Crypto Firm Settles CFTC Charges for Failing to Register as an FCM

A crypto prime brokerage firm settled CFTC charges for failing to register as a futures commission merchant ("FCM").

In a press release accompanying the enforcement order, the CFTC said the case marks its first action against an unregistered FCM that inappropriately facilitated access to digital asset exchanges.

According to the Order, the firm solicited orders from U.S. customers for digital asset derivatives, including futures and swaps, and accepted money and property in connection with those orders. The CFTC found that the firm provided its customers with direct access to exchanges by first creating a main account in its own name and then creating associated sub-accounts. The CFTC said that the exchanges generally did not require, and the firm generally did not provide, customer-identifying information for the sub-account holders.

The CFTC found that the firm collected net fees of approximately $1,179,008 from customers entering into digital asset derivative transactions intermediated by the firm. The CFTC recognized that the firm voluntarily improved its controls for identifying the location of its customers after the CFTC filed a Complaint against an individual and three entities that operated on the Binance platform. 

As a result, the CFTC determined that the firm violated CEA Section 4d(a)(1) ("Dealing by unregistered futures commission merchants or introducing brokers prohibited"). 

To settle the charges the firm agreed to, (i) cease and desist from acting as an unregistered FCM by providing U.S. persons access to digital asset derivatives trading platforms, (ii) pay $1,179,008 in disgorgement and (iii) pay a $589,504 civil monetary penalty. The CFTC noted that the reduced civil monetary penalty reflects the firm's "substantial cooperation."

In a concurring statement, CFTC Commissioner Caroline D. Pham agreed with the CFTC's finding that the firm had violated the law and concluded that U.S. jurisdiction was established by virtue of activities that the entity had engaged in while physically present in the U.S. She criticized the "novel" approach that the CFTC took to establishing its jurisdiction, arguing that the "cross-border issues raised in this matter re-open decades of settled Congressional intent and well-established Commission interpretation of the [CEA's] extraterritoriality and cross-border application to foreign futures and options transactions and the [FCM] registration requirement, as well as to swaps activity outside the United States." Commissioner Pham stated that the Order established a "look-through" test for non-U.S. persons in which it is required that a provider determine the "(1) location of ultimate beneficial owners, (2) location of corporate organization, (3) location of principal place of business, and (4) location of personnel controlling a non-U.S. prime broker sub-account." She argued that these "criteria are not set forth in the CEA’s statutory language, and the Order provides no legal authority to support these factors."

In her concurring opinion, Commissioner Pham further criticized the CFTC for having:

• unprecedentedly interpreted a legislative rule which requires notice-and-comment rulemaking pursuant to the Administrative Procedure Act because it may impose new CFTC registration and trading requirements on scores of non-U.S. legal entities;
• ignored its comprehensive cross-border regulatory regime "in favor of spinning up a brand-new test for extraterritorial application of the CEA without any cited statutory authority;"
• created a "novel 'U.S. location' test to 'look through' non-U.S. legal entities in the latest of a series of ultra vires precedents that undermines the legitimacy of the CFTC and the integrity of global derivatives markets."