Some Legal Issues Surrounding Blockchain and Cryptocurrency Part 6: The CFTC’s Bitfinex Order.

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In a series of 2015 decisions, the CFTC determined that virtual currency is a commodity subject to its jurisdiction.

In a 2016 settled enforcement action, the CFTC took the position that an unregistered platform administering and providing margin trading contracts in crypto-currencies to non-eligible (“retail”) users violated the provisions of the Commodities Exchange Act, In the Matter of BFXNA, Inc. d/b/a Bitfinex, No. 16-19 (CFTC Jun 2, 2016), where:

  • Bitfinex controlled the keys to the customer and escrow wallets involved in the margin lending.
  • Bitfinex used book-entry delivery, instead of actual delivery is required as between buyer and seller:

“[P]hysical delivery of the entire quantity of the commodity, including the portion purchased using leverage, margin, or financing, into the possession of the buyer, or a depository other than the seller, the seller’s parent company, partners, agents, and affiliates will satisfy the actual delivery exception, provided that the purported delivery is not a sham.”  Id. at 5.

  • Bitfinex was the platform that controlled the Omnibus Settlement Wallet, and later changed its platform to settle through third-party multi-signature wallets, but Bitfinex still retained control of those keys, too (plus the Financing Recipients had no contractual relationship with the third-party wallet providers).
  • Bitfinex had capacity to force-liquidate the contracts, thus retained control. Id. at 6.

Next, in Part 7:  The CFTC’s Proposed Cyber-Currency Interpretation.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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