The Commodity Futures Trading Commission issued a Proposed Interpretation that would formally require actual delivery of a virtual currency to a retail client within 28 days to avoid Commission registration requirements by persons selling and either financing or arranging financing of the virtual currency.
Although the CFTC does not typically regulate spot transactions involving retail clients, retail commodity transactions on a leveraged or margined basis, or financed by the offeror, the counterparty or a person acting in concert with such persons on a similar basis may implicate certain Commission requirements – namely registration requirements by the offeror and a requirement that the products be traded on or subject to the rules of a designated (e.g., licensed) contract market. (Click here to access 7 USC §2(c)(2)(D)(i).) The key is whether actual delivery of the commodity has occurred within 28 days of the transaction. If yes, CFTC registration and other requirements are not implicated. If no, CFTC registration and other requirements are implicated.
In its Proposed Guidance, the CFTC said that, consistent with prior guidance involving retail transactions of tangible commodities (click here to access), it will consider “actual delivery” of a virtual currency to have occurred when a customer can take “possession and control” of all of the cryptocurrency and use it freely no later than 28 days from the date of the initial transaction and can do so unencumbered. This would require neither the offeror nor seller, or any person acting in concert with such persons, retaining any interest or control in the virtual currency after 28 days from the date of the transaction.
Among other situations, the CFTC noted that actually delivery of a virtual currency will occur within 28 days of an initial transaction when there is a record of a sale of the relevant virtual currency, including any financed portion, on the relevant blockchain, from the seller’s blockchain wallet to the buyer’s blockchain wallet, or if the transaction occurred on a matching platform, from the offeror’s blockchain wallet to the purchaser’s blockchain wallet – provided the purchaser’s wallet is “not affiliated with or controlled by the counterparty seller or third party offeror in any manner.”
Actual delivery will not have occurred cautioned the CFTC when, within 28 days, virtual currency sold to a retail client is rolled, offset against, netted out, or settled in cash or virtual currency between a buyer and the offeror or counterparty seller or any person acting in concert with either such person.
The CFTC will accept comments on its Proposed Guidance for 90 days after its publication in the Federal Register.
Another Day, New CFTC-Overseen Bitcoin Contracts
CME Bitcoin cash-settled futures contracts began trading last night, as of today’s trade date. Initially CME Bitcoin futures will require an initial margin of 47 percent of contract value for speculators, and 43 percent for hedgers (click here for details). Unlike CBOE cash-settled Bitcoin futures where the unit of trading is one Bitcoin, the unit of trading for CME Group Bitcoin futures contracts is five Bitcoin. The initial listings will be for January, February, March and June 2018. (Click here for details; click here for a general overview of the CME and CBOE’s Bitcoin futures contracts in the article “Three CFTC-Regulated Exchanges Self-Certify Bitcoin Derivatives Contracts” in the December 3, 2017 edition of Bridging the Week.)
In its first night of trading, the January 2018 CME Bitcoin futures contract opened at US $20,650/Bitcoin (click here for details).
Nadex self-certified its Weekly Variable Payout (“Spread”) Bitcoin contract on December 14 for initial trading on December 18 (click here to access). Nadex’s contract will be based on the Tera Bitcoin Price Index – an index comprising prices from nine worldwide spot exchanges trading Bitcoin. This product, which principally will be marketed to retail clients, requires full collateralization by traders and caps persons’ potential gains or losses. (Click here for further details in the article “First Cash-Settled Bitcoin Futures Contract Begins Trading on CFTC-Overseen Exchange; Industry Organization Bemoans Self-Certification Process” in the December 10, 2017 edition of Bridging the Week.)
Bitcoin and Other Cryptocurrencies Allegedly Used for Terrorist Financing
The US Attorney's Office for the Eastern District of New York oversaw the issuance of an indictment against Zoobia Shahnaz for purportedly purchasing Bitcoin and other cryptocurrencies to help finance the Islamic State of Iraq and al-Sham (“ISIS”). The five-count indictment was filed in a federal court in Brooklyn, NY (click here for a copy of the indictment).
According to the indictment, Ms. Shahnaz obtained a loan from a financial institution for $22,500 under false pretenses, and fraudulently used over a dozen credit cards to purchase Bitcoin and other cryptocurrencies valued in excess of US $65,000. Ms. Shahnaz then allegedly engaged in a number of transactions to launder and transmit over US $150,000 to various shelf entities in Pakistan, China and Turkey, and attempted to leave the United States and travel to Syria.
Ms. Shahnaz, if convicted, could be subject to up to 30 years imprisonment for bank fraud and 20 years on each count of money laundering.
Korea-based Crypto-Exchange Fined by Korean Regulator
Korean media reported that Bithumb, Korea's largest cryptocurrency exchange, was sanctioned Korean Won 58.5 million (approximately US $54,000) for failing to protect personal private information of account holders. Bithumb apparently sustained a hacking attack in April that resulted in 31,506 IDs and passwords of users being stolen. (Click here for details from a sample article by THE CHOSUNILBO Business.
Legal Weeds: The CFTC has previously filed and settled an enforcement action against a Bitcoin platform that purportedly dealt with retail clients and facilitated financing where actual delivery did not occur within 28 days.
In June 2016, BFXNA Inc., doing business as Bitfinex, agreed to settle charges brought by the Commission alleging that, from approximately April 2013 through at least February 2016, it engaged in prohibited, off-exchange commodity transactions with retail clients and failed to register as a futures commission merchant, as required. According to the CFTC, during the relevant time period, Bitfinex “operated an online platform for exchange and trading cryptocurrencies, mainly Bitcoins.” The CFTC said that Bitfinex’s platform allowed retail participants to borrow funds to purchase Bitcoins from other platform users. However, financed Bitcoins purchased were not delivered to purchasers within 28 days as required for retail clients under applicable law. (Click here for details in the article “Bitcoin Exchange Sanctioned by CFTC for Not Being Registered” in the June 5, 2016 edition of Bridging the Week.)
Bitfinex is one of the nine component exchanges whose prices are utilized by the Tera Bitcoin Price Index (click here for details). Bitfinex currently does not conduct business with US individual persons. (Click here for details – see paragraph 3.)
The CFTC has brought numerous enforcement actions against firms, claiming that they sold precious metals to retail clients on financing without actual delivery occurring within 28 days.
Most recently, Monex Deposit Company and two affiliated companies (collectively, “Monex”), and Louis Cabrini and Michael Cabrini, the firms’ principals, were charged in a civil complaint by the CFTC with fraud and engaging in illegal precious metals transactions with retail clients. The complaint was filed in a federal court in Illinois, and the case was subsequently transferred to California.
According to the CFTC’s complaint, from July 16, 2011, through March 31, 2017, Monex offered leveraged precious metals trading to retail clients through its “Atlas” trading program. Through this program, retail clients purchased and sold precious metals; paid only a portion of the purchase price; and either borrowed the difference (for purchases) or borrowed the metal (for sales). Clients were subject to margin calls if the value of their account equity declined below a certain level (determined in Monex’s discretion), and forced liquidation, if the value of their account value fell to 7 percent.
The CFTC charged that these leveraged purchase and sales to retail clients constituted prohibited off-exchange futures contracts, and that Monex operated as a futures commission merchant without required registration in facilitating these transactions.
(Click here for details regarding the CFTC’s enforcement action against Monex in the article “Retail Metals Dealer and Principals Sued by CFTC for Illegal Transactions and Fraud” in the September 10, 2017 edition of Bridging the Week.)