Crypto Company Settles Charges for Off-Exchange Leveraged Token Transactions

A crypto company settled CFTC charges for facilitating the trading of leveraged tokens linked to Bitcoin and Ether without registering the transactions on a designated contract market.

According to the CFTC, the company, a blockchain-based decentralized platform, deployed a decentralized protocol ("a collection of smart contracts on the Ethereum blockchain that functioned as a blockchain-based digital asset trading protocol") to allow users to trade leveraged tokens through the company's web interface. The CFTC stated that these tokens provided users with approximately 2:1 leveraged exposure to Bitcoin and Ether.

The CFTC determined that the transactions, which did not result in actual delivery of the underlying commodities, were made available to non-eligible contract participants in violation of CEA Section 4(a) ("Excessive speculation"). The CFTC also found that the company's failure to implement adequate controls led to further violations by allowing retail customers to trade leveraged tokens outside of a regulated exchange environment.

To settle the charges, the company agreed to (i) cease and desist from further violations of the CEA, (ii) pay a civil monetary penalty of $175,000 and (iii) comply with the conditions set forth in the Order.

Statements

• In dissent, Commissioner Summer K. Mersinger criticized the agency's approach of "regulation through enforcement" against decentralized finance ("DeFi") protocols. She argued that the CEA and CFTC rules were designed for traditional market structures, not DeFi, and expressed concern that the CFTC had failed to provide clear guidance on how DeFi platforms could comply with these regulations. She asserted that the settlement imposed a "de minimis penalty" unrelated to the conduct, and warned that the enforcement-first strategy risks pushing responsible DeFi developers and innovation overseas, while leaving the US vulnerable to bad actors. She criticized the decision to penalize the company despite its proactive efforts to block trading of the leveraged tokens at issue. Ms. Mersinger also argued that the company neither profited from nor actively traded the tokens in question, and no market harm or customer losses were alleged. She suggested that the CFTC should prioritize cases involving fraud and customer harm rather than DeFi protocols with no direct evidence of misconduct.

• Commissioner Caroline D. Pham asserted that the CFTC charged the company without detailed evidence supporting its claims about the "Leveraged Tokens" involved in the case. Ms. Pham argued that the absence of specific information about these tokens in the record makes it impossible to determine whether they fall under CFTC jurisdiction. She also emphasized that the CFTC's approach hinges on the mere use of the term "leveraged" in the token names. She argued that, by this logic, any financed commodity transaction could be subject to the same enforcement if delivery exceeded 28 days. Such broad application of the law, she warned, could lead to "absurd" results.