In the space of just seven days, the CFTC has brought two enforcement actions regarding Bitcoin transactions.
In the first action, the CFTC issued an order filing and simultaneously settling charges against Coinflip, Inc. d/b/a Derivabit and its chief executive officer for conducting activity related to commodity options transactions without complying with the Commodity Exchange Act, or CEA, and CFTC regulations. The CFTC alleged that the defendants operated a facility for the trading or processing of commodity options without complying with the CEA or CFTC regulations otherwise applicable to swaps or conducting the activity pursuant to the CFTC’s exemption for trade options.
The CFTC order finds that Coinflip designated put and call options for the delivery of Bitcoins as eligible for trading on the Derivabit platform. In the order, the CFTC for the first time finds that Bitcoin and other virtual currencies are properly defined as commodities.
In the second action, the CFTC issued an order filing and simultaneously settling charges against TeraExchange LLC, a provisionally registered Swap Execution Facility, or SEF, for failing to enforce its prohibition on wash trading and prearranged trading on the SEF platform.
According to the CFTC Tera offered for trading on its SEF a non-deliverable forward contract based on the relative value of the U.S. Dollar and Bitcoin, a virtual currency (the “Bitcoin Swap”). On October 8, 2014, the only two market participants authorized at that time to trade on Tera’s SEF entered into two transactions in the Bitcoin Swap. The transactions were for the same notional amount, price, and tenor, and had the effect of completely offsetting each other. At the time, these were the only transactions on Tera’s SEF.
The CFTC stated Tera arranged for the two market participants to enter into the transactions. Tera brought together the market participants, telling one that the trade would be “to test the pipes by doing a round-trip trade with the same price in, same price out, (i.e. no P/L [profit/loss] consequences) no custodian required,” according to the CFC order.
The CFTC alleged that subsequent to the transactions, Tera issued a press release and made statements at a meeting of the CFTC’s Global Markets Advisory Committee announcing the transactions, creating the impression of actual trading interest in the Bitcoin swap. Neither Tera’s press release nor the statements at the GMAC meeting indicated that the October 8 transactions were pre-arranged wash sales executed for the purpose of testing Tera’s systems.