(2). CFTC Commissioner Sharon Y. Bowen dissented from the Order on the grounds that "fictitious trading deserves a [financial] penalty."
Commentary
Notwithstanding Commissioner Bowen's dissent, the real violation was much more serious: issuing a false public statement and lying to the CFTC.
Without defending the SEF actions, the case also raises the issue of why the entity had to register as a SEF to offer trading in a product that is not required to be traded on a SEF. See footnote 88 of the SEF rules adopting release. The regulatory burdens of SEF registration are fairly high for a startup entity in a startup market.