CFTC Charges Crypto-Derivatives Platform with Trading and AML Violations
Commentary by Steven Lofchie
The CFTC filed charges against five entities and three individuals (collectively, "BitMEX") for owning and operating an unregistered platform for the trading of derivatives on cryptocurrencies. In addition to multiple CEA-related violations, the defendants were charged with violations of money laundering regulations.
According to the Complaint, BitMEX is the world's largest cryptocurrency derivatives platform and has numerous U.S. customers. The CFTC alleged that the platform illegally operated as an unregistered futures commission merchant and was not registered as a swap execution facility or designated as a contract market. The CFTC asserted that BitMEX facilitated digital asset derivatives transactions with an aggregate notional value of "trillions of dollars," received more than $11 billion in bitcoin deposits, and earned fees of more than $1 billion.
The CFTC alleged that the defendants violated CEA Sections 4(a) ("Restriction on futures trading"), 4c(b) ('Prohibited transactions: Regulated option trading"), 4d ("Prohibited Dealings by unregistered futures commission merchants or introducing brokers"), and 5h(a)(1) ("Designation: Swap Execution Facilities"), as well as CFTC Rules 166.3 ("Supervision") and 42.2 ("Compliance with Bank Secrecy Act"). Therefore, the CFTC requested relief in the form of (i) permanent registration and trading bans, (ii) disgorgement of ill-gotten benefits, (iii) restitution to customers and investors, (iv) civil monetary penalties, and (v) a permanent injunction from future violations of the CEA.
In a statement, CFTC Commissioner Brian D. Quintenz both praised the CFTC's Division of Enforcement for bringing the charges, and affirmed his support of innovation and ingenuity in the derivatives market. Mr. Quintenz called for "[the CFTC] to actively police trading platform activity and remove the bad apples so that legitimate, law-abiding marketplaces can flourish."
In a parallel action, the U.S. Attorney's Office for the Southern District of New York indicted a number of the involved parties for violations of the Bank Secrecy Act.
Commentary
The charges in this case do not make any new law as to the regulation of cryptocurrencies. It is already well understood that a cryptocurrency that is not a "security" is a "commodity," and that traded derivatives on commodities are subject to regulation under the CEA. If there is anything remarkable about the charges, it is the size of the BitMEX operation and the length of time for which it operated before attracting enforcement attention.