CFTC

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CFTC
CFTC logo.gif
Founded 1974
Headquarters Washington, D.C.
Key People Rostin Benham, Acting Chairman; Brian D. Quintenz, Dan Berkovitz, and Dawn Stump, Commissioners
Employees 668
Products Federal commodity derivatives regulator
Twitter @CFTC
LinkedIn Profile
Website CFTC.gov
Releases Company News

The U.S. Commodity Futures Trading Commission (CFTC) is the federal regulatory agency that oversees the commodity futures marketplaces in the U.S. It regulates bitcoin and other cryptocurrency derivatives transactions.

The CFTC has exclusive jurisdiction over commodity markets, regulated either as designated contract markets (DCMs) or as swap execution facilities (SEFs), which trade futures, swaps and futures options on numerous physical commodities, indexes and financial instruments. It also regulates the customer solicitation practices, financial intermediaries, and clearinghouses in the industry. The U.S. Congress has granted the CFTC authority to move against fraud and manipulation in cash commodity markets, although the exact nature of that authority is disputed.

To read the full article on the CFTC, click on Marketswiki.gif to open a new tab with MarketsWiki.

Jurisdiction

In September 2018, a federal judge ruled that all virtual currencies fall under the legal definitions for "commodities," and thus fall within the jurisdiction of the CFTC. The CFTC used this ruling to begin pursuing legal action against Crater and My Big Coin Pay Inc., two cryptocurrency companies accused of fraud.[1][2] In February 2019 My Big Coin Pay's founder, Randall Crater, was indicted in the U.S. district court in the Middle District of Florida with four counts of wire fraud and three counts of unlawful monetary transactions. According to the charges, Crater misappropriated $6 million worth of funds, promising investors that the service could be readily exchanged for goods and services, including cash and other cryptocurrencies.[3]

Although treating bitcoin as a commodity for the purpose of trade regulation has been helpful to the CFTC, other factors not strictly related to cryptocurrency have hampered its efforts. In Commodity Futures Trading Commission v. Monex Credit Co. , C.D. Cal., No. 8:17-cv-01868-JVS-DFM, a case involving accusations against precious metals dealer Monex for off-exchange fraud, the CFTC suffered a significant blow to its authority. In that case, Judge James Selna held that the Dodd-Frank Act amendments to the Commodity Exchange Act required the presence of both fraud and manipulation for a case to be brought by the CFTC. In the Monex Credit case, there were no allegations of manipulation. Several of the cases brought by the CFTC regarding cryptocurrencies included no apparent element of market manipulation by the defendants.[4] The CFTC announced on July 26, 2019, that the ninth circuit had ruled in favor of the Commission against Monex, holding that the CFTC did not need to allege manipulation in order to bring charges of fraud in the case.[5]

Bitcoin

In September 2014 the CFTC permitted TeraExchange, a SEF, to certify to the commission that its bitcoin swap complied with the requirements of the Commodity Exchange Act, a statement which implied that bitcoin is a commodity under the CFTC's authority.[6] That December, Chairman Tim Massad stated his view during Congressional testimony that bitcoin was a commodity and acknowledged that the CFTC defined the term "commodity" broadly.[7] In 2015 the CFTC had settled a complaint against a company called Coinflip for providing, during 2014, a marketplace called Derivbit, which listed bitcoin options without being registered as a swap execution facility - the only permissible venue for commodity options trading.[8] The CFTC settled its case against Bitfinex, wherein the CFTC accused Bitfinex of trading off-exchange Bitcoin futures and failing to register as a futures commission merchant, in June 2016.[9] The view that bitcoin can be regulated as a commodity received support on March 6, 2018 when U.S. District Judge Jack Weinstein ordered that the CFTC could sue Patrick McDonnell and his company, CabbageTech, for fraud under the Commodity Exchange Act. CabbageTech solicited funds from investors for providing cryptocurrency advisory services, which the CFTC alleged were never forthcoming. [10]

Ether as a commodity

In December, the CFTC published an official, 60-day Request for Information (RFI) to the public. The RFI stated that its purpose was to "seek public comment and feedback in order to better inform the commission's understanding of the technology, mechanics, and markets for virtual currencies beyond bitcoin, namely Ether and its use in the Ethereum Network." The RFI specified that information gathered through the RFI would be considered in future efforts to provide oversight and regulation to the digital asset markets. It also gave three methods members of the public could use to deliver their comments to the commission, including a mailing address and a link to its public comments website.[11][12]

On October 10, 2019, ahead of any official statements or pertinent actions by the CFTC, Tarbert told the Yahoo! Finance All Markets Summit, "It is my view as chairman of the CFTC that Ether is a commodity.” He said that the CFTC was working with the U.S. Securities and Exchange Commission on bitcoin and they both agreed that neither are securities. He also told the audience that the CFTC was ready to approve Ether futures.[13] Later that month, Tarbert said at DC Fintech Week that a security can turn into a commodity, and vice versa.[14] Despite his earlier statements about Ether being a commodity, Tarbert told CoinDesk’s November 2020 Invest: NYC conference the CFTC and the Securities and Exchange Commission (SEC) were both “thinking carefully” about the upcoming Ethereum 2.0 upgrade which will replace the coin’s current proof-of-work (PoW) model.[15]

Without any formal action by the CFTC, on May 11, 2020 ErisX, a DCM, announced that it was immediately commencing trading in physically deliverable Ether futures contracts. They are the first Ether derivatives contracts to be listed on a regulated U.S. DCM or SEF.[16] The exchange's Ether contracts, one of which is priced in U.S. dollars per Ether and the other of which is priced in bitcoin, call for delivery of one Ether. Contracts are listed for monthly and quarterly settlements.[17] The minimum block size for the Ether contracts is 50 contracts.[18]

Digital asset derivatives

TeraExchange, which applied to the CFTC for registration as a swap execution facility, was permitted to certify its bitcoin swap contract and list if for trading. TeraExchange was registered permanently on May 26, 2016.[19] North American Derivatives Exchange (or NADEX), a DCM, certified bitcoin swaps for trading on its platform in November of 2014.[20] In August 2015, the CFTC accepted applications from LedgerX to be registered as both a swap execution facility in order to trade bitcoin options and a derivatives clearing organization in order to clear bitcoin options. LedgerX was registered for both trading and clearing physically delivered bitcoin swaps in July 2017.[21] LedgerX reported that the first trades of bitcoin swaps occurred on October 16, 2017, when 31 day-ahead swaps changed hands.[22][23]

The Cboe Futures Exchange and the CME Group began offering cash-settled futures contracts that they had previously certified with the agency on December 1 and December 17, 2017, respectively.[24][25] The launching of these futures contracts was controversial with the futures commission merchant community, which complained publicly in a December 2017 letter from the Futures Industry Association.[26] The CFTC's staff responded in June 2018 with a notice to exchanges and clearinghouses seeking to certify new cryptocurrency products that they need to be aware of concerns about market surveillance and financial integrity when they certify contracts.[27]

In March 2019, CFTC commissioner Dan Berkovitz told the cryptocurrency-focused news network Blocktv that the CFTC was "working diligently with all the applicants [of crypto-related companies] to process their applications and get their products on the market. Berkovitz explicitly said that these efforts included working out approval for Bakkt, Intercontinental Exchange's bitcoin-based payment platform.[28]

In October 2020, the CFTC's Division of Swap Dealer and Intermediary Oversight published an advisory to futures commission merchants (FCMs) about holding virtual currencies in segregated accounts, as well as designing risk management programs.[29][30]

Interpretive guidance for "actual delivery"

On March 24, 2020, the CFTC published a statement offering guidance surrounding the interpretation of rules regarding actual delivery for retail digital asset transactions. The statement specified the nature of custody for both buyers and sellers of a digital asset, including conditions in which the transaction involved financial instruments like derivatives, as well as buying on margin/using leverage.[31][32]

Enforcement

McAfee

On March 5, 2021 the CFTC announced that in its first manipulation case involving digital assets it had charged John McAfee and Jimmy Gale Watson, Jr., McAfee's bodyguard, with engaging in digital asset "pump-and-dumps" involving Verge (XVG), Dogecoin (DOGE), and Reddcoin (RDD). The agency said that the U.S. Attorney’s Office for the Southern District of New York had indicted McAfee and Watson on charges of conspiracy to commit fraud, wire fraud, wire fraud conspiracy, conspiracy to commit securities touting fraud, and money laundering.

The CFTC said that the two defendants had accumulated positions in purposefully selected digital assets which McAfee would promote ("pump") in social media channels. After the price had risen they would then sell ("dump") the assets at prices they helped inflate. [33]

McAfee, who was a fugitive at the time, had been arrested in Spain on October 5, 2020 on five counts of tax evasion and five counts of failure to file a tax return. The criminal charges were brought by the Tax Division of the U.S. Department of Justice. They were filed earlier that year on June 15 and sealed pending arrest.[34] The case was filed in the Western District of Tennessee.[35]

The same day the federal criminal charges were announced, the SEC charged McAfee with failing to disclose that he was paid for his promotions of several ICOs which he highlighted in his Twitter feed. According to the agency, McAfee was paid in cryptocurrencies worth more than $23 million. He was also charged with "scalping" digital asset securities. Scalping is the practice of accumulating securities and then promoting them at the same time as the scalper sells them off in the market.[36]

The October 2020 SEC case against the two was ongoing at the time of the CFTC's complaint.

BitMEX actions

On October 1, 2020 both the CFTC and the U.S. Department of Justice (DOJ) announced charges against HDR Holdings and its subsidiaries and affiliates which together operate BitMEX parent, as well as HDR's owner founders, Arthur Hayes, Ben Delo, and Samuel Reed. In its civil complaint, the CFTC accused the defendants of operating an unregistered derivatives trading platform that solicited business from and conducted business with U.S. residents. The CFTC also alleged that BitMEX did not comply with U.S. anti-money laundering requirements.[37] In its indictment that was unsealed the same day, the DOJ charged HDR Holdings, its subsidiaries and affiliates, the three owner founders of HDR, and Gregory Dwyer, the head of business development, with violating and conspiring to violate the Bank Secrecy Act by not implementing an anti-money laundering program.[38] Reed, the CTO, was taken into custody in Massachusetts by federal law enforcement on October 1, 2020, while the other executives remained "at large" in the DOJ's terminology.[39] A week later, BitMEX announced that it had made changes to its leadership, which included Arthur Hayes stepping down as CEO.[40]

In March 2021, a court filing revealed that Hayes had discussed surrendering to U.S. authorities on April 6, 2021; the court filing was tweeted about on Wednesday, March 3 by Pavel Pogodin, a representative for the plaintiffs in civil proceedings against BitMEX and its founders.[41] Hayes, who resides in Singapore, was in the process of discussing arrangements that would allow him to remain living abroad and travel to Hawaii to appear remotely in New York for court appearances, eventually appearing in New York personally, according to a court transcript of Jessica Greenwood, assistant U.S. attorney in Manhattan.[42][43]

$6.5 million Coinbase penalty

The CFTC announced on March 19, 2021 that it had settled charges against Coinbase stemming from activities dating as far back as 2015. The CFTC alleged and the company agreed that it had engaged in " . . . reckless false, misleading, or inaccurate reporting as well as wash trading by a former employee on Coinbase’s GDAX platform."[44] Coinbase's proposed listing of its shares on Nasdaq was pending at the time of the announcement.

Education initiatives

The CFTC has undertaken efforts to educate market participants and potential market participants about the specific risks associated with dealing in cryptocurrencies in general and bitcoin specifically. The CFTC provides a website that lists resources that the CFTC has made available to the public. The web page provides brief descriptions of and hyperlinks to a variety of materials including podcasts, customer advisories, primers/backgrounders and brochures.

In July 2018, the CFTC issued a customer advisory to those considering buying digital currency. The document cited the high rate of failure and fraud among new ICOs and the volatility of digital currency prices. It also urged potential consumers to take responsibility for knowing the laws, function, and promises made by those selling them.

Central Bank Digital Currencies

In July 2020, the CFTC's Technology Advisory Committee (TAC) conducted a meeting to discuss virtual currency and central bank digital currencies (CBDCs). Chris Brummer, Georgetown Law Center professor and faculty director of the Institute of International Economic Law, gave a presentation on central bank digital currencies that included how they could theoretically work and could potentially be issued. He pointed out the rising popularity of stablecoins (which are not necessarily the same thing as CBDCs) and the potential benefits of adopting a "digital dollar," including improved cross-border transactions.[45][46]

Key People

  • Rostin Benham - Acting Chairman
  • Brian D. Quintenz - Commissioner
  • Dawn DeBerry Stump - Commissioner
  • Dan M. Berkovitz - Commissioner

References

  1. U.S. judge sides with CFTC on virtual currency oversight. Reuters.
  2. Federal judge sides with CFTC on virtual currency oversight. Business Insider.
  3. U.S. judge sides with CFTC on virtual currency oversight. U.S. Dept. of Justice.
  4. CFTC Appeals Monex Opinion Curbing Enforcement, Crypto Authority. Bloomberg.
  5. Press Release. CFTC.
  6. TeraExchange Rule Implementation Submission. CFTC.
  7. Crypto Land of Confusion. Futures Magazine.
  8. ORDER INSTITUTING PROCEEDINGS. CFTC.
  9. The Future of Virtual Currencies Under U.S. Derivatives Regulation. K&L Gates.
  10. Cryptocurrencies Like Bitcoin Are Commodities, Federal Judge Says. Here's Why That Matters. Fortune.
  11. CFTC Seeks Public Comments on Crypto-asset Mechanics and Markets. CFTC.
  12. Request for Input on Crypto-asset Mechanics and Markets. CFTC.
  13. CFTC Chairman Confirms Ether Cryptocurrency Is a Commodity. CoinDesk.
  14. CFTC Chairman: a commodity can become a security and vice versa. The Block Crypto.
  15. What the CFTC Chairman Actually Said About Ether Futures and Ethereum 2.0. Yahoo! Finance.
  16. ErisX Pioneers First U.S. Based Ether Futures Contract. Business Wire.
  17. Current Futures Products. ErisX.
  18. Amendments to Eris Exchange Rule 601 (Block Trades) and Establishment of Block Trade Size for Ether Futures (Eris Exchange, LLC Submission #2020-05E). ErisX.
  19. ORDER OF REGISTRATION. CFTC.
  20. Self-Certification of Rule Amendments: Nadex Adds Bitcoin Binary Contracts. CFTC.
  21. ORDER OF REGISTRATION. CFTC.
  22. Data. LedgerX.
  23. Rules. LedgerX.
  24. Cboe Futures Exchange, LLC Product Certification for Bitcoin Futures. CFTC.
  25. CFTC Regulation 40.2(a) Certification. CFTC.
  26. Open letter to CFTC chairman Giancarlo regarding the listing of cryptocurrency derivatives. Futures Industry Association.
  27. CFTC Staff Advisory No. 18-14. CFTC.
  28. CFTC: We’re ‘Diligently’ Working on All Crypto-Related Applications, Including Bakkt’s. CFTC.
  29. CFTC Staff Issues Advisory on Virtual Currency for Futures Commission Merchants. CFTC.
  30. CFTC officials publish new crypto advisory for futures commission merchants. The Block.
  31. CFTC Issues Final Interpretive Guidance on Actual Delivery for Digital Assets. CFTC.
  32. CFTC announces finalized interpretive guidance on the 'actual delivery' of digital assets. The Block.
  33. CFTC Charges Two Individuals with Multi-Million Dollar Digital Asset Pump-and-Dump Scheme. U.S. Commodity Futures Trading Commission.
  34. John McAfee Indicted For Tax Evasion, Accused Of Hiding Cryptocurrency, Yacht From IRS. Forbes.
  35. U.S. DOJ: John McAfee Indicted For Tax Evasion, Arrested In Spain. Nasdaq.
  36. Complaint. U.S. Securities and Exchange Commission.
  37. Press Release Number 8270-20. U.S. Commodity Futures Trading Commission.
  38. Press Release Number:20-218. U.S. Attorney's office of the Southern District of New York.
  39. BitMEX Co-Founders Charged With U.S. Rules Violations. Wall Street Journal.
  40. BitMEX announces leadership changes after U.S. government charges, Arthur Hayes no longer CEO. The Block.
  41. Latest BitMEX news: Arthur Hayes is expected to surrender to US in Hawaii on April 6. Greg Dwyer declined to surrender and US launched extradition proceedings for him from Bermuda. Ben Delo will surrender in NY before end of March.. Twitter.
  42. BitMEX’s Arthur Hayes Proposes Surrender to U.S. Authorities. Bloomberg.
  43. U.S. prosecutors discussing surrender agreement with former BitMEX CEO Arthur Hayes. The Block.
  44. CFTC Orders Coinbase Inc. to Pay $6.5 Million for False, Misleading, or Inaccurate Reporting and Wash Trading. Commodity Futures Trading Commission.
  45. CFTC Seeks Industry Advice on Blockchain Applications. Coindesk.
  46. CFTC’s Technology Advisory Committee to Meet on July 16. YouTube.