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Digital Asset Exchange Settles CFTC Charges for Illegal Off-Exchange Trading

A company (the "Company") operating a digital asset exchange settled CFTC charges for (i) engaging in illegal off-exchange trading of retail commodity transactions with U.S. customers that were not eligible contract participants ("ECPs"), and (ii) failing to register as a futures commission merchant ("FCM").

According to the CFTC Order, from June 2020 to July 21, 2021, the Company enabled U.S. customers that were not ECPs to engage in retail commodity transactions involving digital assets, including Bitcoin. The Company facilitated the execution of some of these transactions by providing margin extensions to its customers, which were used to "buy or sell digital assets on the exchange on a leveraged basis." The Order notes that the Company acted as the sole margin provider for either one or both sides of such transactions, and maintained custody of all assets "purchased using margin for the duration of a customer's open margined position."

The CFTC determined that the Company violated Section 4(a) ("Restriction on Futures Trading") of the Commodity Exchange Act because, among other things, (i) the company entered into and/or executed such margined transactions with non-ECP U.S. customers that did not result in actual delivery in 28 days, and (ii) the margin retail commodity transactions were not conducted on a designated contract market. Additionally, the CFTC found that the Company violated Section 4d(a)(1) ("Futures Commission Merchant Registration Requirements; Duties of Merchants in Handling Customer Receipts") of the Commodity Exchange Act because it accepted such orders for retail commodity transactions and accepted customers' assets in order to margin the transactions.

To settle the charges, the Company agreed to (i) cease and desist from future violations of Section 4(a) and Section 4d(a)(1) of the Commodity Exchange Act, (ii) pay a $1.25 million civil money penalty, and (iii) additional undertakings outlined in the CFTC Order.

Commissioner Reaction

CFTC Commissioner Dawn DeBerry Stump noted that the CFTC's findings against the Company were "informed by [the CFTC's] Final Interpretive Guidance on retail commodity transactions involving certain digital assets issued in 2020." She emphasized that as the Final Interpretive Guidance becomes more pertinent to the CFTC's enforcement activities, the CFTC "should act to replace the [Final Interpretive Guidance] with rules that are based on current input from market participants and members of the public."

Further, Commissioner Stump noted that the retail commodity transactions facilitated by the Company "would continue to be illegal even if [the Company] had an FCM registration." She stated that it "is not entirely clear" how the Company would be regulated as an FCM "because many of the [CFTC's] rules governing its regulation of traditional FCMs do not fit [the Company's] role as an exchange," particularly as an exchange on which retail commodity transactions are traded. She argued that (i) the application of the CFTC's FCM regulations to such an exchange is "uncharted territory at this time," and (ii) "if the [CFTC] is going to hold an exchange liable for operating as an unregistered FCM with respect to retail commodity transactions, it is incumbent upon the [CFTC] to explain in a transparent manner the relevant legal requirements for such an entity that seeks to register as an FCM and how the [CFTC] will apply them in enabling the entity to conduct business with U.S. customers."

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Regulated Entities: 
Exchanges / Contract Markets
Body of Law: