Commodity Trading Software Operator Fined for Operating as Unregistered DCM/FCM
The CFTC sanctioned a digital asset commodity trading platform for failing to register with the CFTC as either a designated contract market ("DCM") or a futures commission merchant ("FCM") and offering trading in CFTC-regulated products to retail investors.
In the Order, the CFTC found that the firm provided retail investors - who did not qualify as eligible contract participants and therefore could not enter into swaps - with the ability to enter into leveraged or margined retail commodity transactions that did not result in actual delivery within 28 days. The firm marketed a blockchain-based software protocol to allow trading in contracts, the value of which was determined by changes in the price difference between two digital assets.
Additionally, the CFTC found that the firm marketed noncompliance with CFTC regulations by advertising a superior trading experience predicated on its refusal to follow know-your-customer, AML and other required protocols. The firm further claimed that it did not take custody of user assets and offered high levels of liquidity at all times. The firm offered its software service to customers anywhere in the world without taking proper steps to screen for U.S. residents (or other non-eligible contract participants) or establishing a proper customer identification program. The firm later transferred control of the protocol to an affiliated decentralized autonomous organization ("DAO") in an attempt to "insulate the [protocol] from regulatory oversight and accountability for compliance with U.S. law[,]" with no changes to its operational methodology. The CFTC also charged the DAO with similar violations.
As a result, the CFTC determined that the firm violated CEA Section 4(a) ("Regulation of futures trading and foreign transactions") and Section 4d(a)(1) ("Dealing by unregistered futures commission merchants or introducing brokers prohibited"), as well as CFTC Rule 42.2 ("Compliance with Bank Secrecy Act"). To settle the charges, the firm agreed to (i) cease and desist, (ii) pay a civil monetary penalty of $250,000 and (iii) initiate undertakings to ensure future compliance with CFTC regulations.
CFTC Commissioner Summer K. Mersinger dissented, arguing that the decision "arbitrarily decide[s] who is accountable for those violations based on an unsupported legal theory amounting to regulation by enforcement while federal and state policy is developing."
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