The U.S. Commodity Futures Trading Commission (CFTC), showing continued regulatory interest in digital currency companies, issued an Order and settled charges against Hong Kong-based digital currency exchange Bitfinex. The CFTC found that Bitfinex was offering illegal off-exchange financed retail commodity transactions in bitcoin and other cryptocurrencies, and failed to register as a Futures Commission Merchant (FCM) as required by the Commodity Exchange Act (CEA). The CFTC also required Bitfinex to pay a $75,000 civil penalty.
Bitfinex operates an online platform for exchanging and trading cryptocurrencies, mainly bitcoins but also others including Litecoin and Ether. The CFTC found that from April 2013 to at least February 2016, Bitfinex (1) permitted users to borrow funds from other users on the platform in order to trade bitcoins on a leveraged, margined, or financed basis; (2) that Bitfinex did not actually deliver those bitcoins to the traders who purchased them; and (3) Bitfinex held the bitcoins in deposit wallets that it owned and controlled.
The CFTC found that by offering to engage in the execution of off-exchange financed retail commodity transactions, Bitfinex violated Section 4(a) of the CEA, which requires such transactions to be conducted on a designated contract market or derivatives transaction execution facility. The CFTC further found that because the transactions did not result in actual delivery of bitcoins, Bitfinex could not rely on the exception to the CFTC’s jurisdiction over such transactions (delivery occurring within 28 days) found in Section 2(c)(2)(D)(ii)(III)(aa) of the CEA. The CFTC further found that Bitfinex accepted orders and received funds in connection with retail commodity transactions but was not registered with the CFTC as an FCM and, therefore violated Section 4d(a) of the CEA.
The CFTC’s order is noteworthy, in part, because of start date of the transactions at issue—from April 2013. This is a reminder that government investigations often take quite some time, and that regulators are not afraid of looking back in time to find violations.